________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2000~~2001

Commission File Number 000-26697

MP3.com, Inc.

(Exact name of registrant as specified in its charter)






Delaware		33-0840026
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4790 Eastgate Mall, San Diego, CA		92121
(Address of principal executive offices)		(Zip Code)

(858) 623-7000

(Registrant’s telephone number, including area code)

N/A

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

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

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

Common Stock, $0.001 per share par value, 68,~~469~~665,~~793~~728 shares outstanding as of ~~September~~April 3019, ~~2000~~2001.

This report contains 4946 pages.

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION
PART I -- CONSOLIDATED FINANCIAL INFORMATION
	Item 1.Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2.Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations
	Item 3.Quantitative and Qualitative Disclosures about Market Risk
PART II -- OTHER INFORMATION
	Item 1.Legal Proceedings
Item 2.Changes in Securities and Use of Proceeds
	Item 2.Changes in Securities and Uses of Proceeds
	Item 4.Submission of Matters to a Vote of Security Holders
	Item 5.Other Information
	Item 6.Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.31
Exhibit 10.17
EXHIBIT 10.32
Exhibit 10.28
EXHIBIT 10.33
Exhibit 10.29
EXHIBIT 10.34
Exhibit 10.30
EXHIBIT 10.35
Financial Data Schedule

MP3.COM, INC.

FORM 10-Q

For the Quarter Ended ~~September~~March 3031, ~~2000~~2001

INDEX

	Page
PART I — FINANCIAL INFORMATION
PART I — CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements		1
Item 1. Condensed Consolidated Financial Statements		3
Item 2. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations		12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures about Market Risk		42
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		4341
Item 2. Changes in Securities and Use of Proceeds		46
Item 2. Changes in Securities and Uses of Proceeds		45
Item 4. Submission of Matters to a Vote of Security Holders		4645
Item 5. Other Information		46
Item 6. Exhibits and Reports on Form 8-K		45
Item 6. Exhibits and Reports on Form 8-K		48

PART I — CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

MP3.COM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

ASSETS

			September 30,			December 31,
			March 31,			December 31,
			2000			1999
			2001			2000
			(Unaudited)
Current assets:
	Cash and cash equivalents		$	~~183~~91,211		$	~~193~~83,~~192~~858
	Marketable securities			52,775			220,039
	Short-term investments in marketable securities			—			14,988
	Short-term investments			5,647			14,750
	Accounts receivable, net			4,812			4,409
	Accounts receivable, net			5,704			6,871
	Restricted cash			—			30,000
	Unbilled receivables			21,~~545~~259			12,~~279~~021
	Prepaid expenses			6,075			2,878
	Prepaid expenses and other current assets			12,990			11,074
	Other current assets			513			3,456
	Prepaid multimedia content royalties			9,056			8,755
		Total current assets		~~256~~119,~~470~~328			~~442~~155,~~465~~105
Property and equipment, net of accumulated depreciation				19,~~884~~428			1320,~~849~~270
Strategic investments				18,750			11,983
Prepaid marketing and promotions expense, net of accumulated amortization				3,511			3,579
Prepaid marketing and promotions expense				3,999			2,162
Prepaid multimedia content royalties, net of accumulated amortization, less current portion				39,691			41,633
Prepaid multimedia content royalties				35,500			—
Strategic investments				11,410			11,410
Other non-current assets				75,~~362~~998			16,~~423~~602
		Total assets	$	~~341~~199,~~965~~366		$	~~471~~238,~~882~~599
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	4,~~384~~810		$	54,~~659~~767
	Line of credit			—			1,234
	Accrued expenses			14,721			15,690
	Accrued expenses			17,716			5,019
	Deferred revenues			1,654			1,104
	Deferred revenues			16,831			42,361
	Reserve for litigation and copyright matters			43,399			42,933
	Reserve for litigation and copyright matters			116,885			—
		Total current liabilities		64,584			64,494
		Total current liabilities		155,816			54,273
Other liabilities				427			389
Other liabilities				350			59
Stockholders’ equity:
	Preferred stock, par value $0.001 per share; 15,000,000 authorized at September 30, 2000 and December 31, 1999; none issued and outstanding at September 30, 2000 and December 31, 1999			—			—
	Preferred stock, par value $0.001 per share; 15,000,000 authorized at March 31, 2001 and December 31, 2000; none issued and outstanding at March 31, 2001 and December 31, 2000.			—			—
	Common stock, par value $0.001 per share; 300,000,000 authorized at September 30, 2000 and December 31, 1999; 68,469,793 and 68,620,913 issued and outstanding at September 30, 2000 and December 31, 1999, respectively			68			69
	Common stock, par value $0.001 per share; 300,000,000 authorized at March 31, 2001 and December 31, 2000; 68,664,790 and 68,529,044 issued and outstanding at March 31, 2001 and December 31, 2000, respectively			69			69
	Additional paid in capital			~~478~~501,~~921~~125			~~477~~501,~~272~~194
	Common shares issuable			5,391			—
	Note receivable from stockholder			(258	)		(258	)
	Deferred compensation			(63,~~154~~501	)		(184,~~148~~945	)
	Accumulated other comprehensive (loss) income			(34	)		1,454
	Accumulated other comprehensive loss			(11	)		(12	)
	Accumulated deficit			(~~286~~368,~~744~~460	)		(42322,~~839~~332	)
		Total stockholders’ equity		~~185~~134,~~799~~355			~~417~~173,~~550~~716
			$	341,965		$	471,882
		Total liabilities and stockholders’ equity	$	199,366		$	238,599

