<PAGE>

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

                            ------------------------

                                   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 30,1999

                                       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

                            ------------------------
                            MPATH INTERACTIVE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

                                665 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)

                            ------------------------

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

  The number of outstanding shares of the registrant's Common Stock, $0.00005
par value, was 22,298,496 as of July 29, 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


                                       1
<PAGE>

                            MPATH INTERACTIVE, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                                                              PAGE
<S>                                                                                           <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
 Condensed Consolidated Balance Sheets - June 30, 1999 (unaudited)
        and December 31, 1998...........................................................         3
 Unaudited and Condensed Consolidated Statements of Operations - Three Months
        and Six Months Ended June 30, 1999 and 1998.....................................         4
 Unaudited Condensed Consolidated Statements of Cash Flows -Six Months
        Ended June 30, 1999 and 1998....................................................         5
 Notes to Condensed Consolidated Financial Statements...................................         6
Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations.......................................................         8
Item 3. Qualitative and Quantitative Disclosure about Market Risk.......................        18

PART II: OTHER INFORMATION
Item 1. Legal Proceedings...............................................................        18
Item 2. Changes in Securities and Use of Proceeds.......................................        19
Item 3. Defaults Upon Senior Securities.................................................        20
Item 4. Submission of Matters to a Vote of Security Holders.............................        20
Item 5. Other Information...............................................................        20
Item 6. Exhibits and Reports on Form 8-K................................................        20
     Signatures.........................................................................        20
</TABLE>

                                       2
<PAGE>

                            MPATH INTERACTIVE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                          June 30,      December 31,
                                                                                        ------------   -------------
                                                                                            1999            1998
                                                                                        ------------   -------------
                                                                                        (Unaudited)
                                   ASSETS
<S>                                                                                     <C>            <C>
Current assets:
  Cash and cash equivalents  ........................................................   $     80,837   $       1,114
  Accounts receivable, net of allowance for doubtful accounts of $415 and
    $20 respectively  ...............................................................          2,256           2,226
  Prepaid expenses and other current assets  ........................................          1,522             710
                                                                                        ------------   -------------
     Total current assets  ..........................................................         84,615           4,050
Restricted cash  ....................................................................             --             170
Property and equipment, net  ........................................................          2,703           1,878
Other assets  .......................................................................            290              79
                                                                                        ------------   -------------
     Total assets  ..................................................................   $     87,608   $       6,177
                                                                                        ============   =============


     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable  .................................................................   $        610   $       1,119
  Accrued payroll and related expenses  .............................................          1,745           1,063
  Accrued expenses  .................................................................            897             719
  Current portion of capital lease obligations  .....................................            414             458
  Deferred revenue  .................................................................            505             332
  Notes payable  ....................................................................            307           2,426
                                                                                        ------------   -------------
     Total current liabilities  .....................................................          4,478           6,117
Convertible note payable  ...........................................................             --           1,864
Capital lease obligations and notes payable, net of current portion  ................            242             326
                                                                                        ------------   -------------
     Total liabilities  .............................................................          4,720           8,307
                                                                                        ------------   -------------

Commitments and contingencies

Stockholders' equity (deficit):
  Convertible preferred stock........................................................             --               1
  Common stock warrants  ............................................................              2               2
  Common stock ......................................................................              1              --
  Additional paid-in capital  .......................................................        160,338          63,155
  Deferred stock based compensation  ................................................        (10,945)        (11,263)
  Notes receivable from stockholders  ...............................................         (2,328)         (1,020)
  Accumulated deficit  ..............................................................        (64,180)        (53,005)
                                                                                        ------------   -------------
     Total stockholders' equity (deficit)  ..........................................         82,888          (2,130)
                                                                                        ------------   -------------
     Total liabilities and stockholders' equity  ....................................   $     87,608   $       6,177
                                                                                        ============   =============
</TABLE>




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

                                       3
<PAGE>

                            MPATH INTERACTIVE, INC.

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

<TABLE>
<CAPTION>
                                                                      Three Months Ended                 Six Months Ended
                                                                      ------------------                 ----------------
                                                                           June 30,                          June 30,
                                                                           --------                          --------
                                                                    1999              1998              1999            1998
                                                                    ----              ----              ----            ----
<S>                                                               <C>               <C>                <C>             <C>
Net revenues:
 Live Communities  ...............................................    $ 1,465           $   393          $  2,585       $   710
 Technology Products  ............................................      1,767             1,103             2,775         2,237
                                                                      -------           -------          --------       -------
   Total revenues  ...............................................      3,232             1,496             5,360         2,947

