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

FORM 10-K/A-2

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|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|--- | ----------------------------------------------------------------------------------------
|    | For the Fiscal Year Ended: December 31, 2000                                            
|OR 
|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-25520

CENTERSPAN COMMUNICATIONS CORPORATION(Exact name of registrant as specified in its charter)

|Oregon                                                         |  | 93-1040330                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|7175 NW Evergreen Parkway #400
Hillsboro, Oregon               |  | 97124-5839                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrant's telephone number, including area code:503-615-3200

Securities
registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
/ /

The
aggregate market value of the voting stock held by non-affiliates of the Registrant is $63,351,457 as of March 20, 2001 based upon the last sales price ($13.00) as reported by
the Nasdaq National Market System.

The
number of shares outstanding of the Registrant's Common Stock as of March 20, 2001 was 8,046,285 shares.

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Documents Incorporated by Reference

The
Registrant will incorporate into Part III of Form 10-K by reference portions of its Proxy Statement for its 2001 Annual Meeting of Shareholders.

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CENTERSPAN COMMUNICATIONS CORPORATION  2000 FORM 10-K/A-2 ANNUAL REPORT  TABLE OF CONTENTS

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I    
|Item 1.    |  | Business                                                                              |  | 2   
|PART II   
|Item 6.    |  | Selected Financial Data                                                               |  | 6   
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 8   
|Item 8.    |  | Consolidated Financial Statements and Supplementary Data                              |  | 20  
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 37  
|Signatures |  | 38                                                                                   

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Item 1. Business

Overview

CenterSpan Communications Corporation ("CenterSpan" or the "Company") was originally incorporated in 1990 as ThrustMaster, Inc., an Oregon corporation. The Company
changed its name to CenterSpan Communications Corporation in October 1999.

CenterSpan's
hardware business historically accounted for the bulk of the Company's revenues and expenses. From its founding in 1990 through 1997, CenterSpan (formerly ThrustMaster) was a leader in
designing and marketing innovative PC game controller products. However, commencing in 1997, many larger competitors including Microsoft Corporation, Kensington (Gravis), Logitech International S.A.,
and InterAct Accessories, which had greater economies of scale, financial, technical and marketing resources than CenterSpan, entered the game controller market, creating an extremely competitive
environment characterized by declining prices and increased marketing costs. CenterSpan's management determined that CenterSpan could not achieve the economies of scale necessary to be profitable in
the game controller market in the foreseeable future and concluded that the Company should sell the hardware business and invest the proceeds in the Company's Internet community, collaboration and
communication business. The hardware business was sold in July 1999 for $15 million in cash, subject to certain adjustments.

Following
the sale of the hardware business in 1999, CenterSpan began developing and marketing peer-to-peer Internet communication and collaboration solutions.

In
the first quarter of 2000, we released a beta version of our Internet communications software product, Socket, which is based on three technologies developed by the Intel Architecture
Labs. These technologies facilitate PC-to-PC text messaging and multi-point audio over the Internet, enabling communication and collaborative information sharing.

The
Company has launched a next generation peer-to-peer digital distribution channel, the new Scour Exchange, which enables members to search and enjoy content,
such as music and video files, in a secure and legal environment. We began beta testing of the new Scour Exchange in March 2001and
expect to begin receiving revenue from the paid subscription version of the Scour Exchange in the second half of 2001.

Digital Distribution Channel

In the third quarter of 2000, we began development of a peer-to-peer file sharing and search network utilizing digital rights management technology,
which we code-named C-star. In December 2000, CenterSpan purchased certain assets of Scour, Inc. ("Scour") as approved by the U.S. Bankruptcy Court. Prior to its
bankruptcy, Scour developed Internet information location tools and provided other online services. Its search and peer-to-peer file sharing application, Scour
Exchange, facilitated the search and exchange of digital audio, video and image files over the Internet. Scour was pursuing an advertising based revenue model with respect to the free
sharing of files in the old Scour Exchange. CenterSpan began testing a free beta version of its new Scour Exchange, incorporating the C-star technology, in
March 2001 to test its secure and legal digital distribution channel, which integrates peer-to-peer technology with digital rights management support. We believe that
the purchase of the Scour brand name and access to a portion of the Scour Exchange user base as potential subscribers will provide a significant acceleration in the acceptance of a
digital distribution channel. As of March 31, 2001, over 300,000 participants have registered for this beta test. In the second half of 2001, CenterSpan plans to launch a tiered paid
subscription service. We also expect to generate revenue from licensing the C-star technology as a platform for secure and legal digital distribution.

2

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Internet Communications Software

On May 31, 1998 CenterSpan entered into a license agreement with Intel Corporation ("Intel") that licensed to CenterSpan certain software source code technology related
to voice communications over the Internet. In August 1999, we entered into a second license agreement with Intel that licensed to CenterSpan additional software source code for development of
its Internet community, collaboration and communications products. In April 2000, we signed an amendment to our August 1999 license agreement with Intel, which provides CenterSpan with
rights to all current and future development of "Launch and Connect" technology, which is a significant component of our Socket product. The "Launch and Connect" technology allows groups
to launch and participate in online activities (e.g. multi-player online video games) while continuing to communicate through voice or text conferencing over the Internet. The amendment grants
CenterSpan exclusive rights, subject to performance obligations, to all engineering development, support, marketing and licensing of the "Launch and Connect" technology with a final expiration date of
April 21, 2005.

At
the end of the first quarter of 2000, we released a beta version of our Socket product and during the second quarter of 2000 released Socket 1.0. The adoption rate of
Socket was less than expected. We believe that was due primarily to a lack of open standards for communications between instant
messaging products. We anticipated having more than 1 million registered Socket users by the end of 2000, but achieved fewer than 50,000. We believe that the future of Internet
community, collaboration and communications will be driven by open, standards-based technology and solutions and that the failure to register users for Socket was caused by the lack of
these standards. The revenue model for 2000 for the Socket product was based on expected affiliate fees to be received from e-commerce partners for sales of multi-player
applications such as video games generated by comparison of capabilities of Socket users. Due to the low rate of adoption and use of the Socket product, the Company earned
only $1 thousand in revenue from affiliate fees during 2000. We have discontinued all distribution efforts related to Socket and we are not currently promoting or marketing
Socket, although the software is still available.

Product Development and Technology

Digital Distribution Channel

CenterSpan
began beta testing the new Scour Exchange in March 2001 for the secure and legal distribution of digital content.

The
capabilities of the new Scour Exchange are expected to allow users to:



Benefits
for content providers include:



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Benefits
for the consumer include:



The
new Scour Exchange on-line music and video subscription service is expected to be implemented in the second half of 2001. We expect to charge a tiered subscription with a
free tier in which promotional video and music are distributed. In addition, we expect to have middle and premium tiers at monthly rates that may range from $4.95 to $24.95. Exact rates have not yet
been established. The more expensive tiers will allow for a larger amount of file downloads for more popular music. We also anticipate generating revenue from the new Scour Exchange
through commissions earned related to the
distribution and purchase of digital content and physical goods and from integrated advertising placements.

CenterSpan
also anticipates generating revenue from the licensing of the C-star technology to third parties as a platform for secure and legal digital distribution channels in areas such
as secure documents, e-books and editorial content, in addition to media and entertainment. The Company paid $5.8 million in cash and issued 333,333 shares of its Common Stock to
acquire certain assets from Scour. CenterSpan expended approximately $1.0 million on selling, general and administrative expenses through December 31, 2000 preparing for the launch of
Scour Exchange in the first quarter of 2001. In addition, the majority of CenterSpan's research and engineering expenses of $2.7 million in the second half of 2000 were for the
development of a new backend technology infrastructure originally expected to be incorporated into a new version of Socket that became the basis for the C-Star technology. In
the first quarter of 2001, CenterSpan expended approximately $3.0 million on research and engineering and selling, general and administrative expenses related to Scour Exchange.
Through the first quarter of 2001, CenterSpan generated $12,000 of advertising revenue derived from Scour Exchange.

Internet Community, Collaboration and Communication

CenterSpan
has developed a desktop-based "Internet Activity Hub" called Socket, targeted at small groups of mainstream Internet users. The hub is built around a core technology, currently
licensed from Intel Corporation, that encompasses the following areas:



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Due
to a lower than anticipated adoption rate, we have discontinued all distribution efforts related to Socket, although the software is still available, and we are not currently
promoting or marketing Socket. The resources we currently expend on Socket are not material and we do not currently have any plans to expend significant resources on Socket
in the future.

Research and Engineering

Research and engineering expenses consist primarily of salaries and related expenses, consultant fees and the cost of software used in product development. Research and
engineering expenses were $4.9 million in 2000 compared to $3.3 million in 1999. Included in the amount for 2000 is a $1.3 million non-cash charge related to the value
of a warrant issued to Intel in exchange for the license of certain technology, which was used in products under development at that time. Included in the 1999 amount is a $2.5 million
non-cash charge primarily related to the value of a warrant issued to Intel in exchange for the license of certain technology, which was used in products under development at that time.
The warrant issued to Intel was for the purchase of 125,000 shares of CenterSpan's Common Stock at $13.41 per share, which represented a 15% discount to an average of the preceding 10 day
closing stock price. The warrant vested immediately and is exercisable until April 21, 2005. This warrant was valued using the Black-Scholes model with the following assumptions: expected
dividends, 0%; risk-free interest rate, 5.9%; volatility, 83%; and expected life, 5 years.

CenterSpan
made significant investments in research and engineering in 2000 related to its Internet community, collaboration and communications software business. CenterSpan significantly increased
the size of its engineering department during 2000 and at December 31, 2000 the Company had 26 in the engineering group compared to 16 at December 31, 1999. CenterSpan plans to make
similar investments in research and engineering during 2001 as in 2000.

Sales, Distribution and Marketing

CenterSpan is pursuing a subscription revenue model for the new Scour Exchange. The new Scour Exchange will be available by pointing a user's browser
to the Scour.com web-site. CenterSpan is also pursuing a licensing revenue model for application of its search and peer-to-peer file sharing technology
as a platform licensed to third parties for secure and legal digital distribution channels in areas such as secure documents, e-books and editorial content, in addition to media and
entertainment.

CenterSpan
attempted to use a commission based business model relative to the Internet communications software business. Socket is distributed via free downloads from certain Internet
sites. CenterSpan's earlier software products, Talk n'Play and iConference, were sold to end users through various retail channels. Based on the lack of success achieved through the retail channels,
CenterSpan chose to distribute Socket free of charge to attempt to obtain broader distribution in a timely manner. We expected that this would lead to greater long-term revenue generating
potential.