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

MP3.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)

(Unaudited)

				Three Months Ended						~~Nine Months Ended~~
				September 30,			September 30,			September 30,			September 30,
				March 31,			March 31,
				2000			1999			2000			1999
				2001			2000
Net revenues				$	2021,~~459~~750		$	417,~~051~~495		$	~~58,132~~		$	~~6,628~~
Cost of revenues (excludes deferred compensation amortization of $—, $153, $128, $162, respectively)					3,746			1,687			11,314			2,704
Cost of revenues (excludes amortization of deferred compensation of $ — and $71, respectively)					4,875			3,756
		Gross profit			16,~~713~~875			213,~~364~~739			~~46,818~~			~~3,924~~
Operating expenses:
	Sales and marketing (excludes deferred compensation amortization of $485, $6,371, $1,495, $7,277, respectively)				14,029			8,897			42,992			12,227
	Sales and marketing (excludes deferred compensation amortization of $321 and $591, respectively)				10,491			17,002
	Engineering and product development (excludes deferred compensation amortization of $507, $1,469, $1,981, $1,912, respectively)				6,067			2,373			17,471			3,444
	Engineering and product development (excludes deferred compensation amortization of $325 and $805, respectively)				5,595			5,279
	General and administrative (excludes deferred compensation amortization of $468, $4,377, $4,193, $6,481, respectively)				8,896			3,110			23,255			4,874
	General and administrative (excludes deferred compensation amortization of $325 and $2,935, respectively)				6,218			7,762
	Charge related to litigation and copyright matters				20,000			—			170,000			—
	Charge related to class action and derivative lawsuits				41,428			—
	Costs related to acquisition activities				—			—			1,704			—
	Amortization of deferred compensation				971			4,402
	Amortization of deferred and other stock-based compensation				1,460			12,370			7,796			15,833
	Costs related to acquisition activities				—			1,704
			Total operating expenses		5064,~~452~~703			2636,~~750~~149			~~263,218~~			~~36,378~~
Loss from operations					(3347,~~739~~828	)		(2422,~~386~~410	)		~~(216,400~~	)		~~(32,454~~	)
Interest income, net					41,~~039~~700			45,~~517~~678			~~14,833~~			~~4,836~~
Impairment of strategic investments					(19,000	)		—			(40,670	)		—
Loss before minority interest					(46,128	)		(16,732	)
Loss before minority interest					(48,700	)		(19,869	)		(242,237	)		(27,618	)
Minority interest in losses of an unconsolidated subsidiary					—			1,405
Minority interest in loss of an unconsolidated subsidiary					—			—			(1,668	)		—
Net loss				$	(46,128	)	$	(18,137	)
Net loss				$	(48,700	)	$	(19,869	)	$	(243,905	)	$	(27,618	)
Net loss per share:
Net loss per share:
	Basic and diluted			$	(0.69	)	$	(0.28	)
	Basic and diluted			$	(0.74	)	$	(0.33	)	$	(3.70	)	$	(0.54	)
	Weighted average shares — basic and diluted				66,929,000			64,628,000
	Weighted average shares — basic and diluted				65,989,000			60,333,000			65,851,000			51,153,000