Cost of net revenues:
 Live Communities  ...............................................        842               567             1,652         1,151
  Live Communities - warrant expense..............................          -                 -               849             -
 Technology Products  ............................................        293               190               524           382
                                                                      -------           -------          --------       -------
   Total cost of revenues  .......................................      1,135               757             3,025         1,533
                                                                      -------           -------          --------       -------
     Gross profit   ..............................................      2,097               739             2,335         1,414
                                                                      -------           -------          --------       -------
Operating expenses:
 Research and development  .......................................      1,723               767             3,266         1,546
 Sales and marketing  ............................................      3,468             1,896             5,799         3,748
 General and administrative  .....................................      1,615               820             3,053         1,587
 Stock based compensation  .......................................        962               650             1,898         1,300
                                                                      -------           -------          --------       -------
     Total operating expenses  ...................................      7,768             4,133            14,016         8,181
                                                                      -------           -------          --------       -------
      Loss from operations  ......................................     (5,671)           (3,394)          (11,681)       (6,767)
 Interest and other income (expense), net  .......................        471               146               505           131
                                                                      -------           -------          --------       -------
      Net loss  ..................................................    $(5,200)          $(3,248)         $(11,176)      $(6,636)
                                                                      =======           =======          ========       =======

Other comprehensive income:
    Unrealized gain on investments  ..............................         91                 -                91             -
                                                                      -------                            --------
       Comprehensive loss  .......................................    $(5,109)          $(3,248)         $(11,085)      $(6,636)
                                                                      =======           =======          ========       =======

Net loss per common share:
 Basic and diluted  ..............................................    $  (.34)          $ (1.55)         $  (1.20)      $ (3,28)
                                                                      =======           =======          ========       =======
 Pro forma  ......................................................    $  (.26)          $  (.26)         $   (.62)      $  (.53)
                                                                      =======           =======          ========       =======
Weighted average shares outstanding:
 Basic and diluted  ..............................................     15,283             2,095             9,290         2,026
                                                                      =======           =======          ========       =======
 Pro forma  ......................................................     19,718            12,511            17,949        12,443
                                                                      =======           =======          ========       =======
 </TABLE>


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

                                       4
<PAGE>

                            MPATH INTERACTIVE, INC.

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

<TABLE>
<CAPTION>
                                                                                                             Six Months Ended
                                                                                                                 June 30,
                                                                                                                 --------
                                                                                                            1999           1998
                                                                                                            ----           ----
<S>                                                                                                         <C>            <C>
Cash used in operating activities  ..................................................................       $ (8,179)      $(5,363)

Cash flows from investing activities:
  Acquisition of property and equipment  ............................................................         (1,444)         (275)
                                                                                                            --------       -------
          Net cash used in investing activities  ....................................................         (1,444)         (275)
                                                                                                            --------       -------
Cash flows from financing activities:
  Payments of notes payable  ........................................................................         (4,290)            -
  Payments under capital lease obligations  .........................................................           (230)         (151)
  Issuance of Notes Payable Insurance Premium  ......................................................            408             -
  Proceeds from exercise of common stock options and warrants, net of repurchase  ...................            771           (97)
  Proceeds from issuance of Series E preferred stock, net  ..........................................         18,797             -
  Proceeds from initial public offering, net of issuance costs............  .........................         73,890             -
                                                                                                            --------       -------
          Net cash provided by (used in) financing activities  ......................................         89,346          (248)
                                                                                                            --------       -------
          Net increase (decrease) in cash and cash equivalents  .....................................         79,723        (5,886)
                                                                                                            --------       -------
Cash and cash equivalents, beginning of period  .....................................................          1,114         9,132
                                                                                                            --------       -------
Cash and cash equivalents, end of period  ...........................................................       $ 80,837       $ 3,246
                                                                                                            ========       =======
</TABLE>

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

                                       5
<PAGE>

                            MPATH INTERACTIVE, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 1999
                                  (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 instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial statements at June 30, 1999 and 1998 have been included.

The condensed consolidated financial statements include those of the Company and
its wholly-owned subsidiary. Intercompany balances and transactions have been
eliminated in consolidation.

Results for the three months and six months ended June 30, 1999 are not
necessarily indicative of results for the entire fiscal year or future periods.
These financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's
Registration Statement on Form S-1 (No. 333-72437), including the related
prospectus dated April 29,1999 as filed with the SEC.

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

The Company has adopted the accounting treatment prescribed by SFAS no. 130,
"Comprehensive Income."  Unless otherwise noted, the components of the Company's
"Other comprehensive income" and "Comprehensive loss" have no tax effect as the
Company makes no provision for U.S. income taxes applicable to unrealized gains
on investments.

Net Loss Per Share

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

Pro Forma Net Loss Per Share

Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B, Series C, Series D and Series E
preferred stock into shares of the Company's common stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
on January 1, 1998 for Series A, B, C and D and on January 19, 1999 for Series
E. Pro forma common equivalent shares, comprised of unvested common stock, and
incremental common shares issuable upon the exercise of stock options and
warrants, are not included in pro forma diluted net loss per share because they
would be anti-dilutive.

                                       6
<PAGE>

                            MPATH INTERACTIVE, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 1999
                                  (Unaudited)


Accounting for Derivatives

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities.  SFAS 133 is effective for fiscal years
beginning after June 15, 1999.  The Company does not believe the adoption of
SFAS 133 will have a material effect on the Company's consolidated results of
operations or financial condition.