CenterSpan
intends to use a comprehensive marketing campaign and word-of-mouth, or "viral expansion," to help in attracting subscription users of its software as well as a
direct sales group with respect to technology licensing. CenterSpan also intends to market the new Scour Exchangesubscription service directly to former users of the old Scour
Exchange.

CenterSpan
spent $462,000 and $159,000 on advertising related to its continuing operations during 2000 and 1999, respectively. No amounts were spent in 1998 related to advertising for CenterSpan's
Internet software business.

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Competition

The Internet digital distribution channel business is competitive. We expect competition to increase in the future. Our principal competitors include Internet music
distributors through digital download or streaming technologies such as MP3.com, Napster, Liquid Audio, Duet and Real Networks, music labels and movie studios, as well as providers of digital
distribution services, such as MusicNet and RioPort. Many of our current and future competitors may have advantages over us, including:



Intellectual Property

Some of the intellectual property rights used in the development of the CenterSpan's software products are licensed from Intel Corporation. These licenses were expensed in a
prior year and expire August 21, 2005. The Company has applied for registration of the names CenterSpan, Socket and Scour Exchange. CenterSpan relies on
patent, trademark and copyright law, trade secret protection and confidentiality agreements with it employees, strategic partners and others to protect its proprietary rights. Although we believe that
our products, processes and trademarks do not infringe on the rights of others, third parties may assert infringement or other related claims against CenterSpan in the future. Any infringement claim
or related litigation against CenterSpan, or any challenge to the validity of CenterSpan's own intellectual property rights, and the expense and effort of defending the same, could materially and
adversely affect our business, financial condition and results of operations.

Employees

As of December 31, 2000, we had a total of 53 full-time employees. At times, we supplement our workforce with temporary contract workers. None of
CenterSpan's employees are represented by a labor union. CenterSpan has not experienced any work stoppages and considers its relations with its employees to be good.

Item 6. Selected Financial Data

The following selected consolidated financial data relating to CenterSpan should be read in conjunction with CenterSpan's consolidated financial statements and the related
notes thereto. On July 26, 1999, the Board of Directors of the Company approved the sale of the Company's hardware business assets.

6

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The Company has presented the hardware business as a discontinued operation in the selected consolidated financial data presented below.

|IN THOUSANDS (except per share amounts)                                                                             |                                     | 2000 |         | 1999   |   | 1998    |       | 1997 |        | 1996  |  
|------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ---- | ------- | ------ | - | ------- | ----- | ---- | ------ | ----- | -
|Consolidated Statement of Operations Data                                                                           |                                     |      |         |        |   |         |       |      |        |       |  
|Revenues                                                                                                            |                                     | $    | 1       |        | $ | 787     |       | $    |       |       | $
|Cost of goods sold                                                                                                  |                                     |      |        |        |   | 569     |       |      |       |       |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Gross profit                        |      |         | 1      |   |         | 218   |      |        |      |  
|Operating expenses:                                                                                                 |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Research and engineering            |      |         | 4,865  |   |         | 3,282 |      |        | 162   |  
|                                                                                                                    | Selling, general and administrative |      |         | 5,499  |   |         | 2,474 |      |        | 935   |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Total operating expenses            |      |         | 10,364 |   |         | 5,756 |      |        | 1,097 |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Loss from operations                                                                                                |                                     |      | (10,363 | )      |   | (5,538  | )     |      | (1,097 | )     |  
|Interest income                                                                                                     |                                     |      | 895     |        |   | 417     |       |      | 64     |       |  
|Loss from beneficial conversion feature                                                                             |                                     |      |        |        |   | (987    | )     |      |       |       |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Income (loss) from continuing operations before income taxes                                                        |                                     |      | (9,468  | )      |   | (6,108  | )     |      | (1,033 | )     |  
|Provision for income taxes                                                                                          |                                     |      |        |        |   | (4,532  | )     |      |       |       |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Income (loss) from continuing operations                                                                            |                                     |      | (9,468  | )      |   | (10,640 | )     |      | (1,033 | )     |  
|Income (loss) from discontinued operations, net of tax provision (benefit) of $0, $(5,792), $1,615, $1,370 and $687 |                                     |      |        |        |   | (5,207  | )     |      | (8,023 | )     |  
|Gain on disposal of discontinued operations                                                                         |                                     |      |        |        |   | 6       |       |      |       |       |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Net income (loss)                                                                                                   |                                     | $    | (9,468  | )      | $ | (15,841 | )     | $    | (9,056 | )     | $
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Income (loss) per share from continuing operations:                                                                 |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Basic                               |      | $       | (1.52  | ) | $       | (2.11 | )    | $      | (0.24 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Diluted                             |      | $       | (1.52  | ) | $       | (2.11 | )    | $      | (0.24 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Income (loss) per share from discontinued operations:                                                               |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Basic                               |      | $       |       |   | $       | (1.03 | )    | $      | (1.83 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Diluted                             |      | $       |       |   | $       | (1.03 | )    | $      | (1.83 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Net income (loss) per share:                                                                                        |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Basic                               |      | $       | (1.52  | ) | $       | (3.14 | )    | $      | (2.07 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Diluted                             |      | $       | (1.52  | ) | $       | (3.14 | )    | $      | (2.07 | )
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|Shares used in per share calculations:                                                                              |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Basic                               |      |         | 6,231  |   |         | 5,038 |      |        | 4,380 |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  
|                                                                                                                    | Diluted                             |      |         | 6,231  |   |         | 5,038 |      |        | 4,380 |  
|                                                                                                                    |                                     |      |         |        |   |         |       |      |        |       |  

|IN THOUSANDS                    |  | 2000 |        | 1999 |   | 1998   |  | 1997 |        | 1996
|------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|Consolidated Balance Sheet Data |  |      |        |      |   |        |  |      |        |     
|Working capital                 |  | $    | 6,998  |      | $ | 15,535 |  | $    | 10,685 |     
|Total assets                    |  |      | 20,855 |      |   | 19,357 |  |      | 25,954 |     
|Total liabilities               |  |      | 3,165  |      |   | 3,397  |  |      | 14,401 |     
|Shareholders' equity            |  |      | 17,690 |      |   | 15,960 |  |      | 11,553 |     

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

This
management's discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto, included elsewhere in this
Form 10-K/A-2.

Forward Looking Information

The discussion and analysis below as well as other items and attachments to this Form 10-K/A-2 contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about
themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact that CenterSpan makes in this Report on Form 10-K/A-2 are forward-looking. In particular,
statements regarding the adequacy of funds to meet CenterSpan's current or future cash needs; the development of its software products; the Internet community, collaboration and communications market;
and its future results of operations or financial position are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify forward-looking statements. However, the absence of these words does not mean the statement is not forward-looking. CenterSpan cannot guarantee any of the forward-looking
statements, which are subject to risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from those CenterSpan forecasts in forward-looking statements
due to a variety of factors, including some of those set forth elsewhere within this discussion. CenterSpan does not intend to update any forward-looking statements due to new information, future
events or otherwise. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to
other forward-looking statements.

Continuing Operations

The continuing operations of the Company consist of its software business, which began in mid-1998.

In
the third quarter of 2000, CenterSpan began development of a peer-to-peer file sharing and search network utilizing digital rights management technology, which is
code-named C-star. In December 2000, CenterSpan purchased certain assets of Scour, Inc. ("Scour") as approved by the U.S. Bankruptcy Court. Prior to its
bankruptcy, Scour developed Internet information location tools and provided other online services. Its search and peer-to-peer file sharing application, Scour
Exchange, facilitated the search and exchange of digital audio, video and image files over the Internet. We began beta testing of the new Scour Exchange, incorporating the
C-star technology, in March 2001 to test its secure and legal
digital distribution channel, which integrates peer-to-peer technology with digital rights management support. To date, more than 300,000 beta participants have registered for
this beta test. In the second half of 2001, CenterSpan plans to launch a tiered paid subscription service.

CenterSpan
is pursuing a tiered subscription revenue model for Scour Exchange and also expects to receive revenue from merchandise sales, advertising placements on the Scour.com website
and integrated advertising in the Scour Exchange. Scour Exchange will be available by pointing a user's browser to the Scour.com website. CenterSpan is also pursuing a
licensing revenue model for applications of its search and peer-to-peer file sharing technology to third parties for secure and legal digital distribution channels in areas
such as secure documents, e-books and editorial content, in addition to media and entertainment.

8

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Our Internet communications software product Socket is based on three technologies developed by the Intel Architecture Labs. These technologies facilitate PC-to-PC
text messaging and multi-point audio over the Internet, enabling communication and collaborative information sharing. Due to a lower than anticipated adoption rate, we have discontinued all
distribution efforts related to Socket, although the software is still available, and we are not currently promoting or marketing Socket. The resources we currently expend on
Socket are not material and we do not currently have any plans to expend significant resources on Socket in the future.

Results of Continuing OperationsYear Ended December 31, 2000 Compared to 1999

Revenues

Total revenues were $1,000 in 2000 compared to $787,000 in 1999. At the end of the first quarter of 2000, CenterSpan released a beta version of its Socket product
and during the second quarter of 2000 released Socket 1.0. However, CenterSpan did not generate any revenues during the first, third or fourth quarters of 2000 and only $1,000 in the
second quarter of 2000 related to the Socket releases. CenterSpan anticipated 2000 to be an investment year, in which the focus was on the distribution of Socket to
end-users and did not expect to generate significant revenue. The adoption rate of Socket was less than expected, primarily, we believe, due to a lack of open standards for
communications between instant messaging products. We believe that the future of Internet community, collaboration and communications will be driven by open, standards-based technology and solutions.

The
$787,000 of revenue generated in 1999 was from the retail sale of Talk n'Play and iConference software products. The Company discontinued marketing and selling Talk n'Play and iConference during
2000 when it was determined that such products would not generate sufficient revenue to support the business.

Gross Profit

Gross profit for 2000 was $1,000 (100% of revenue) generated from affiliate fees from e-commerce partners relative to the Socket product.

Gross
profit for 1999 was $218,000 (27.7% of revenues) and was generated from the retail sale of Talk n'Play and iConference products and is net of the cost of production and inventory adjustments.

Research and Engineering

Research and engineering expenses consist primarily of salaries and related expenses, consultant fees and the cost of software used in product development. Research and
engineering expenses were $4.9 million in 2000 compared to $3.3 million in 1999. Included in the amount for 2000 is a $1.3 million non-cash charge related to the value
of a warrant issued to Intel in exchange for the license of certain technology, which was used in products under development at that time. Included in the 1999 amount is a $2.5 million
non-cash charge primarily related to the value of a warrant issued to Intel in exchange for the license of certain technology, which was used in products under development at that time.
CenterSpan made significant investments in research and engineering in 2000 related to its Internet community, collaboration and communications software business. CenterSpan significantly increased
the size of its engineering department during 2000 and at December 31, 2000 the Company had 26 in the engineering group compared to 16 at December 31, 1999. The increase in 2000 compared
to 1999 is due to a $2.4 million increase in salaries, recruiting and related costs associated with the development of Socket and C-star and a $157,000 increase in
depreciation. CenterSpan plans to make similar investments in research and engineering during 2001 as in 2000, primarily for further development of its C-star technology and the related
Scour Exchange.