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

MP3.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

				Nine Months Ended
				Three Months Ended
				September 30,			September 30,
				March 31,			March 31,
				2000			1999
				2001			2000
Operating activities:
Net loss				$	(~~243~~46,~~905~~128	)	$	(2718,~~618~~137	)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Adjustments to reconcile net loss to cash used in operating activities:
	Depreciation and amortization of goodwill				5,513			470
	Depreciation, amortization of goodwill and amortization of prepaid multimedia royalty licenses				4,581			1,158
	Stock-based charges associated with acceleration of stock option vesting				6,471			1,093
	Amortization of deferred compensation				971			4,402
	Amortization of stock based marketing				3,142			2,524
	Charge related to class action and derivative lawsuits (non-cash portion)				5,391			—
	Amortization of deferred and other stock based compensation				7,846			16,970
	Stock based charges associated with the acceleration of stock option vesting				—			6,030
	Loss on sale of fixed assets				90			—
	Amortization of stock based marketing				—			208
	Impairment of strategic investments				40,670			—
	Loss on sale of fixed assets				—			19
	Charge for litigation and copyright matters				170,000			—
	Charge associated with facility relocation costs				—			815
	Deferred income taxes				—			(98	)
	Changes in operating assets and liabilities:
		Accounts receivable			1,166			(1,515	)
		Restricted cash			30,000			—
		Unbilled receivables			(1,266	)		(716	)
		Accounts receivable			(403	)		813
		Prepaid expenses and other current assets			(2,280	)		(6,040	)
		Unbilled receivables			762			466
		Accounts payable			(1,276	)		3,399
		Prepaid expenses and other current assets			2,743			552
		Accrued expenses and reserve for litigation and copyright matters			(40,356	)		3,235
		Accounts payable			43			(3,580	)
		Deferred revenue			(25,530	)		45,320
		Accrued expenses			(931	)		9,339
			Cash (used in) provided by operating activities		(79,715	)		37,839
		Reserve for litigation and copyright matters			(2,776	)		—
		Deferred revenue			550			(4,290	)
			Cash used in operating activities		(5,197	)		(3,020	)
Investing activities:
Purchase of property and equipment					(101,~~620~~227	)		(85,~~248~~571	)
Maturities (purchases) of marketable securities, net					167,176			(284,841	)
Maturities of marketable securities, net					14,977			74,385
Purchases of strategic investments					(39,738	)		—
Purchases of prepaid multimedia content royalties					(1,626	)		—
Acquisition of MP3Radio.com, net of cash acquired					(3,816	)		—
Purchases of strategic investments					—			(31,637	)
Issuance of note receivable					(4,000	)		—
Other assets					10			(1,845	)
Prepaid multimedia content royalties					(35,500	)		—
Cash provided by investing activities					12,134			35,332
Other assets					(1,861	)		(5,299	)
Cash provided by (used in) investing activities					71,641			(298,388	)
Financing activities:
Payments under capital lease obligation					—			(14	)
Proceeds from the issuance of common stock					404			975
Proceeds from issuance of Series A, B, and C convertible preferred stock					—			60,577
Repurchase of unvested common stock					—			(2,400	)
Proceeds from exercise of stock options for common stock and the sale of common stock					1,725			365,402
Payments on line of credit					—			(217	)
Repurchase of unvested common stock					(2,400	)		—
Cash provided by (used in) financing activities					404			(1,642	)
(Payments) proceeds on line of credit					(1,234	)		1,234
Translation adjustment					12			—
Translation adjustment					2			—
Increase in cash and cash equivalents					7,353			30,670
Cash (used in) provided by financing activities					(1,907	)		427,199
Cash and cash equivalents at beginning of period					83,858			193,192
(Decrease) increase in cash and cash equivalents					(9,981	)		166,650
Cash and cash equivalents at end of period				$	91,211		$	223,862
Cash and cash equivalents at beginning of period					193,192			39
Supplemental disclosures of cash flow information:
Cash and cash equivalents at end of period				$	183,211		$	166,689
Interest paid				$	—		$	27
Taxes paid				$	5		$	—
Supplemental schedule of non-cash activities:
Unrealized loss on marketable securities, net				$	1		$	5,773
Reduction in deferred compensation associated with stock option forfeitures				$	473		$	3,558