2.   Stockholders' Equity

Conversion of Warrants

In January 1999, in connection with the issuance of  the Company's Series E
convertible preferred stock, an additional 77,422 shares of Series E preferred
stock were reserved for issuance upon exercise of warrants granted to the
investment bankers at an exercise price of $6.60 per share. In April 1999, these
warrants were exercised for total proceeds of approximately $511,000.



Initial Public Offering

     In May 1999, the Company completed its initial public offering and issued
3,900,000 shares of its Common Stock to the public at a price of $18.00 per
share. The Company received net proceeds of approximately $64.1 million in cash.
As of the closing date of the offering, all of the preferred stock outstanding
was converted into an aggregate of 13,529,343 shares of common stock. In June
1999, the Company issued an additional 585,000 shares of its Common Stock at a
price of $18 per share for net proceeds of approximately $9.8 million, relating
to the underwriters' thirty-day option to purchase these shares in connection
with the initial public offering.


3.   Segment Information

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

<TABLE>
<CAPTION>
                                            Three Months Ended June 30,              Six Months Ended June 30,
                                            ---------------------------              -------------------------
                                              1999                1998                1999                1998
                                              ----                ----                ----                ----
<S>                                          <C>                 <C>                 <C>                 <C>
Live Communities                             ($3,517)            ($2,568)            ($7,307)            ($5,224)
Technology Products                          ( 1,192)            (   176)            ( 2,475)              ( 243)
                                             -------             -------             -------             -------
Total Operating Loss                         ($4,709)            ($2,744)            ($9,782)            ($5,467)
                                             =======             =======             =======             =======
</TABLE>

Amounts do not reconcile to total operating loss since they exclude stock-based
compensation.

                                       7
<PAGE>

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

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

Overview

     Mpath develops, licenses and operates technologies that enable us and other
Internet sites to create and manage Live Communities. We were incorporated and
commenced operations in January 1995. From inception through September 1996, our
activities primarily consisted of recruiting employees and raising capital,
performing product and technology development, engaging in marketing activities
and negotiating strategic relationships. In November 1995, we entered into an
agreement with PSINet, Inc. for the deployment of a low-latency network, which
provided a platform for launching and operating the Mplayer.com service. Testing
of the Mplayer.com service began in February 1996 and the service was launched
commercially in October 1996. In April 1996, we licensed our live community
software and network services to SegaSoft Networks, Inc., which occurred
concurrently with an equity investment by affiliates of SegaSoft's parent, CSK
Corporation. In January 1999, we launched HearMe.com, our second live community
service. 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, the
Company raised gross proceeds of approximately $80.7 million from the sales of
common stock through its initial public offering. A portion of the proceeds from
this offering will be used to finance research and development and sales and
marketing activities.

     We generate our revenues from two business units, Live Communities and
Mpath Technology Products (formerly known as Mpath Foundation.) With respect to
Live Communities, we derive the substantial majority of revenues from
advertising fees. While the Mplayer.com and the HearMe.com services are free to
all registered members, users may also pay subscription fees to us in exchange
for access to premium services such as special events, rankings and ratings,
contests, magazine subscriptions, special features and exclusive games. We also
have a subscription plan that allows the members to purchase a year's
subscription up front at a discounted rate. Additionally, we have begun to
derive revenues from e-commerce activities, including fees from special event
promotions and merchandise sales. Advertising revenue is recognized ratably over
the term of each particular advertising agreement. E-commerce revenue is
recognized when notification of shipment has taken place and the revenue has
been earned. Subscription revenue is recognized ratably over the related
subscription period. With respect to Mpath Technology Products, we derive
revenues from licensing fees for our technology, including our Pop.X product
which enables others to create live communities, and related services. We also
derive incremental Mpath Technology Products revenues from service, maintenance
and upgrade fees, which represent a significant source of recurring revenues
each year. Service revenues are recognized over the period in which services are
provided. Development revenue is recognized at the time services are completed
or as development milestones are achieved. License revenue is recognized in the
period earned. Deferred revenue consists primarily of monthly service revenue
billed and paid in advance.

     Since we launched our first Live Community service in October 1996 and
began negotiating certain license agreements through the Mpath Technology
Products business unit, we have generated $16.2 million in revenues through June
30, 1999. For the period from inception to June 30, 1999 we have incurred a

                                       8
<PAGE>

cumulative net loss of $64.2 million, of which $14.5 million came from a one-
time write-off of goodwill and in-process research and development expenses
associated with our acquisition of Catapult.