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Selling, General and Administrative

Selling, general and administrative expenses consist of salaries and related expenses for personnel engaged in direct sales, partner development, consultant fees, advertising,
promotional materials, executive, legal, accounting and administrative personnel, professional services and general corporate expenses. Selling, general and administrative expenses increased to
$5.5 million in 2000 from $2.5 million in 1999, as a result of expanding the Company's workforce and marketing activities related to the Internet community, collaboration and
communications software business. CenterSpan incurred $424,000 of additional marketing and advertising costs in 2000 for the launch of the Socket product. CenterSpan significantly
increased the number of employees assigned to continuing operations in marketing, product development and administration and, as a result, salaries, recruitment and related costs increased
$1.5 million in 2000 compared to 1999. At December 31, 2000, the company had 27 people in marketing, product development and administration compared to 19 at December 31, 1999.
CenterSpan also incurred an additional $415,000, including increased depreciation, related to improved Internet infrastructure and bandwidth charges during 2000, primarily for support of the
Socket product. The increases in the selling and marketing activities in 2000 were undertaken with the assumption that the Company would generate revenue from its Socket
product to support such expenditures. When revenues did not materialize as anticipated, CenterSpan reduced, and, by the end of 2000, virtually eliminated, spending related to Socket. In
the fourth quarter of 2000, CenterSpan began focusing its selling and marketing activities on the new ScourExchange.

Interest Income

Interest income increased to $895,000 in 2000 from $417,000 in 1999 as a result of increased cash balances, which resulted primarily from private placements of debt and equity
securities during 1999 and the sale of CenterSpan's hardware business in October 1999 for $15.0 million.

Loss from Beneficial Conversion Feature

On June 9, 1999, CenterSpan issued and sold to two investors $6.0 million aggregate principal amount of its zero coupon Convertible Debentures due June 9,
2002 for $6.0 million in cash. The Convertible Debentures were recorded as debt. The beneficial conversion feature was recorded as additional paid in capital and as a discount against
long-term debt. The beneficial conversion feature of $987,000 was recognized over 90 days using the effective interest method. The debt was converted to equity prior to
December 31, 1999.

Provision for Income Taxes

A valuation allowance has been recorded for the full amount of deferred tax assets generated in 2000 due to the uncertainty regarding the utilization of the net operating loss
and credit carryforwards. CenterSpan's tax provision for 1999 includes the establishment of a full valuation allowance of $8.4 million on CenterSpan's deferred tax asset due to the change in
CenterSpan's business and the uncertainty regarding the realization of the asset balance. CenterSpan has federal, state and foreign net operating loss carryforwards of $22,107, $30,002 and $6,551,
respectively, that expire from 2013-2021.

Year Ended December 31, 1999 Compared to 1998

The continuing operations of CenterSpan consist of its software business, which began in mid-1998 and began generating revenues in 1999.

10

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Revenues

Revenues for 1999 were generated from the sale of two products, Talk n'Play and iConference, and totaled $787,000. The Company discontinued the retail sale of these products in
the fourth quarter of 1999.

Gross Profit

Gross profit for 1999 was $218,000 (27.7% of revenues) and was generated from the retail sale of Talk n'Play and iConference products and is net of the cost of production and
inventory adjustments.

Research and Engineering

Research and engineering expenses were $3.3 million in 1999 and $162,000 in 1998. Included in the 1999 amount is a $2.5 million non-cash charge
primarily related to the value of a warrant issued to Intel in exchange for the license of certain technology, which was used in products under development at
that time. The Company made significant investments in research and engineering in 1999 related to its Internet community, collaboration and communications software business, expanding the software
engineering employee base from 11/2 full time equivalent employees at December 31, 1998 to 16 at December 31, 1999. The increase in engineering employees is responsible
for the remainder of the increase in research and engineering expense in 1999 compared to 1998.

Of
the total research and engineering expenses, $250,000 and $162,000 in 1999 and 1998, respectively, have been allocated to continuing operations from the discontinued hardware business based on the
number of employees remaining with the software business, their related employee costs and overhead for facilities and other related costs and corporate overhead expenses that were expected to
represent continuing expenses. Employee costs, determined by head count working in the software business activities, represented $190,000 and $110,000 in 1999 and 1998, respectively; while overhead
for facilities and other related costs, as determined by relative square footage associated with the software business, totaled $60,000 and $52,000 in 1999 and 1998, respectively.

Selling, General and Administrative

Selling, general and administrative expenses increased to $2.5 million in 1999 from $935,000 in 1998 as a result of expanding the workforce and other activities related
to the Internet community, collaboration and communications software business. CenterSpan incurred $97,000 for marketing, packaging and advertising costs related to the Talk n'Play and iConference
retail products in 1999. The expanded workforce contributed $101,000 to the increase in selling, general and administrative expenses in 1999 compared to 1998.

Of
the total selling, general and administrative expenses, $1.1 million and $935,000 in 1999 and 1998, respectively, have been allocated to continuing operations from the discontinued hardware
business, based on the number of employees remaining with the software business, their related employee costs and overhead for facilities and other related costs and corporate overhead expenses that
were expected to represent continuing expenses. Employee costs, determined by head count working in the software business activities, represented $616,000 and $515,000 in 1999 and 1998, respectively;
while overhead for facilities and other related costs, as determined by relative square footage associated with the software business, totaled $510,000 and $435,000 in 1999 and 1998, respectively.

Interest Expense

Interest expense was allocated to the discontinued operations of the hardware business.

11

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Interest Income

Interest income increased to $417,000 in 1999 from $64,000 in 1998 as a result of increased cash balances, which resulted primarily from private placements of debt and equity
securities during 1999 and the sale of the hardware business in October 1999 for $15.0 million.

Loss from Beneficial Conversion Feature

On June 9, 1999, the Company issued and sold to two investors $6.0 million aggregate principal amount of the Company's zero coupon Convertible Debentures due
June 9, 2002 for $6.0 million in cash. The Convertible Debentures were recorded as debt. The beneficial conversion feature was recorded as additional paid in capital and as a discount
against long-term debt. The beneficial conversion feature of $987,000 was recognized over 90 days using the effective interest method. The debt was converted to equity prior to
December 31, 1999.

Provision for Income Taxes

The Company's tax provision for 1999 includes the establishment of a full valuation allowance of $8.4 million on the Company's deferred tax asset due to the change in
the Company's business. A valuation allowance has been recorded for the full amount of deferred tax assets, as a result of uncertainty regarding the realization of the asset balance.

Results of Discontinued OperationsSale of the Hardware Business

CenterSpan's hardware business had historically comprised the bulk of the Company's revenues and expenses. From its founding in 1990 through 1997, CenterSpan (formerly
ThrustMaster) was a leader in designing and marketing innovative PC game controller products. However, commencing in 1997, many larger competitors, including Microsoft Corporation, Kensington
(Gravis), Logitech International S.A., and InterAct Accessories, which had greater economies of scale, financial, technical and marketing resources than CenterSpan, entered the game controller market,
creating an extremely competitive environment characterized by declining prices and increased marketing costs. CenterSpan's management determined that CenterSpan could not achieve the economies of
scale necessary to be profitable in the game controller market and concluded that the Company should sell the hardware business and invest the proceeds in the Company's Internet community,
collaboration and communication business.

On
July 26, 1999, CenterSpan entered into an agreement to sell substantially all of the assets of its hardware business including related sales and return warranty reserves. This transaction
closed on October 1, 1999 for $15.0 million in cash, $2.25 million of which remains in an escrow account (see Item 3. Legal Proceedings in the Company's
Form 10-K). The Company recorded a gain on the disposal of its hardware business of $6,000 in the fourth quarter of 1999.

The
sale of the hardware business has been accounted for as discontinued operations and, accordingly, its operations are segregated in the statements of operations included elsewhere in this
Form 10-K/A-2. Revenues from discontinued operations were $13.5 million and $25.9 million for the years ended December 31, 1999 and 1998,
respectively. Certain expenses have been allocated to continuing operations, based on the number of employees remaining with the software business, their related employee costs and overhead for
facilities and other related costs and corporate overhead expenses that were expected to represent continuing expenses.

Loss
from discontinued operations was $5.2 million in 1999 compared to loss from discontinued operations of $8.0 million in 1998. The loss from discontinued operations represents the net
activity of the discontinued hardware business, including revenues and associated expenses and the resulting tax benefit for the years ended December 31, 1999 and 1998. Loss from discontinued
operations includes

12

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the entire tax benefit of the Company for the year ended December 31, 1998 as management determined that income tax benefits were primarily associated with the hardware business because the
software business had limited activity in 1998.

CenterSpan
realized a gain on the disposal of its discontinued operations of $6,000 in 1999. The gain was the difference between the estimated proceeds of the sale and CenterSpan's basis in the net
assets sold and related expenses.

Liquidity and Capital Resources

CenterSpan has financed its activities to date with a combination of cash flow from operations, borrowed funds, proceeds from the sale of its hardware business and proceeds
from the sale of debt and equity securities. At December 31, 2000, CenterSpan had $7.0 million of working capital and a current ratio of 3.2:1.0. Included in total working capital is
$2.4 million of restricted cash, which relates to amounts held in escrow related to the sale of CenterSpan's hardware business in 1999. See Item 3. Legal Proceedings in the Company's
Form 10-K.

In
December 2000, CenterSpan purchased certain assets of Scour, Inc. for $5.8 million in cash and 333,333 shares of its Common Stock with a market value of $10.50 per share.

On
each of December 18, 2000 and February 23 2001, CenterSpan sold 714,286 shares of its Common Stock (for a total of 1,428,572 shares) to Peter R. Kellogg, an accredited investor, at a
price of $7.00 per share for aggregate proceeds of $10.0 million. The price per share reflected an approximate 21% discount to the trailing 30 day average closing price on
December 4, 2000, the date Mr. Kellogg committed to purchase the shares. On March 30, 2001, after issuance of the 1,428,572 shares, Mr. Kellogg held a total of 1,979,172
shares, or 24.6%, of our Common Stock. The proceeds from these stock sales are being used to fund current operations.