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

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

MP3.com, Inc. (“MP3.com”) has created ~~what it believes is~~ a unique and robust technology infrastructure ~~for~~designed ~~the~~to facilitate the storage, management, promotion, and delivery of digital music. As ~~the Internet’s~~a ~~premier~~ Music Service Provider (“MSP”), ~~MP3.com~~the company is dedicated to providing consumers ~~with anytime, anywhere~~ access to ~~their~~ music when they want it, where they want it, using any web-enabled device. ~~MP3.com~~ The Company’s web site hosts ~~what~~large ~~MP3.com~~catalogs ~~believes is the largest collection~~ of digital music available on the ~~Internet,~~ ~~with more than 600,000 songs and audio files posted from over 100,000 digital artists and record labels~~Internet. Dedicated to growing the digital music space, ~~MP3.com~~the Company’s products and services include on-demand Subscription Music Channels, an innovative ~~Retail~~ Business Music Services ~~Program~~program, a ~~Syndicated~~ Radio ~~Division~~Services program and others. Additionally, through ~~MP3.com~~the Company’s MSP technology initiative and its Music InterOperating System, MP3.com is partnering with a variety of forward-looking ~~technology~~businesses ~~companies~~ to expand its digital music strategy. ~~MP3.com shares are traded~~ ~~on the Nasdaq National Market System under the symbol~~ ~~“MPPP.” MP3.com was incorporated in the state of Delaware on March 17, 1998 and commenced operations on that date. MP3.com is headquartered in San Diego, California.~~

MP3.com shares of Common Stock are listed for trading on the Nasdaq National Market System under the symbol “MPPP.” MP3.com was incorporated in the state of Delaware on March 17, 1998 and commenced operations on that date. MP3.com is headquartered in San Diego, California.

Basis of Presentation

The accompanying condensed consolidated financial statements as of ~~September~~March 3031, ~~2000~~2001 and for the three ~~and nine~~ months ~~ended~~ ~~September~~ended March 3031, ~~2000~~2001 and ~~1999~~2000 are unaudited and have ~~been~~ been prepared by MP3.com pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements have been prepared on the same basis as ~~MP3.com’s~~the audited ~~financial~~consolidated ~~statements~~financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information included, in ~~accordance~~ accordance with generally accepted accounting principles. ~~Certain~~ Certain information and footnote disclosures normally included in in consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations. The consolidated ~~statements~~results of operations for the three ~~and nine~~ months ended ~~September~~ March 3031, 2001 ~~2000~~ are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, ~~2000~~2001. Certain prior period amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

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

Use of Estimates

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

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provisions for returns, bad debts, valuation of privately- held strategic investments, ~~and~~the ultimate realizability of the prepaid multimedia content royalties, the reserve for litigation and copyright matters and the charge and reserve for class action and derivative lawsuits. Actual results ~~may~~could differ from ~~these~~those estimates.

Net Loss Per Share

MP3.com computes net loss per share following SFAS No. 128, “Earnings Per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of ~~SFAS~~ SFAS No. 128, basic net ~~income (~~loss) per share is computed by dividing the net ~~income (~~loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of unvested restricted common shares, incremental common shares issuable upon the exercise of stock options, and common shares issuable upon the exercise of warrants for common stock, are included in diluted net loss per share to the extent these shares are dilutive. Common equivalent shares are not included in the computation of dilutive net loss per share for the three months ended March 31, 2001 and 2000 because the effect would be anti-dilutive.

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

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

The following table sets forth the computation of basic and diluted net loss per share as follows (~~dollar~~in ~~amounts~~thousands, inexcept ~~thousands~~share and per share data):

		Three Months Ended						~~Nine Months Ended~~
		September 30,			September 30,			September 30,			September 30,
		March 31,			March 31,
		2000			1999			2000			1999
		2001			2000
Numerator:
	Net loss	$	(4846,~~700~~128	)	$	(1918,~~869~~137	)	$	~~(234,905~~	)	$	~~(27,618~~	)
Denominator:
	Weighted average shares outstanding		68,~~354~~615,000			6567,~~235~~811,000			~~68,087,000~~			~~56,174,000~~
	Weighted average unvested common shares subject to repurchase agreements		(21,~~365~~686,000	)		(43,~~902~~183,000	)		~~(2,236,000~~	)		~~(5,021,000~~	)
Denominator for basic and diluted calculation			6566,~~989~~929,000			6064,~~333~~628,000			~~65,851,000~~			~~51,153,000~~
Net loss per share:
	Basic and diluted	$	(0.7469	)	$	(0.3328	)	$	~~(3.70~~	)	$	~~(0.54~~	)

Diluted common stock equivalents include common stock options, warrants for common stock as if converted, and restricted stock that has not yet fully vested. Potentially dilutive securities totaled ~~total~~ approximately 4 2,~~705~~635,000 and 59,~~752~~753,000 common shares ~~for the three and nine~~as ~~months~~of ~~ended September~~March 3031, 2001 and 2000, respectively, and were ~~excluded~~ excluded from historical diluted earnings per share because of ~~their~~ their anti-dilutive effect.