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

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

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


Results of Operations


     Three Months Ended June 30, 1999 Compared to the Three Months Ended June
30, 1998

     Revenues. Net revenues increased 116% from approximately $1.5 million for
the three months ended June 30, 1998 to approximately $3.2 million for the three
months ended June 30, 1999. Net revenues from Live Communities increased 272%
from $393,000 to $1.5 million. This increase was primarily driven by growth in
advertising revenues associated with an expanding number of advertisers and the
growth of traffic and usage time in our Live Communities. Net revenues from
Mpath Technology Products increased 60% from approximately $1.1 million for the
three months ended June 30, 1998 to approximately $1.8 million for the three
months ended June 30, 1999. The increase was due to increased technology
licensing fees earned from both new and existing customers during the period.

     Cost of revenues. Cost of revenues increased 50% from approximately
$757,000, or 51% of net revenues, for the three months ended June 30, 1998 to
approximately $1.1 million, or 35% of net revenues, for the three months ended
June 30, 1999. Cost of revenues decreased as a percentage of net revenues
primarily due to the increase in advertising revenues generated by Live
Communities for the three months ended June 30, 1999. The absolute increase in
cost of revenues was due to the significant increase in Live Communities
subscriber usage and the resulting increase in server and network costs between
1998 and 1999. Cost of revenues for Live Communities increased from
approximately $567,000 for the three months ended June 30, 1998 to approximately
$842,000 for the three months ended June 30, 1999. Cost of revenues for Mpath
Technology Products increased from approximately $190,000 for the three months
ended June 30, 1998 to approximately $293,000 for the three months ended June
30, 1999. The increase was attributable to server costs associated with hosting
services provided to certain Mpath Technology Products customers.

     Research and development. Research and development expenses increased 125%
from approximately $767,000, or 51% of net revenues, for the three months ended
June 30, 1998 to approximately $1.7 million,

                                       9
<PAGE>

or 53% of net revenues, for the three months ended June 30, 1999. The increase
in research and development expenses was primarily due to an increase in salary
expense in 1999 as additional engineers were hired to support the Mpath
Technology Products development of the POP.X technology and to additional
consulting fees and software expenditures associated with this development.

     Sales and marketing. Sales and marketing expenses increased 83% from
approximately $1.9 million, or 127% of net revenues, for the three months ended
June 30, 1998, to approximately $3.5 million, or 107% of net revenues, for the
three months ended June 30, 1999. Sales and marketing expenses decreased as a
percentage of net revenues primarily because of the substantial increase in net
revenues between 1998 and 1999. The increase in sales and marketing expenses was
primarily due to an increase in headcount in the Live Communities marketing team
and content programming personnel, increases in advertising sales headcount and
related travel expenses and an increase in headcount of the Mpath Technology
Products sales force.

     General and administrative. General and administrative costs increased 97%
from approximately $820,000, or 55% of net revenues, for the three months ended
June 30, 1998 to approximately $1.6 million, or 50% of net revenues, for the
three months ended June 30, 1999. General and administrative costs increased
primarily due to higher salary expenses resulting from additional headcount in
the finance, administrative and operations support area hired to expand our
infrastructure, additional costs relating to the costs of maintaining Mpath as a
public entity and an increase in the reserve for doubtful accounts.

     Stock based compensation. Stock based compensation costs increased from
approximately $650,000, or 43% of net revenues, in the three months ended June
30, 1998 to approximately $962,000, or 30% of net revenues, in the three months
ended June 30, 1999. The increase related to an increase in the number of
options granted as we continued to hire additional employees resulting in a
larger cumulative amount of options granted. The increase attributable to these
new issuances was added to the expense from grants in previous years which
continued to vest in 1999.

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

     Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30,
1998

     Revenues. Net revenues increased 82% from approximately $2.9 million for
the six months ended June 30, 1998 to approximately $5.4 million for the six
months ended June 30, 1999. Net revenues from Live Communities increased 264%
from $710,000 to $2.6 million. This increase was primarily driven by growth in
advertising revenues associated with an expanding number of advertisers and the
growth of traffic and usage time in our Live Communities. Net revenues from
Mpath Technology Products increased 24% from approximately $2.2 million for the
six months ended June 30, 1998 to approximately $2.8 million for the six months
ended June 30, 1999. The increase was due to increased technology licensing fees
earned from both new and existing customers during the period.

     Cost of revenues. Cost of revenues increased 97% from approximately $1.5
million, or 52% of net revenues, for the six months ended June 30, 1998 to
approximately $3.0 million, or 56% of net revenues, for the six months ended
June 30, 1999. Cost of revenues increased as a percentage of net revenues
primarily due to the expense of $849,000 associated with a warrant to purchase
120,000 common shares which was granted to an internet service provider in 1995,
the terms of which were finalized during the six months ended June 30, 1999.
Another factor contributing to the increase in costs of revenues was the
significant increase in Live Communities subscriber usage and the resulting
increase in server and network costs between 1998 and 1999. Cost of revenues for
Live Communities increased from approximately $1.2 million for the six months
ended June 30, 1998 to approximately $1.7 million for the six months ended June
30, 1999 excluding the warrant expense discussed above. Cost of revenues for
Mpath Technology Products increased from approximately $382,000 for the six
months ended June 30, 1998 to approximately $524,000 for the six months ended
June 30, 1999. The increase was attributable to server costs associated with
hosting services provided to certain Mpath Technology Products customers.