CenterSpan
currently anticipates that it will continue to experience growth in its operating capital expenses as it enters new markets for its products and services, increases marketing activities,
continues research and development spending, develops new distribution channels and expands its infrastructure. These operating expenses will consume a significant amount of the Company's cash
resources. Management believes that the Company's current cash balances, its net proceeds from financing activities in December of 2000 and February of 2001 and its anticipated revenue growth will be
sufficient to meet its anticipated cash needs for working capital and capital expenditures throughout 2001. However, any projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash and cash that may be generated from future operations are insufficient to satisfy the liquidity requirements, the Company may seek additional funds through public or
private equity financing or from other sources, including the sale of certain of the Company's assets. However, there is no certainty that CenterSpan may be able to obtain adequate or favorable
financing and any financing the Company obtains may dilute the ownership interest of its shareholders prior to the financing. In addition, the Company may, from time to time, consider the acquisition
of, or investment in, complementary businesses, products, services and technologies, which might impact its liquidity requirements or cause the Company to issue additional equity or debt securities.

Net
cash used by continuing operations was $7.9 million in 2000 primarily as a result of a cash loss from operations of $7.7 million, a $232,000 decrease in accounts payable and accrued
liabilities, $2.5 million used for the purchase of property and equipment and $4.8 million used for the purchase of intangibles, offset by proceeds from issuance of Common Stock of
$6.4 million. The decrease in accounts payable and accrued liabilities is primarily a result of a decrease in trade purchases.

At
December 31, 2000 CenterSpan had $2.4 million of restricted cash. At the end of March 2001 CenterSpan and Guillemot entered into a settlement agreement and mutual release under
which CenterSpan received approximately $1.4 million of restricted cash from escrow. Guillemot received

13

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approximately $1.0 million, including amounts collected on their behalf and purchase price adjustments called for in the asset purchase contract.

New Accounting Pronouncements

In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 137 and 138 establish accounting and reporting standards for all derivative instruments. SFAS 137 and 138 are
effective for fiscal years beginning after June 15, 2000. CenterSpan does not currently have any derivative instruments and, accordingly, the adoption of SFAS 137 and 138 will not have
an impact on its financial position, results of operations or cash flows.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements. In June 2000, SAB 101B was issued which defers the implementation date of SAB 101 until October 1, 2000.
The adoption of SAB 101 did not have a significant impact on the Company's financial condition or results of operations.

In
March 2000, the Financial Accounting Standards Board issued Interpretation No. 44,Accounting for Certain Transactions Involving Stock
Compensationan Interpretation of APB Opinion No. 25("FIN 44"). FIN 44 applies prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee, which
apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after
January 12, 2000. This statement did not have a significant impact on CenterSpan's financial position, results of operations or cash flows.

Risk Factors

We are subject to the risk that our solutions will not be adopted by consumers and therefore we may not achieve or maintain
profitability.

We
commenced our software business in mid-1998. Accordingly, we have a limited operating history with which you can evaluate our current business and prospects. Our business is new and
will not be successful unless consumers adopt wide usage of our products and services and revenues are generated from customers and e-commerce partners. We derived insignificant revenues
from the Socket product and are no longer developing or promoting it. We have only begun beta testing of the new Scour Exchange. Although we have received significant interest in the free
beta test program with over 300,000 pre-registered beta testers, the number of free beta users that can be converted to paying
subscribers is unknown. In addition, our prospects must be considered in light of the risks and uncertainties encountered by early stage companies in new and rapidly evolving markets such as the
Internet file sharing community, collaboration and communications markets.

We incurred net losses in our software business of $9.5 million in 2000, $10.6 million in 1999 and $1.0 million 1998; continued losses may deplete our
capital resources.

We
have derived insignificant revenues from our software business and have incurred substantial net losses in every quarter since we began our software operations. We cannot predict when, if ever, we
will achieve profitability. In addition, we plan to increase our operating expenses to implement our peer-to-peer digital distribution channel through increased staffing and
organizational expenses,

14

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marketing costs, capital expenditures and other expenses. As a result, we expect to incur significant operating losses on a quarterly and annual basis for the foreseeable future. Continued losses
would impair our capital resources, which in turn may require CenterSpan to raise additional capital or curtail its business activities.

If we do not successfully introduce a subscription version of the new Scour Exchangein a timely manner, we may not
achieve anticipated revenues and profitability, which would continue to deplete our capital resources.

The
beta version of the new Scour Exchange that was released at the end of March of 2001 is free to the public. We expect to launch a fee based subscription service in the second half of
2001. Additional development is now underway to integrate the credit card financial clearing capabilities necessary for a subscription service.

If we fail to secure access to popular music and video files, we may not be able to generate significant revenue through a subscription service, which could lead to continued
operating losses.

Our
revenue model for 2001 is primarily based on subscription fees from the new Scour Exchange file sharing digital distribution network. We have only established a limited number of
digital distribution content provider alliances with smaller independent labels and studios for music and video files for the beta test. If we fail to secure access to popular music and video files
from more than one major music label or movie studio, we may not be able to generate significant revenue through a subscription service.

If we fail to attract a significant number of subscribers to the Scour Exchange, we may not achieve anticipated
subscription revenues, which could lead to continued operating losses.

On
line subscription services for music and video are new and have not been proven either in a peer-to-peer structure such as the new Scour Exchange, or using
other structures like streaming or server-based downloading.

If consumers are able to get music and video files for free from other services, we may not be able to achieve anticipated subscription revenue, which could lead to continued
operating losses.

In
March of 2001, the largest Internet file sharing network, Napster, was ordered by a federal court to block the exchange of copyrighted music identified by the music labels. Third party surveys of
Napster and other free peer-to-peer exchange users indicate a willingness to pay for digital music files on a subscription basis by a majority of the users if the files are not
available for free. The record industry and the motion picture industry continue to attack several forms of illegal exchange of copyrighted files. If innovative software providers are able to develop
alternative technologies for free file sharing, it will be difficult to attract and retain paying subscribers for the new Scour Exchange.

If we are unable to successfully develop new products based on the C-star technology, we may not be able to generate anticipated revenues, which could lead to
continued operating losses.

We
believe that the C-star search and peer-to-peer file sharing technology, which is the basis of the Scour Exchange, has application in vertical
markets in addition to media and entertainment. We are pursuing a product licensing strategy to generate revenue from the use of the C-star platform. If we are unable to create and sell
products based on the C-star technology, we may not achieve anticipated revenues or profitability.

If we are not able to compete effectively, we may not be able to generate anticipated subscription and licensing revenues, which could lead to continued operating
losses.

The
Internet digital distribution channel business is competitive and many of our competitors may have greater resources and experience than CenterSpan. We expect competition to increase in the
future. Our principal competitors include Internet music distributors through digital download or streaming

15

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technologies, such as MP3.com, Napster, Liquid Audio, Duet and Real Networks, music labels and movie studios, as well as providers of digital distribution services and software such as MusicNet and
RioPort. Many of our current and future competitors may have advantages over us, including:



Our
current and potential competitors may establish cooperative relationships among themselves or with third parties that would increase their ability to compete with us. In addition, competitors may
be able to adapt more quickly than we can to new or emerging technologies and changes in customer needs, or to devote more resources to promoting and selling their products. If we fail to adapt to
market demands and to compete successfully with existing and new competitors, our ability to generate subscription and licensing revenue would suffer.

If we lose key personnel, we may not be able to timely deploy products and services such as Scour Exchangeand
C-star technology platform, which may delay or decrease anticipated revenues and lead to continued operating losses.

Our
success depends largely upon the continued services of our executive officers and other key management and development personnel. The loss of the services of one or more of our executive officers,
engineering personnel, or other key employees could have a material adverse effect on our ability to timely deploy services and products such as the Scour Exchange and C-star
technology platform, which may delay or decrease anticipated revenues and profitability. Our employees are employed on an "at will" basis and could terminate their employment with us at any time. We
do not maintain key person life insurance policies on any of our employees.

If we are not able to attract and retain additional personnel we may not be able to timely deploy products and services such as Scour
Exchangeand C-star technology platform, which may delay or decrease anticipated revenues and lead to continued operating
losses.

Our
future success also depends on our ability to attract and retain highly qualified personnel. We may not be successful in attracting or retaining qualified personnel, which could have a material
adverse effect on our ability to timely deploy services and products such as the Scour Exchange and C-star technology platform, which may delay or decrease anticipated
revenues and profitability. The competition for qualified personnel in the software markets is intense, and we may be unable to attract, assimilate, or retain additional highly qualified personnel in
the future. We attempt to hire engineers with high levels of experience in designing and developing software in time-pressured environments. There are a limited number of qualified
engineers in our geographic location, resulting in intense competition for their services.

We may not be able to make desired acquisitions or integrate acquired assets into our operations, which could result in limited stock price appreciation or shareholder
dilution.

A
component of our growth strategy is to selectively acquire complementary companies, products or technologies, such as our acquisition of certain assets of Scour, Inc. We may not be successful
in integrating the Scour, Inc. assets or completing and integrating any future acquisitions. In addition, we may not be able to complete acquisitions on terms acceptable to us. We have limited
experience with

16

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completing and integrating acquisitions as a team. Our failure to effectively integrate any acquired businesses could adversely affect us. In connection with any acquisitions, we could:



Future
acquisitions could also pose numerous additional risks to our operations, including:



17

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If we are unable to increase the size of our systems and management resources related to our operations, we may not achieve anticipated Scour
Exchangerevenues, which could lead to continued operating losses.

We
began beta testing the new Scour Exchange infrastructure in March of 2001, utilizing an initial computer infrastructure that we expect to be capable of supporting several hundred
thousand registered users. In order to support a subscription based service that could have more than a million subscribers, we intend to hire additional management resources with experience in this
area and increase the size and capacity of our computer infrastructure. If we are unsuccessful in hiring additional management resources with experience in this area or if we are unable to
successfully increase the capacity of our computer systems, we may be unable to support enough subscribers to achieve anticipated revenues or profitability.

We may need to access additional funds to finance ongoing operations, which may require us to commit significant amounts of capital to debt service and could result in dilution
to our shareholders.

As
of March 31, 2001, we believe that available funds will be adequate to meet our anticipated cash needs during the next 12 months. However, additional capital beyond the amounts
currently forecast by us may be required and may not be available on reasonable terms, if at all. Additional financing may involve public or private offerings of debt or equity securities, and may
include bank debt. Debt financing may increase our leveraged position, require us to devote significant cash to service debt and limit funds available for working capital, capital expenditures, and
general corporate purposes. Any of these results could increase our vulnerability to adverse economic and industry conditions and competitive pressures. Equity financing may cause additional dilution
to purchasers of our Common Stock.

If we are unable to protect our intellectual property, competitors may obtain access to proprietary information, which could have a material adverse impact on our subscription
and licensing revenues.

We
regard elements of the new Scour Exchange as proprietary and are attempting to protect them by relying on patent, trademark, service mark, trade dress, copyright, and trade secret laws
and restrictions, as well as confidentiality procedures and contractual provisions. Any steps we take to protect our intellectual property may be inadequate, time consuming, and expensive. In
addition, despite our efforts, we may be unable to prevent third-parties from infringing upon or misappropriating our intellectual property. Any infringement or misappropriation could have a material
adverse effect on our subscription and licensing revenues. New patent applications may not provide us with any competitive advantages, or may be challenged by third parties. Effective trademark,
copyright, and trade secret protection may not be available in every country in which our services and products are
used. In addition, our competitors may independently develop similar technology that substantially limits the value of our intellectual property.

Others may bring intellectual property infringement claims against us, which could require significant resources to defend and could lead to restrictions on our current
operations.

In
addition to the technology we have developed internally, we also have acquired or licensed technologies from other companies including Microsoft and Intel. Our internally developed technology or
the technology we acquired or licensed may infringe on a third party's intellectual property rights and third parties may bring claims against us alleging infringement of their intellectual property
rights. Any infringement or claim of infringement could have a material adverse affect on our business, resulting in suspension of subscription and licensing revenue generating activities or the
payment of cash.

In
recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We are not currently involved in any intellectual property
litigation. We may, however, be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These potential
claims and any resulting

18

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litigation could subject us to significant liability for damages and invalidation of our proprietary rights. Any litigation involving intellectual property, regardless of its success, likely would be
time-consuming and expensive to defend and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the
following:



Software defects could inhibit our ability to attract customers or cause losses of customers, which would adversely affect our revenues.

Our
software may contain undetected errors or "bugs" when first introduced or as new versions or enhancements are released. Despite our internal testing, these errors may be discovered only after our
software has been installed and used by customers. These undetected errors may relate to components supplied to us. Our products are complex as a result of factors including:



The
complexity of our products increases the likelihood that they may contain errors when introduced. Problems encountered by customers or software recalls could materially adversely affect our
ability to attract and retain subscription customers for the new Scour Exchange or decrease the likelihood that potential customers will license the C-star technology
platform.

The market price for our Common Stock, like other technology stocks, may be volatile, which could lead to a decrease in the value of your investment.

The
market price of CenterSpan's Common Stock could decline due to the impact of any of the following factors:



In
addition, the stock markets have recently experienced price and volume volatility that has affected stock prices for many companies in the technology sector. General stock market trends may
continue to be negative for this sector and this may adversely affect the market price of our Common Stock even though our business prospects may be good.

19

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Item 8. Financial Statements and Supplementary Financial Data

Independent Auditors' Report

The Board of Directors
CenterSpan Communications Corporation

We
have audited the accompanying consolidated balance sheets of CenterSpan Communications Corporation and subsidiaries (formerly ThrustMaster, Inc.) as of December 31, 2000 and 1999, and
the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CenterSpan Communications Corporation and subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.

As
discussed in Note 15 to the consolidated financial statements, the Company has reclassified $2.5 million as research and engineering expense in 1999 due to the correction of an error
in the application of an accounting principle. This correction does not affect net loss for 1999.

KPMG
LLP

Portland,
Oregon March 27, 2001, except as to note 15
which is dated August 17, 2001

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Report of Independent Accountants

To
the Shareholders and Board of Directors
of CenterSpan Communications Corporation:

In
our opinion, the consolidated statements of operations, of changes in shareholders' equity, and of cash flows for the year ended December 31, 1998 present fairly, in all material respects,
the results of operations and cash flows of CenterSpan Communications Corporation and subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion. We have not audited the consolidated financial statements of CenterSpan Communications Corporation and subsidiaries for any period subsequent to
December 31, 1998.

PricewaterhouseCoopers
LLP

Portland,
Oregon
January 25, 1999

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CENTERSPAN COMMUNICATIONS CORPORATION  (Formerly Thrustmaster, Inc.)  CONSOLIDATED BALANCE SHEET  (Dollars in thousands)

|                                                                        |                                                                                                                 | December 31,                               |      
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -----
|
|ASSETS                                                                  |                                                                                                                 |                                            |      
|Current assets:                                                         |                                                                                                                 |                                            |      
|                                                                        | Cash and cash equivalents                                                                                       |                                            | $    
|                                                                        | Restricted cash                                                                                                 |                                            |      
|                                                                        | Prepaid expenses and other                                                                                      |                                            |      
|                                                                        |                                                                                                                 |                                            |      
|                                                                        |                                                                                                                 | Total current assets                       |      
|Plant and equipment, net of accumulated depreciation of $1,014 and $601 |                                                                                                                 |                                            | 2,409
|Other assets                                                            |                                                                                                                 |                                            | 8,283
|                                                                        |                                                                                                                 |                                            |      
|                                                                        |                                                                                                                 | Total assets                               |      
|                                                                        |                                                                                                                 |                                            |      
|LIABILITIES AND SHAREHOLDERS' EQUITY                                    |                                                                                                                 |                                            |      
|Current liabilities:                                                    |                                                                                                                 |                                            |      
|                                                                        | Accounts payable                                                                                                |                                            | $    
|                                                                        | Accrued liabilities                                                                                             |                                            |      
|                                                                        |                                                                                                                 |                                            |      
|                                                                        |                                                                                                                 | Total current liabilities                  |      
|                                                                        |                                                                                                                 |                                            |      
|Shareholders' equity:                                                   |                                                                                                                 |                                            |      
|                                                                        | Preferred stock, no par value, 5,000,000 shares authorized; none issued or outstanding                          |                                            |      
|                                                                        | Common stock, no par value, 25,000,000 shares authorized; 7,303,351 and 5,950,120 shares issued and outstanding |                                            |      
|                                                                        | Common stock warrants                                                                                           |                                            |      
|                                                                        | Accumulated deficit                                                                                             |                                            |      
|                                                                        |                                                                                                                 |                                            |      
|                                                                        |                                                                                                                 | Total shareholders' equity                 |      
|                                                                        |                                                                                                                 |                                            |      
|                                                                        |                                                                                                                 | Total liabilities and shareholders' equity |      
|                                                                        |                                                                                                                 |                                            |      

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

22

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CENTERSPAN COMMUNICATIONS CORPORATION  (Formerly Thrustmaster, Inc.)  CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)

|                                                              |                                                                             | Year Ended December 31, |        
|------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------- | -------
|
|Revenue                                                       |                                                                             | $                       | 1      
|Cost of goods sold                                            |                                                                             |                         |       
|                                                              |                                                                             |                         |        
|Gross profit                                                  |                                                                             |                         | 1      
|Operating expenses:                                           |                                                                             |                         |        
|                                                              | Research and engineering                                                    |                         |        
|                                                              | Selling, general and administrative                                         |                         |        
|                                                              |                                                                             |                         |        
|                                                              |                                                                             |                         | 10,364 
|                                                              |                                                                             |                         |        
|Loss from operations                                          |                                                                             |                         | (10,363
|Interest income                                               |                                                                             |                         | 895    
|Expense from beneficial conversion feature                    |                                                                             |                         |       
|                                                              |                                                                             |                         |        
|                                                              |                                                                             |                         | 895    
|                                                              |                                                                             |                         |        
|Loss from continuing operations before taxes                  |                                                                             |                         | (9,468 
|Provision for income taxes                                    |                                                                             |                         |       
|                                                              |                                                                             |                         |        
|Loss from continuing operations                               |                                                                             |                         | (9,468 
|Loss from discontinued operations:                            |                                                                             |                         |        
|                                                              | Loss from discontinued operations, net of tax benefit of $0, $0, and $5,792 |                         |        
|                                                              | Gain from disposal of discontinued operations                               |                         |        
|                                                              |                                                                             |                         |        
|Net loss                                                      |                                                                             | $                       | (9,468 
|                                                              |                                                                             |                         |        
|Basic and diluted loss per share from continuing operations   |                                                                             | $                       | (1.52  
|                                                              |                                                                             |                         |        
|Basic and diluted loss per share from discontinued operations |                                                                             | $                       |       
|                                                              |                                                                             |                         |        
|Basic and diluted net loss per share                          |                                                                             | $                       | (1.52  
|                                                              |                                                                             |                         |        
|Shares used for per share calculations                        |                                                                             |                         | 6,231  
|                                                              |                                                                             |                         |        

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

23

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CENTERSPAN COMMUNICATIONS CORPORATION  (Formerly Thrustmaster, Inc.)  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)

|                                                 |                                                                                                 | Year Ended December 31,                  |                                                    
|------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:            |                                                                                                 |                                          |                                                    
|                                                 | Net loss                                                                                        |                                          |                                                    
|                                                 | Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: |                                          |                                                    
|                                                 |                                                                                                 | Loss from discontinued operations        |                                                    
|                                                 |                                                                                                 | Depreciation                             |                                                    
|                                                 |                                                                                                 | Net loss on retirement of assets         |                                                    
|                                                 |                                                                                                 | Deferred income taxes                    |                                                    
|                                                 |                                                                                                 | Beneficial conversion feature on debt    |                                                    
|                                                 |                                                                                                 | Warrants issued for technology           |                                                    
|                                                 | Changes in operating assets and liabilities                                                     |                                          |                                                    
|                                                 |                                                                                                 | Restricted cash                          |                                                    
|                                                 |                                                                                                 | Accounts receivable                      |                                                    
|                                                 |                                                                                                 | Prepaid expenses and other assets        |                                                    
|                                                 |                                                                                                 | Income taxes receivable                  |                                                    
|                                                 |                                                                                                 | Accounts payable and accrued liabilities |                                                    
|                                                 |                                                                                                 |                                          |                                                    
|                                                 |                                                                                                 |                                          | Net cash provided by (used in) operating activities
|Cash flows from investing activities:            |                                                                                                 |                                          |                                                    
|                                                 | Payments for purchase of plant and equipment                                                    |                                          |                                                    
|                                                 | Purchase of intangibles                                                                         |                                          |                                                    
|                                                 | Proceeds from sale of hardware business                                                         |                                          |                                                    
|                                                 |                                                                                                 |                                          |                                                    
|                                                 |                                                                                                 |                                          | Net cash (provided by) used in investing activities
|Cash flows from financing activities:            |                                                                                                 |                                          |                                                    
|                                                 | Proceeds from (payments on) operating line of credit, net                                       |                                          |                                                    
|                                                 | Proceeds from issuance of convertible debt                                                      |                                          |                                                    
|                                                 | Proceeds from issuance of common stock and warrants                                             |                                          |                                                    
|                                                 |                                                                                                 |                                          |                                                    
|                                                 |                                                                                                 |                                          | Net cash provided by financing activities          
|Cash used in discontinued operations             |                                                                                                 |                                          |                                                   
|                                                 |                                                                                                 |                                          |                                                    
|Increase (decrease) in cash and cash equivalents |                                                                                                 |                                          | (8,766                                             
|Cash and cash equivalents:                       |                                                                                                 |                                          |                                                    
|                                                 | Beginning of period                                                                             |                                          |                                                    
|                                                 |                                                                                                 |                                          |                                                    
|                                                 | End of period                                                                                   |                                          | $                                                  
|                                                 |                                                                                                 |                                          |                                                    
|Cash paid during the year for:                   |                                                                                                 |                                          |                                                    
|                                                 | Income taxes                                                                                    |                                          | $                                                  
|Supplemental cash flow information:              |                                                                                                 |                                          |                                                    
|                                                 | Stock issued in connection with purchase of assets                                              |                                          | $                                                  