                                       10
<PAGE>

     Research and development. Research and development expenses increased 111%
from approximately $1.5 million, or 52% of net revenues, for the six months
ended June 30, 1998 to approximately $3.3 million, or 61% of net revenues, for
the six months ended June 30, 1999. Research and development expenses increased
as a percentage of net revenues primarily because of a substantial increase in
engineering headcount between 1998 and 1999. The increase in research and
development expenses was primarily due to an increase in salary expense in 1999
as additional engineers were hired to support the Mpath Technology Products
development of the POP.X technology and to additional consulting fees and
software expenditures associated with this development.

     Sales and marketing. Sales and marketing expenses increased 55% from
approximately $3.7 million, or 127% of net revenues, for the six months ended
June 30, 1998, to approximately $5.8 million, or 108% of net revenues, for the
six months ended June 30, 1999. Sales and marketing expenses decreased as a
percentage of net revenues primarily because of the substantial increase in net
revenues between 1998 and 1999. The increase in sales and marketing expenses was
primarily due to an increase in marketing expense in order to grow advertising
revenues in our Live Communities business unit, increased Live Communities
marketing headcount and an increase in headcount of the Mpath Technology
Products and Live Communities sales forces.

     General and administrative. General and administrative costs increased 92%
from approximately $1.6 million, or 54% of net revenues, for the six months
ended June 30, 1998 to approximately $3.1 million, or 57% of net revenues, for
the six months ended June 30, 1999. General and administrative costs increased
primarily due to reserves taken against receivables during the six months ended
June 30, 1999. Higher salary expenses due to additional headcount in the
finance, administrative and operations support area hired to expand our
infrastructure also contributed to the increase over the prior year period.

     Stock based compensation. Stock based compensation costs increased from
approximately $1.3 million or 44% of net revenues in the six months ended June
30, 1998 to approximately $1.9 million or 35% of net revenues in the six months
ended June 30, 1999. The increase related to an increase in the number of
options granted as we continued to hire additional employees resulting in a
larger cumulative amount of options granted. The increase attributable to these
new issuances was added to the expense from grants in previous years which
continued to vest in 1999.

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

Liquidity and Capital Resources

     As of June 30, 1999, we had approximately $80.8 million of cash and cash
equivalents.

     Net cash used in operating activities for the six months ended June 30,
1999 was $8.2 million compared to $5.4 million in the six months ended June 30,
1998. For both periods, net cash used by operating activities was primarily a
result of funding ongoing expansion of our research and development and sales
and marketing efforts and the resulting larger infrastructure and support
functions.

     Net cash used in investing activities was $1.4 million for the six months
ended June 30, 1999 compared to $275,000 for the six months ended June 30, 1998.
Cash used in investing activities in each period was primarily related to
purchases of property and equipment.

     Net cash provided by financing activities in the six months ended June 30,
1999 was $89.4 million as compared to net cash used in financing activities in
the six months ended June 30, 1998 of $248,000. The major sources of financing
activities during the six months ended June 30, 1999 was our initial public
offering, through which we raised net proceeds of approximately $73.9 million
and which was completed in May 1999 and our sale of Series E preferred stock in
January 1999 through which we raised net proceeds of approximately $18.8
million.

                                       11
<PAGE>

     In 1995, we entered into a capital lease agreement with Lighthouse Capital
and we drew down all available funds of approximately $1.5 million. We entered
into a Loan and Security Agreement with Greyrock Business Credit, a Division of
NationsCredit Commercial Corporation in July 1998. The agreement consisted of a
term loan for $1.5 million, an accounts receivable revolving line of credit for
$1.5 million and a capital equipment loan of $1.0 million. Amounts borrowed
under these agreements are collateralized by substantially all our assets, bear
interest at the prime rate plus two percent and mature on June 30, 1999. By
December 1998, we had drawn down $1.5 million against the term loan agreement
and approximately $1.0 million against the capital equipment agreement. In
January 1999, we fully repaid the term loan with a portion of the net proceeds
from the sale of our Series E Preferred Stock in January 1999.  In May 1999 we
fully repaid the equipment loan from the proceeds of the IPO.  There are no
outstanding loans to Greyrock Business Credit.

     Upon the acquisition of Catapult in 1996, we assumed a convertible note
payable from Catapult bearing interest at prime and which is due together with
interest in November 2001. At December 31, 1998, we had $1,864,000 outstanding
under this note payable. On June 11, 1999, we elected to pay off the loan
balance together with the accrued interest thereon, for a total of $2,265,000.

     We currently anticipate that the net proceeds of $74 million from the
public offering which we completed in May 1999 and from the issuance of the
underwriters' overallotment in June 1999, together with our existing lines of
credit and available funds will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months. We may
need to raise additional funds in the future in order to fund more aggressive
brand promotions and more rapid expansion, to develop newer or enhanced products
or services, to fund acquisitions, to respond to competitive pressures, or to
acquire complementary businesses, technologies or services. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all.

Year 2000 Compliance

     Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.

     State of Readiness. We have made a preliminary assessment of the Year 2000
readiness of our information technology ("IT") systems, including the hardware
and software that enable us to provide and deliver our products and services. We
have completed our Year 2000 compliance plan and contracted for the services of
two Year 2000 compliance consultants. Our assessment plan consists of:

     .    quality assurance testing of our internally developed proprietary
          software incorporated in our products;

     .    contacting third-party vendors and licensors of material hardware,
          software and services that are both directly and indirectly related to
          the delivery of our products and services;

     .    contacting vendors of material non-IT systems;

     .    assessment of repair or replacement requirements;

     .    repair or replacement;

     .    implementation; and

     .    creation of contingency plans in the event of Year 2000 failures.

                                       12
<PAGE>

     In accordance with our Year 2000 compliance plan we have identified
measures that will have to be taken to avoid Year 2000 disruptions to our
business operations. We have also conducted an assessment of our systems and
third party products that must be verified for Year 2000 compliance. Our Year
2000 compliance plan schedules the following activities:

     .    First quarter 1999--Began engineering and operational work required to
          make our products Year 2000 compliant.

     .    Second quarter 1999--Completed component evaluation for Year 2000
          compliance.

     .    Third quarter 1999--Complete development of Year 2000 compliant
          systems.

     .    Third quarter 1999--Test our systems in a constrained environment for
          Year 2000 compliance.

     .    Fourth quarter 1999--Resolve remaining Year 2000 compliance issues.

     We have been informed by our hardware and software component vendors that
the products we use are currently Year 2000 compliant. We will require our other
material hardware and software component vendors to provide assurance of their
Year 2000 compliance. We will complete this process during 1999. We are
currently assessing our non-IT systems and will seek assurance of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, we will not be able to
completely evaluate whether our IT systems or non-IT systems will need to be
revised or replaced.

     We have located and printed Year 2000 readiness disclosure statements for
our software and hardware vendors. In accordance with our Year 2000 compliance
plan and under the guidance of our Year 2000 consultants we will contact our
hardware, software and service vendors concerning Year 2000 compliance, we will
contact by letter, email or fax the vendors that have not provided Year 2000
readiness disclosure statements. This communication to the vendors will request
a written response confirming that the vendor's products and services are Year
2000 compliant. At present we believe there are upgrade products for all the
significant third party hardware products, software products and services we
rely upon to operate our business. If the vendors are, in fact, not Year 2000
compliant, we may experience some short term difficulty procuring software
applications, computer hardware and telecommunication services to replace non-
compliant products and services.

     Costs. To date, we have incurred approximately $94,000 in connection with
identifying or evaluating Year 2000 compliance issues. Our expenses have related
to the operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. We anticipate our costs will
continue to include employee expenses and will increase for purchases of Year
2000 compliant upgrades to our existing hardware and software platforms. We
estimate that these costs will total between approximately $150,000 and $200,000
and approximately $100,000 for two Year 2000 compliance consultants; however, if
these costs are substantially higher than anticipated, it could have a material
adverse effect on our business, results of operations and financial condition.
The cost of Year 2000 compliance will be accounted for as an operating expense
and funded from working capital.

     Risks. We are not currently aware of any Year 2000 compliance problems
relating to our technology or our IT or non-IT systems that would have a
material adverse effect on our business, results of operations or financial
condition, without taking into account our efforts to avoid or fix potential
problems. We may discover Year 2000 compliance problems in our technology that
will require substantial revisions. In addition, third-party software, hardware
or services incorporated into our material IT and non-IT systems may need to be
revised or replaced, all of which could be time consuming and expensive. If we
fail to fix our technology or to fix or replace third-party software, hardware
or services on a timely basis, the result could be lost revenues, increased
operating costs, the loss of customers and other business interruptions, any of
which could have a material adverse effect on our business, results of
operations and financial condition. Moreover, the failure to adequately address
Year 2000 compliance issues in our technology, and

                                       13
<PAGE>

our IT and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend. In addition, there can no assurance that
governmental agencies, utility companies, Internet access companies, third-party
service providers and others outside our control will be Year 2000 compliant.
The failure by these types of entities to be Year 2000 compliant could result in
a systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering our products and services to our customers, decrease the use of the
Internet or prevent users from accessing the Web sites of our strategic
partners, which could have a material adverse effect on our business, results of
operations and financial condition.

     Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and the development of contingency plans. The results of our
Year 2000 simulation testing and the responses received from third-party vendors
and service providers will be taken into account in determining the nature and
extent of any contingency plans. We have identified our worst-case scenario as
the interruption of our business resulting from Year 2000 failure of the
electric company or our ISPs to provide services. We have not yet completed our
worst-case scenario contingency plan. Without a worst-case scenario contingency
plan we may not have enough time to complete remedial measures and implement
contingency planning for the worst-case scenario. We completed our contingency
plan in accordance with our compliance plan and under the guidance of our
consultants in July 1999.