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

24

---



CENTERSPAN COMMUNICATIONS CORPORATION  (Formerly Thrustmaster, Inc.)  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  (in thousands)

|                                                    |                                   | Common Stock |   |   |        |   |   |       |   |   |        
|--------------------------------------------------- | --------------------------------- | ------------ | - | - | ------ | - | - | ----- | - | - | -------
|
|
|Balance at December 31, 1997                        |                                   | 4,294        |   | $ | 13,486 |   | $ |      |   | $ | 5,794  
|Proceeds from issuance of common stock              |                                   | 303          |   |   | 679    |   |   |      |   |   |       
|Tax benefits from stock options exercised           |                                   |             |   |   | 681    |   |   |      |   |   |       
|Comprehensive loss:                                 |                                   |              |   |   |        |   |   |       |   |   |        
|                                                    | Cumulative translation adjustment |              |  |   |        |  |   |       |  |   |        
|Net loss                                            |                                   |             |   |   |       |   |   |      |   |   | (9,056 
|                                                    |                                   |              |   |   |        |   |   |       |   |   |        
|Balance at December 31, 1998                        |                                   | 4,597        |   |   | 14,846 |   |   |      |   |   | (3,262 
|Proceeds from issuance of common stock              |                                   | 848          |   |   | 9,270  |   |   | 1,030 |   |   |       
|Tax benefits from stock options exercised           |                                   |             |   |   | 30     |   |   |      |   |   |       
|Beneficial conversion feature on debt               |                                   |             |   |   | 987    |   |   |      |   |   |       
|Conversion of convertible debt                      |                                   | 492          |   |   | 6,000  |   |   |      |   |   |       
|Exercise of warrants                                |                                   | 13           |   |   | 203    |   |   |      |   |   | (203   
|Warrants issued in exchange for goods and services  |                                   |             |   |   |       |   |   | 2,500 |   |   |       
|Non-cash compensation expense                       |                                   |             |   |   | 400    |   |   |      |   |   |       
|Comprehensive income:                               |                                   |              |   |   |        |   |   |       |   |   |        
|                                                    | Cumulative translation adjustment |              |  |   |        |  |   |       |  |   |        
|Net loss                                            |                                   |             |   |   |       |   |   |      |   |   | (15,841
|                                                    |                                   |              |   |   |        |   |   |       |   |   |        
|Balance at December 31, 1999                        |                                   | 5,950        |   |   | 31,736 |   |   | 3,530 |   |   | (19,306
|Exercise of stock options                           |                                   | 240          |   |   | 1,398  |   |   |      |   |   |       
|Exercise of warrants                                |                                   | 66           |   |   | 684    |   |   |      |   |   | (684   
|Warrant issued in exchange for technology           |                                   |             |   |   |       |   |   | 1,300 |   |   |       
|Common stock issued in exchange for specific assets |                                   | 333          |   |   | 3,500  |   |   |      |   |   |       
|Common stock issued in private placement            |                                   | 714          |   |   | 5,000  |   |   |      |   |   |       
|Net loss                                            |                                   |             |   |   |       |   |   |      |   |   | (9,468 
|                                                    |                                   |              |   |   |        |   |   |       |   |   |        
|Balance at December 31, 2000                        |                                   | 7,303        |   | $ | 42,318 |   | $ | 4,830 |   | $ | (29,458
|                                                    |                                   |              |   |   |        |   |   |       |   |   |        

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

25

---



CENTERSPAN COMMUNICATIONS CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (In thousands, except per share amounts)

NOTE 1. The Company

CenterSpan Communications Corporation ("CenterSpan" or the "Company") was originally incorporated in 1990 as ThrustMaster, Inc., an Oregon Corporation. The Company
changed its name to CenterSpan Communications Corporation in October 1999.

The
Company has historically been a developer and marketer of realistic, high quality game controllers for the home personal computer ("PC") and video console markets, which comprised the Company's
hardware business. CenterSpan sold this portion of its business in July 1999. See Note 3.

CenterSpan
is now a developer and marketer of peer-to-peer Internet communication and collaboration software solutions.

The
consolidated financial statements include the accounts of CenterSpan Communications Corporation, an Oregon corporation, and its wholly-owned subsidiaries, ThrustMaster (Europe) Limited,
ThrustMaster (Deutschland) GmbH and CSCC Corporation. All inter-company transactions have been eliminated.

NOTE 2. Significant Accounting Policies

Cash and Cash Equivalents.Cash equivalents consist of highly liquid debt instruments purchased with an original maturity of three
months or less.

Restricted Cash.Restricted cash includes $2,250 held in escrow related to the sale of the Company's hardware business. See Notes 8 and
13, Commitments and Contingencies and Subsequent Events.

Fair Value of Financial Instruments.CenterSpan's financial instruments consist of accounts receivable and accounts payable. For the
periods presented, the fair value of CenterSpan's financial instruments is equal to the carrying value of the financial instruments.

Plant and Equipment.Plant and equipment are stated at cost and are depreciated using the straight-line method over the
estimated useful lives (three to seven years). Replacements and improvements which extend the useful life are capitalized. Maintenance and repairs and routine replacements are expensed as incurred.
Upon disposal, costs and related accumulated depreciation of the assets are removed from the accounts and resulting gains and losses are reflected in operations.

Other Assets.Other assets primarily consists of intangible assets purchased during 2000 in conjunction with the purchase of certain
assets of Scour, Inc. See Note 3. The intangible assets are amortized on the straight-line basis over the expected period to be benefited of 18 months to three years.
The Company assesses the recoverability of its intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation.

Income Taxes.Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of change.

Revenue Recognition.Revenue for software sold in the retail channel was recognized at the time of product shipment. Revenue from
e-commerce transactions is recognized at the time an end-user

26

---

transaction is completed with one of the Company's Internet affiliate partners. Revenue that will be generated by CenterSpan's new Scour Exchange will be recognized over the subscription period.

In
December 1999, the Securities Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which provides guidance in
applying generally
accepted accounting principles for revenue recognition in financial statements. SAB 101 was effective beginning in the fourth quarter of 2000 and did not have a material impact on our financial
statements.

Revenue
is recorded when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or
determinable, and collectability is reasonably assured.

Research and Engineering Expense.Research and engineering costs, including software development costs, are charged to operations as
incurred. Total research and engineering costs were $4,865, $3,282 and $162 for the years ended December 31, 2000, 1999 and 1998, respectively. The 2000 amount includes a $1,300
non-cash charge for the license of certain technology from Intel during 2000. The 1999 amount includes a $2,500 non-cash charge for the license of certain technology from Intel
during 1999.

Software Development Costs.Development costs related to software products are expensed until technological feasibility of the product
has been established. Based on CenterSpan's product development process, technological feasibility is established upon completion of a working model. Costs incurred by CenterSpan between completion of
the working model and the point at which the product is ready for general release have not been significant, and, accordingly, no costs have been capitalized.

Technology.The market for CenterSpan's products is characterized by rapidly changing technology, evolving industry standards, and
changing customer needs. CenterSpan believes that its future success will depend, in part, upon its ability to enhance its current products and develop new products on a timely and
cost-effective basis, and to respond to changing customer needs and technological developments. An inability of CenterSpan to generate demand for its products, whether as a result of
competition, technological change or other factors, could have a material adverse effect on the Company's financial condition, results of operations and liquidity.

Advertising.Advertising costs, which include cooperative advertising and marketing development funds, are expensed as incurred and
totaled $462 and $159 for continuing operations in 2000 and 1999, respectively, and zero in 1998.

Stock Based Compensation.CenterSpan accounts for stock-based employee compensation arrangements in accordance with provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant between the exercise price of the instrument granted and the fair
value of the underlying stock. Non-employee stock-based compensation is determined in accordance with SFAS No. 123, utilizing the Black Scholes valuation methodology. Stock-based
compensation is amortized over the vesting period of the related securities. The Company accounts for stock and stock options issued to non-employees in accordance with the provisions of
Emerging Issues Task Force Consensus on Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

Earnings Per Share Data.Basic earnings per common share is computed using the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares of common stock and dilutive common

27

---

equivalent shares outstanding during the year. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive.

Shares
used for basic and diluted earnings per share ("EPS") are the same for all periods presented since CenterSpan was in a loss position.

Potentially
dilutive securities that were not included in the diluted net loss per share calculations because they would be antidilutive were as follows:

Year Ended December 31,2000

1999

1998Stock options

2,143

1,181

1,046Stock warrants

599

479

117Total

2,742

1,660

1,163


Comprehensive Income (Loss).CenterSpan has adopted the accounting treatment prescribed by Financial Accounting Standards Board SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources. Comprehensive loss was $(9,468), $(15,810) and $(9,087) for the years ended
December 31, 2000, 1999 and 1998, respectively.

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

Reclassifications.Certain reclassifications, none of which affected operating or net loss, have been made to prior year amounts to
conform to the current year presentation.

NOTE 3. Purchase of Certain Assets of Scour, Inc.

In December 2000, the Company purchased certain assets of Scour, Inc. for $5,787 in cash and 333 shares of its Common Stock, which had a value of $10.50 per
share, for total consideration of $9,287. The assets consisted of the following:

Customer list

$
5,253Trade name


2,438Purchased technology


580Property, plant & equipment


1,016$
9,287


NOTE 4. Discontinued Operations: Disposal of Hardware Business Assets

On July 26, 1999, CenterSpan entered into an agreement to sell substantially all of the assets of its hardware business including related sales and return warranty
reserves. This transaction closed on October 1, 1999 for $15,000 in cash, $2,250 of which remains in an escrow account. See Notes 8 and 13. CenterSpan recorded a gain on the disposal of its
hardware business of $6 in the fourth quarter of 1999. Revenues applicable to the discontinued operations were $0, $13,452 and $25,905 for the years ended December 31, 2000, 1999 and 1998,
respectively.

28

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NOTE 5. Plant and Equipment

Plant and equipment consists of the following at December 31:

2000

1999Computers and other equipment

$
2,765

$
536Tooling


3


3Furniture and fixtures


495


364Leasehold improvements


160


983,423


1,001Less: Accumulated depreciation


(1,014
)

(601
)$
2,409

$
400


NOTE 6. Other Assets

Other assets consists of the following at December 31:

2000

1999Customer list

$
5,253

$
Trade name


2,438


Purchased technology


580


Other


12


25$
8,283

$
25


The
Company reviews long-lived assets, goodwill and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company determines impairment based on a comparison of the carrying amount of the assets to the estimated fair value of the assets, which is determined based on the
discounted cash flow method or current market prices for similar assets when available.

NOTE 7. Accrued Liabilities

Accrued liabilities consist of the following at December 31:

2000

1999Accrued bonuses

$
500

$
300Accrued sublease costs





297Other accrued expenses related to discontinued operations


1,944


2,173Other liabilities


113


192$
2,557

$
2,962


On
July 26, 1999, CenterSpan entered into an agreement to sell substantially all of the assets of its hardware business, including related sales and return warranty reserves. This transaction
closed on October 1, 1999 for $15,000 in cash. Other accrued expenses related to discontinued operations at December 31, 1999 represented estimated costs to exit the hardware business.
During the year 2000, payments totaling $229 were made to former hardware business vendors and partners.

29

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NOTE 8. Commitments, Contingencies and Factors That Could Affect Future Results

Commitments

CenterSpan leases facilities and equipment under non-cancelable operating leases. Certain of the facility leases contain escalation clauses. The following is a
schedule by years, through expiration of the facilities leases, of future minimum lease payments required under these leases as of December 31, 2000:

For the year ending December 31,2001

$
2482002


2552003


180$
683


Under
the agreements for the lease of its office facilities, CenterSpan is obligated to the lessors for its share of certain expenses related to the use, operation, maintenance and insurance of the
property. These expenses, payable monthly in addition to the base rent, are not included in the amounts shown above. Rental expense totaled $222 for each of the years ended December 31, 2000,
1999, and 1998.

Contingency

On June 15, 2000, CenterSpan filed a lawsuit for breach of contract against Guillemot Corporation S.A. ("Guillemot") in the United States District Court for the District
of Oregon (Case No. Civ. 00-830-ST). On July 26, 1999, Guillemot contracted to purchase certain CenterSpan assets for a total price of $15,000, of which $2,250 was to be
retained in escrow and released to CenterSpan pursuant to a schedule provided in the parties' Escrow Agreement. CenterSpan alleged that Guillemot breached the terms of the Escrow Agreement by
prohibiting the scheduled release of escrow funds to CenterSpan. At the end of March 2001 CenterSpan and Guillemot entered into a settlement agreement and mutual release under which CenterSpan
received approximately $1,400 of restricted cash from escrow. Guillemot received approximately $1,000, including amounts collected on their behalf and purchase price adjustments called for in the
asset purchase contract.

Factors That Could Affect Future Results

The revenue and profit potential related to CenterSpan's single current product, Socket, and the new Scour Exchange currently under development are
unproven. The Socket product has generated only insignificant revenue to date. CenterSpan began beta testing of the new Scour Exchange in March 2001. Neither
Socket, the new Scour Exchange, nor other future products may achieve widespread consumer acceptance, which would adversely affect CenterSpan's future results of operations
and liquidity.

The
markets for CenterSpan's products are characterized by frequent new product introductions and product obsolescence. These factors typically result in short product life cycles. If CenterSpan does
not
successfully introduce new products within a given product cycle, its sales will be adversely affected for that cycle and possibly for subsequent cycles. Failure to timely introduce these products
could also impair CenterSpan's brand name and ability to maintain relationships with strategic partners. In addition, each new product cycle presents new opportunities for competitors to gain a
product advantage or increase their market share.

30

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NOTE 9. Changes in Equity

On January 28, 1999, CenterSpan issued to three investors an aggregate of 250 shares of its Common Stock (subject to adjustment as described below) and warrants to
acquire 71 shares of its Common Stock for an aggregate of $4,000. The exercise price applicable to 50% of the shares issuable upon exercise of the warrants is $20.00 per share; the exercise price for
the remaining warrant shares is $22.40 per share. The Common Stock warrants are exercisable until January 28, 2004. The warrant was valued using the Black-Scholes model using the following
assumptions: expected dividends, 0%; risk-free interest rate, 4.6%; volatility, 76%; and expected life, 5 years. The fair value of the warrant was $580. CenterSpan also agreed to
issue to the investors "adjustment" shares of its Common Stock for no additional consideration depending upon the market price of the Company's Common Stock during specified periods following the
investment. The adjustment periods lapsed in July 1999 and the Company was not required to issue any additional shares.

On
June 9, 1999, CenterSpan issued and sold to two investors $6,000 aggregate principal amount of its zero coupon Convertible Debentures due June 9, 2002 (the "Debentures"). The
Debentures were converted into 492 shares of CenterSpan's Common Stock in December 1999.

On
August 31, 1999, CenterSpan sold 274 shares of its Common Stock for $18.258 per share to a single investor, receiving $5,000 in proceeds. In connection with the sale, the Company issued a
warrant for 30 shares of its Common Stock to the investor's financial consultant as a finder's fee. The exercise price for this warrant is $18.258 per share and is exercisable at any time before
August 30, 2004. The warrant was valued using the Black-Scholes model using the following assumptions: expected dividends, 0%; risk-free interest rate, 5.9%; volatility, 78%; and
expected life, 5 years. The fair value of the warrant was $450.

In
August 1999, CenterSpan issued a warrant to acquire 200 shares of its Common Stock for $18.09 per share, which represented a 15% discount to an average of the preceding 20 day closing
stock price, to Intel Corp. in exchange for certain technology. The warrant is exercisable until August 9, 2004. The warrant was valued using the Black-Scholes model using the following
assumptions: expected dividends, 0%; risk-free interest rate, 5.0%; volatility, 78%; and expected life, 5 years. The fair value of the warrant was $2,200.

In
April 2000, CenterSpan issued a warrant to purchase 125 shares of its Common Stock at $13.41 per share, which represented a 15% discount to an average of the preceding 10 day closing
stock price, to Intel Corp. in exchange for certain technology. The warrant vested immediately and is exercisable until April 21, 2005. The warrant was valued using the Black-Scholes model
using the following assumptions: expected dividends, 0%; risk-free interest rate, 5.9%; volatility, 83%; and expected life, 5 years. The fair value of the warrant was $1,300.

In
December 2000, CenterSpan issued 333 shares of its Common Stock in connection with the purchase of the assets of Scour, Inc. The shares were valued at $10.50 per share.

NOTE 10. Stock Option Plans and Warrants

Options

CenterSpan has adopted a stock option plan for employees and directors (the "1998 Plan") and has reserved 1,500 shares of Common Stock for issuance thereunder. The 1998 Plan
provides for incentive stock options and nonqualified options to be granted. CenterSpan previously made grants under the 1994 Stock Option Plan, the 1994 Directors' Stock Option Plan, and a
nonqualified plan adopted in 1990, under which a total of 1,200 shares had been reserved. In May 1998, any ungranted options and any future forfeitures under the 1994 and 1990 option plans were
transferred to the 1998 Stock Option Plan. At December 31, 2000, CenterSpan had 1,752 shares of its Common Stock reserved for issuance

31

---

under the 1998 Plan and all previous plans combined. CenterSpan has also issued options outside of the 1998 Plan, for which it had 135 shares reserved for issuance at December 31, 2000.

During
2000, the Board of Directors also adopted the 2000 Nonqualified Stock Option Plan (the "2000 Nonqualified Plan") and approved the reservation of 900 shares of the Company's Common Stock for
issuance thereunder. At December 31, 2000, 900 shares of the Company's Common Stock remained reserved for issuance thereunder.

Except
for the 2000 Nonqualified Plan, the stock option plans generally require the price of options to be at the estimated fair market value of the stock at the date of grant. Options have a maximum
duration of ten years (five years under certain circumstances) and may be exercised in varying amounts over the vesting periods. During 1998, the Board of Directors approved a stock option repricing
for all executives and employees of CenterSpan. Included in the options granted and options cancelled in 1998 are 278 options related to this repricing. The repricing was effective as of
October 1, 1998.

The
following table summarizes all stock option transactions in the last three fiscal years:

|                            |                            | Shares
Available for
Grant |        | Shares
Subject to
Options |       | Weighted
Average
Exercise Price
Per Share
|--------------------------- | -------------------------- | -------------------------- | ------ | ------------------------- | ----- | -----------------------------------------
|Balances, December 31, 1997 |                            | 223                        |        | 896                       |       | $                                        
|                            | Additional shares reserved |                            | 1,060  |                           |      |                                          
|                            | Options granted            |                            | (811   | )                         | 811   |                                          
|                            | Options cancelled          |                            | 358    |                           | (358  | )                                        
|                            | Options exercised          |                            |       |                           | (303  | )                                        
|                            |                            |                            |        |                           |       |                                          
|Balances, December 31, 1998 |                            | 830                        |        | 1,046                     |       |                                          
|                            | Additional shares reserved |                            | 50     |                           |      |                                          
|                            | Options granted            |                            | (752   | )                         | 752   |                                          
|                            | Options cancelled          |                            | 293    |                           | (293  | )                                        
|                            | Options exercised          |                            |       |                           | (324  | )                                        
|                            |                            |                            |        |                           |       |                                          
|Balances, December 31, 1999 |                            | 421                        |        | 1,181                     |       |                                          
|                            | Additional shares reserved |                            | 1,425  |                           |      |                                          
|                            | Options granted            |                            | (1,412 | )                         | 1,412 |                                          
|                            | Options cancelled          |                            | 210    |                           | (210  | )                                        
|                            | Options exercised          |                            |       |                           | (240  | )                                        
|                            |                            |                            |        |                           |       |                                          
|Balances, December 31, 2000 |                            | 644                        |        | 2,143                     |       | $                                        
|                            |                            |                            |        |                           |       |                                          

The
following table summarizes information about stock options outstanding at December 31, 2000:

|Options Outstanding |             | Options Exercisable
|------------------- | ----------- | -------------------
|
|$                   | 2.43-5.34   |                    
|                    | 6.00-9.88   |                    
|                    | 10.50-13.69 |                    
|                    | 14.25-17.50 |                    
|                    | 23.88-29.63 |                    
|                    |             |                    
|$                   | 2.43-29.63  |                    
|                    |             |                    

32

---

At
December 31, 1999 and 1998, 556 and 308 options, respectively, were exercisable at weighted average exercise prices of $5.04 per share and $2.73 per share, respectively.