     Certain Business Risks

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

     We have had substantial losses since our inception and our operating losses
may increase in the future. Accordingly, we cannot assure you that we will ever
become or remain profitable. If our revenues fail to grow at anticipated rates,
our operating expenses increase without a commensurate increase in our revenues
or we fail to adjust operating expense levels accordingly, our business, results
of operations and financial condition will be adversely affected. As of June 30,
1999, we had an accumulated deficit of $64.2 million. Although we have
experienced growth in net revenues, members, customers and Internet reach in
recent periods, we cannot be certain that our growth rates will continue at
their current levels or increase in the future.

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

     Mpath Technology Products revenues have accounted for the majority of our
revenues to date. Historically, we have received a significant portion of our
Mpath Technology Products revenues from a limited number of sales and license
agreements. Therefore, any downturn in the business of these customers or
potential customers could have a material adverse effect on our revenues and
quarterly results of operations. We believe that a customer's decision to
license our technology is relatively discretionary and, for large-scale users,
often involves a significant long-term commitment of resources. We currently
have fourteen Mpath Technology Products customers.

                                       14
<PAGE>

     Our Mpath Technology Products customers often take a long time to evaluate
our products and services, and many people are involved in the sales process.
The long sales and implementation cycles for our products and services and the
timing of these sales may cause license and service revenues and operating
results to vary significantly from period to period. We spend a lot of time
educating and providing information to our prospective customers regarding the
use and benefits of our products and services. Even after deciding to license
our products, our customers tend to deploy our products slowly and deliberately
depending on the expertise of the customer, the size of deployment, the
complexity of the customer's system architecture, the quantity of hardware
involved, and the degree of hardware and software configuration necessary to
deploy our products.

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

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

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

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

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

     Although we view our strategic relationships with media, Internet and
technology companies as a key factor in our overall business strategy, we cannot
be certain that we will be successful in developing new strategic relationships
or that our strategic partners will view such relationships as significant to
their own business or that they will continue their commitment to us in the
future. Our business, results of operations

                                       15
<PAGE>

and financial condition, and our stock price may be materially adversely
affected if any strategic partner discontinues its relationship with us for any
reason. Additionally, any party to a strategic agreement with us may fail to
perform its contractual obligations and we cannot be certain that we could
enforce any such agreement. We do not generally establish minimum performance
requirements for our strategic partners but instead rely on their voluntary
efforts. In addition, most of these agreements may be terminated by either party
with little notice. Therefore, we cannot be certain that these relationships
will be successful.

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

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

     As part of our business strategy, we review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. Future acquisitions by us could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could materially and adversely affect
our results of operations. Furthermore, acquisitions entail numerous risks and
uncertainties, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which we have no or limited
prior experience, and potential loss of key employees of acquired organizations.

     Our future success depends in large part upon our ability to aggregate and
deliver compelling content over the Internet. If we fail to aggregate and
deliver compelling third-party content to our users, Web traffic to our site
might decrease and, as a result, advertising revenue might decrease. This could
have a material adverse effect on our business, results of operations and
financial condition. Although we create some of our own content such as poker
and chess, we also rely on third-party content providers, such as game
developers, for entertaining content. Our ability to aggregate and deliver
compelling content provided by third parties may be adversely impacted by a
number of factors, including the following: third-parties may increase the price
of the content they provide, many of our third-party content providers compete
with us for members and advertising and may decide not to provide us with
content, our contracts with third-party content providers are usually short-term
and may be canceled if we do not fulfill our obligations, and our

                                       16
<PAGE>

competitors and many of our third-party content providers provide content that
is similar or the same as our content and may do so at a lower cost.

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

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

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

     We currently sell the vast majority of our Mpath Technology Products and
services through our internal sales staff. If demand for our products and
services increases, however, we will need to enter into reseller arrangements
with Web development firms, enterprise applications resellers and OEM partners
to distribute our products and technologies. If we do not adequately develop and
maintain a network of resellers and OEMs, our business, results of operations
and financial condition could be adversely impacted. Resellers and OEMs
frequently have exclusive sales territories pursuant to individually negotiated
contracts, which may limit our ability to build and expand our network of
resellers and OEMs. In addition, some resellers and OEMs may offer products of
one or more of our competitors, and they may emphasize our competitors' products
at the expense of our products.

    Also inherent in our business are additional risks, which include, but are
not limited to: competition in the market for Internet users and for Live
Community technology and services; our ability to successfully manage our
growth, our ability to hire and retain personnel, our ability to protect our

                                       17
<PAGE>

proprietary software and intellectual property, and patent, product liability
and other litigation. In addition, potential new government regulations could
have an adverse effect on our ability to target product offerings and attract
advertisers and would have a material adverse effect on our business, results of
operations and financial condition.



ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

     Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not plan to use derivative financial instruments in
our investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment
risk. We plan to mitigate default risk by investing in high-credit quality
securities.


PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On September 20, 1996, Mpath, MPCAT Acquisition Corporation (a wholly-owned
subsidiary of Mpath), and Catapult Entertainment, Inc. executed an Agreement and
Plan of Reorganization. The agreement provided for the merger of MPCAT into
Catapult such that Catapult would be the surviving corporation and would become
a wholly-owned subsidiary of Mpath. In addition, Catapult agreed, as part of the
merger agreement, that it would file a voluntary bankruptcy petition. On October
10, 1996, Catapult filed a voluntary bankruptcy petition under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court for the
Northern District of California, San Jose Division. On November 15, 1996, the
Bankruptcy Court entered its order, which approved the merger between MPCAT and
Catapult. At the same time, the Bankruptcy Court entered a separate order that
authorized Catapult to assume two patent licenses that it had obtained from
Steve Perlman prior to filing the bankruptcy petition. Mr. Perlman objected to
the assumption of his licenses by Catapult, and on November 18, 1996, Mr.
Perlman filed an appeal with the United States District Court for the Northern
District of California, San Jose Division. On August 7, 1997, the District Court
affirmed the Bankruptcy Court decision. On September 8, 1997, Mr. Perlman filed
an appeal with the Ninth Circuit Court of Appeals, and on January 28, 1999, the
Ninth Circuit reversed the Bankruptcy Court and the District Court. The Ninth
Circuit held that Catapult could not assume Mr. Perlman's licenses without Mr.
Perlman's consent. Catapult has filed a petition for certiorari. The United
States Supreme Court has requested Mr. Perlman to provide a response.

     We have been informed that the current holder of the rights to these
patents is Microsoft. We believe that the technology used in our products and
services does not infringe upon these patents. However, if a court were to rule
that our technology did infringe upon these patents, we believe we will be able
to work around these patents. Even if we were unable to work around these
patents and were required to remove these portions of our technology, we do not
believe that this would have a material adverse effect on our business, results
of operations, or financial condition.

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

                                       18
<PAGE>

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

  (c) Recent Sales of Unregistered Securities.

During the three months ended June 30, 1999, Mpath has issued an aggregate of
863,955 options to purchase its common stock, net of lapsed options of  68,545
to its employees, directors and consultants with exercise prices ranging from
$8.87 to $29.50 per share exclusive of options registered under the Securities
Act.  The issuance of these securities was deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. Almost all of these
issuances were made in reliance upon Rule 701 promulgated under the Securities
Act. Those issuances that were not made in reliance upon Rule 701 were to
officers of Mpath whose relationship with Mpath provided for adequate access to
information about Mpath.

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

     On May 4, 1999, Mpath completed an initial public offering of its 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,
Mpath paid an aggregate of $5,651,100 in underwriting discounts and commissions
to the Underwriters. In addition, the following table sets forth the other
material expenses incurred in connection with the offering.


<TABLE>
<CAPTION>
                                                                       Amount Paid
                                                                   --------------------
<S>                                                                <C>
Securities and Exchange Commission registration fee                       $   50,000
,NASD filing fee                                                               5,500
NASDAQ National Market listing fee                                            95,000
Printing and engraving expenses                                              245,000
Legal fees and expenses                                                      361,500
Accounting fees and expenses                                                 189,700
Blue Sky qualification fees and expenses                                       3,000
Transfer Agent and Registrar fees                                              5,500
Miscellaneous fees and expenses                                              233,800
                                                                          ----------
Total                                                                     $1,189,000
                                                                          ----------
</TABLE>

     After deducting the underwriting discounts and commissions and the offering
expenses described above, Mpath received net proceeds from the offering of
approximately $73,900,000. Mpath has used the net proceeds from its initial
public offering of Common Stock to invest in interest bearing investment grade
instruments and to fund the general operations of Mpath. In addition, Mpath
currently expects to use the net proceeds primarily for working capital and
general corporate purposes, including approximately $5.0 million for funding
product development and approximately $5.0 million for expanding its sales and
marketing organization. In addition, Mpath may use a portion of the net proceeds
for further development of its product lines through acquisitions of products,
technologies and businesses.  None of Mpath's net proceeds of the offering were
paid directly or indirectly to any director, officer, general partner of Mpath
or their associates, persons owning 10% or more of any class of equity
securities of Mpath, or an affiliate of Mpath.

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<PAGE>

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.

     (a) Exhibits

     EXHIBIT
     NUMBER                                  DESCRIPTION
     -------                                 -----------
       27.1                                  Financial Data Schedule


     (b) Reports on Form 8-K

     None

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

MPATH INTERACTIVE, INC.

       By:  /s/ LINDA R. PALMOR _______________________    Date: August 5, 1999

     Linda R. Palmor
     Chief Financial Officer
     (Principal Accounting and Financial Officer)

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