Warrants

All warrants are exercisable for shares of the Company's Common Stock. The following table summarizes warrant transactions:

|Date Issued |  | Shares
Subject to
Warrant |  | Warrant
Shares
Cancelled |  | Shares
Acquired
Upon
Exercise |  | Warrant
Shares
Outstanding at
December 31,
2000 |  | Expiration
Date |  | Weighted
Average
Exercise
Price
Per Share
|----------- |  | ------------------------- |  | ------------------------ |  | ----------------------------- |  | ----------------------------------------------- |  | --------------- |  | -----------------------------------------
|03/03/95    |  | 117                       |  | 38                       |  | 79                            |  |                                                |  | 02/24/00        |  |                                          
|05/04/98    |  | 89                        |  |                         |  |                              |  | 89                                              |  | 12/04/03        |  |                                          
|08/09/99    |  | 200                       |  |                         |  |                              |  | 200                                             |  | 08/09/04        |  |                                          
|08/30/99    |  | 30                        |  |                         |  |                              |  | 30                                              |  | 08/30/04        |  |                                          
|01/28/99    |  | 35                        |  |                         |  |                              |  | 35                                              |  | 01/28/04        |  |                                          
|01/28/99    |  | 35                        |  |                         |  |                              |  | 35                                              |  | 01/28/04        |  |                                          
|04/21/00    |  | 125                       |  |                         |  |                              |  | 125                                             |  | 04/21/05        |  |                                          
|12/18/00    |  | 85                        |  |                         |  |                              |  | 85                                              |  | 12/18/05        |  |                                          
|            |  |                           |  |                          |  |                               |  |                                                 |  |                 |  |                                          
|            |  |                           |  |                          |  |                               |  | 599                                             |  |                 |  | $                                        
|            |  |                           |  |                          |  |                               |  |                                                 |  |                 |  |                                          

At
December 31, 2000, 1999 and 1998 warrants covering 599, 479 and 206 shares of the Company's Common Stock, respectively, were exercisable at weighted average exercise prices of $14.23, $14.11
and $6.38 per share, respectively.

SFAS 123

CenterSpan applies APB opinion No. 25 and related interpretations in accounting for its stock based compensation plans. However, in accordance with SFAS 123, pro
forma disclosures as if CenterSpan adopted the fair value method requirements under SFAS 123 for all awards subsequent to January 1, 1995, are presented below.

The
weighted average per share fair value of options and warrants granted during 2000, 1999 and 1998 was $6.65, $6.37 and $0.66, respectively. The fair value of each option and warrant granted during
the years ended 2000, 1999 and 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Year ended December 31,2000

1999

1998Risk-free interest rate

5.2%-6.8
%
4.6%-5.9
%
4.1%-5.6
%Expected dividend yield

0
%
0
%
0
%Expected lives (years)

5

5

3.3Volatility

89
%
76%-78
%
34
%


33

---

Had
compensation cost for CenterSpan's stock option plans and warrants been determined consistent with SFAS 123, CenterSpan's net loss would have been adjusted to the following pro forma
amounts:

Year Ended December 31,2000

1999

1998Loss from continuing operations:As reported

$
(9,468
)
$
(10,640
)
$
(1,033
)Pro forma


(14,143
)

(11,277
)

(1,033
)Basic and diluted loss per share from continuing operations:As reported


(1.52
)

(2.11
)

(0.24
)Pro forma


(2.27
)

(2.24
)

(0.24
)Loss from discontinued operations:As reported





(5,201
)

(8,023
)Pro forma





(5,340
)

(8,288
)Basic and diluted loss per share from discontinued operations:As reported





(1.03
)

(1.83
)Pro forma





(1.06
)

(1.89
)Net loss:As reported


(9,468
)

(15,841
)

(9,056
)Pro forma


(14,143
)

(16,617
)

(9,321
)Basic and diluted net loss per share:As reported


(1.52
)

(3.14
)

(2.07
)Pro forma


(2.27
)

(3.30
)

(2.13
)


The
effect of applying SFAS 123 in this pro forma disclosure is not indicative of future amounts.

NOTE 11. Income Taxes

The provision for (benefit from) income taxes from continuing operations in 2000 and 1999 and from discontinued operations in 1998:

Year ended December 31,2000

1999

1998Current:Federal

$


$
(145
)
$
(2,224
)State











(145
)

(2,224
)Deferred:Federal





4,166


(2,591
)State





511


(977
)


4,677


(3,568
)$


$
4,532

$
(5,792
)


34

---

The
provision for (benefit from) income taxes differs from the amount of income taxes determined by applying the statutory federal income tax rate to income from continuing operations for 2000 and
1999 and from discontinued operations for 1998 due to the following:

Year Ended December 31,2000

1999

1998Statutory federal income tax rate

(34.0
)%
(34.0
)%
(34.0
)%State taxes, net of federal income taxes

(4.4
)
(4.4
)
(4.4
)Change in valuation allowance

38.4

108.0

Research and development tax credit and other





(3.5
)Effective tax rate


%
69.6
%
(41.9
)%


Deferred
tax assets (liabilities) are comprised of the following components:

December 31,2000

1999Deferred tax assets:Expenses and allowances not currently deductible

$
616

$
627Net operating loss carryforwards


10,993


7,155Credit carryforwards


581


581Net deferred income taxes


12,190


8,363Valuation allowance


(12,190
)

(8,363
)$


$



The
valuation allowance for deferred tax assets as of January 1, 1998 was $0. The net change in total valuation allowance for the years ended December 31, 2000, 1999 and 1998 was an
increase of $3,827, $8,363 and $0, respectively.

The
Company has established a valuation allowance for certain deferred tax assets, including those for a portion of net operating loss and tax credit carryforwards. Such a valuation allowance is
recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. The portion of the valuation allowance for deferred tax assets for which subsequently
recognized tax benefits will be applied directly to contributed capital is $2,021 as of December 31, 2000. This amount is attributable to differences between financial and tax reporting of
employee stock option transactions.

CenterSpan
has federal, state and foreign net operating loss carryforwards of $22,107, $30,002 and $6,551, respectively, that expire from 2013-2021. CenterSpan has accumulated unused
federal and state research and experimentation credits of approximately $461 that expire from 2003-2019. CenterSpan also has Alternative Minimum Tax (AMT) credits in the amount of $163,
which may be carried forward indefinitely.

NOTE 12. 401 (k) Plan

CenterSpan has a 401(k) Plan covering substantially all employees meeting minimum service requirements. The 401(k) Plan allows CenterSpan to make discretionary matching
contributions. CenterSpan provided discretionary contributions of $36, $30, and $46 for the years ended December 31, 2000, 1999, and 1998, respectively.

35

---

NOTE 13. Subsequent Events

In February 2001, CenterSpan sold 714 shares to an individual investor for $7.00 per share for total proceeds to CenterSpan of $5,000. In conjunction with this issuance,
a warrant covering 85,000 shares of the Company's common stock was issued at an exercise price of $9.063. The warrant is immediately exercisable and expires in February 2006.

On
June 15, 2000, CenterSpan filed a lawsuit for breach of contract against Guillemot Corporation S.A. ("Guillemot"). On July 26, 1999, Guillemot contracted to purchase certain
CenterSpan assets for a total price of $15,000, of which $2,250 was to be retained in escrow and released to CenterSpan pursuant to a schedule provided in the parties' Escrow Agreement. CenterSpan
alleged that Guillemot breached the terms of the Escrow Agreement by prohibiting the scheduled release of escrow funds to CenterSpan. At the end of March 2001, CenterSpan and Guillemot entered
into a settlement agreement and mutual release under which CenterSpan received approximately $1,400 of restricted cash from escrow. Guillemot received approximately $1,000, including amounts collected
on their behalf and purchase price adjustments called for in the asset purchase contract.

NOTE 14. Quarterly Financial Data (Unaudited)

Selected unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2000 is as follows:

|In thousands, except per share data                           |  | 1st Quarter |       | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter |       
|------------------------------------------------------------- |  | ----------- | ----- | ----------- | - | ----------- | - | ----------- | ------
|1999                                                          |  |             |       |             |   |             |   |             |       
|Revenue                                                       |  | $           | 346   |             | $ | 375         |   | $           | 85    
|Gross profit                                                  |  |             | 246   |             |   | 235         |   |             | 71    
|Loss from continuing operations                               |  |             | (202  | )           |   | (5,113      | ) |             | (4,224
|Gain (loss) from discontinued operations                      |  |             | (196  | )           |   | (5,011      | ) |             |      
|Net loss                                                      |  |             | (398  | )           |   | (10,124     | ) |             | (4,224
|Basic and diluted loss per share from continuing operations   |  |             | (0.04 | )           |   | (1.05       | ) |             | (0.84 
|Basic and diluted loss per share from discontinued operations |  |             | (0.04 | )           |   | (1.03       | ) |             |      

|In thousands, except per share data  |  | 1st Quarter |        | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter |       
|------------------------------------ |  | ----------- | ------ | ----------- | - | ----------- | - | ----------- | ------
|2000                                 |  |             |        |             |   |             |   |             |       
|Revenue                              |  | $           |       |             | $ | 1           |   | $           |      
|Gross profit                         |  |             |       |             |   | 1           |   |             |      
|Net loss                             |  |             | (1,380 | )           |   | (3,430      | ) |             | (2,410
|Basic and diluted net loss per share |  |             | (0.23  | )           |   | (0.55       | ) |             | (0.39 

---

NOTE 15. Reclassification of certain expenses

The Company has reclassified a $2,500 non-cash charge initially recorded as a special charge, to research and engineering expense in 1999 to properly present the
acquisition of in-process research and development obtained primarily as part of a license of certain technology from IntelSee note 9 to the financial statements. The
technology acquired was used in products under development at that time and should have been recorded as expense in the third quarter when the technology was acquired. This reclassification does not
affect net loss in 1999.

36

---



PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Financial Statements and Schedules

The Consolidated Financial Statements, together with the reports thereon of KPMG LLP and PricewaterhouseCoopers LLP, are included on the pages indicated below:

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                         |  | 19  
|Report of Independent Accountants                                                                    |  | 21  
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                         |  | 22  
|Consolidated Statements of Operations for the years ended December 31, 2000,1999 and 1998            |  | 23  
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998           |  | 24  
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 |  | 25  
|Notes to Consolidated Financial Statements                                                           |  | 26  

There
are no schedules required to be filed herewith.

Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 31, 2000. The following reports on Form 8-K were filed the
first quarter of 2001:



Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

|Exhibit No. |  |                                      
|----------- |  | -------------------------------------
|23.1        |  | Consent of KPMG LLP                  
|23.2        |  | Consent of PricewaterhouseCoopers LLP

37

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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.

|Date: August 20, 2001 |  | CENTERSPAN COMMUNICATIONS CORPORATION
|--------------------- |  | -------------------------------------
|                      |  | By:                                  

38

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