Comprehensive Income

MP3.com has adopted the provisions of SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes standards for reporting comprehensive income and its components in consolidated financial statements. Comprehensive income, ~~as defined,~~ includes all changes in equity (net assets) during a period from non-owner sources. Net ~~income (~~loss) and other ~~comprehensive~~ ~~income (~~comprehensive loss), including foreign currency translation adjustments, and unrealized gains and losses on investments shall be reported, net of their related tax effect, to arrive at comprehensive loss. There was no difference between MP3.com’s net loss and its total comprehensive loss for

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~arrive at comprehensive income. There were no differences between MP3.com’s net loss and its total comprehensive loss for~~ the ~~nine~~three months ended ~~September~~March 3031, 2001 and 2000, except for ~~unrealized~~ unrealized ~~loss~~losses on investments of approximately $341,000 and $5,773,000, respectively.

Segment Information

MP3.com has adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 requires public companies to report financial and descriptive information about their reportable operating segments. MP3.com identifies its operating segments based on how management internally evaluates separate financial information ~~(if available)~~, business activities and management responsibility. MP3.com believes it operates in a single business segment. Through ~~September~~March 3031, ~~2000~~2001, ~~there~~MP3.com ~~were~~has ~~no significant~~had insignificant foreign operations.

A summary of advertising and ~~merchandise~~non-advertising revenue from ~~customers~~ customers is as follows (in thousands):

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2000		1999		2000		1999
	2001		2000
Advertising	$	1920,~~770~~011	$	314,~~638~~584	$	~~56,024~~	$	~~5,875~~
Merchandise		689		413		2,108		753
Non-advertising		1,739		2,911
	$	2021,~~459~~750	$	417,~~051~~495	$	~~58,132~~	$	~~6,628~~

Supplemental cash flow disclosures are as follows (in thousands):

	Nine Months Ended
	September 30,
	2000		1999
Supplemental disclosures of cash flow information:
Interest paid	$	75	$	89
Taxes paid	$	—	$	168
Supplemental schedule of non-cash financing activities:
Stock based compensation associated with the acceleration of stock option vesting	$	6,471	$	1,093
Unrealized loss on marketable securities, net	$	1,490	$	—
Forfeiture of stock options	$	4,197	$	—
Common stock issued for notes receivable	$	—	$	338
Cancellation of stockholder notes receivable	$	—	$	78
Warrants for common stock and common stock issued in exchange for prepaid marketing costs	$	—	$	2,302
Donation of 100,000 shares of MP3.com common stock to the MP3 Foundation	$	—	$	767

Note 2 — Legal Proceedings

Record Label Lawsuits. On January 21, 2000, ten major recording companies filed a copyright infringement lawsuit against MP3.com in the United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in connection with certain content available in its My.MP3.com service, made unauthorized copies of tens of thousands of audio CDs in violation of the Copyright ~~Act. On~~Litigation ~~April 28, 2000, the court granted plaintiffs’ motion~~ ~~for summary judgment and held that MP3.com was liable for infringing plaintiffs’ copyrights, and the litigation proceeded with discovery on the issues of willfulness and~~

6 Major Label Lawsuits. On January 21, 2000, ten major recording companies filed a copyright infringement lawsuit against MP3.com, Inc. in the United States District Court for the Southern District of New York (the “Major Label Lawsuit”). The complaint alleged that MP3.com, in connection with certain content available in its My.MP3 service, made unauthorized copies of tens of thousands of audio CDs in violation of the Copyright Act. On April 28, 2000, the court granted plaintiffs’ motion for summary judgment and held that MP3.com was liable for infringing plaintiffs’ copyrights, and the litigation proceeded with discovery on the issues of willfulness and damages. On May 10, 2000, MP3.com disabled all content within the My.MP3 service except as expressly authorized by the copyright holders.

~~Table~~ Between June and August 2000, MP3.com entered into settlement and license agreements with Warner Music Group, BMG Entertainment, Sony Music, and Capitol Records, Inc. (EMI), which together represented eight of ~~Contents~~the ten major recording companies that filed the Major Label Lawsuit. The settlement agreements provide for a settlement amount to be paid in cash by MP3.com in exchange for a release from the settling plaintiffs and their affiliated entities (as defined in the settlement agreements) of all claims related to the lawsuit and the My.MP3 service. “Most-favored-nation” provisions in these settlement agreements require additional settlement amounts to be paid under certain circumstances.

As a result of these settlements, the Major Label Lawsuit was limited to a dispute with UMG Recordings, Inc., which represented two of the original plaintiffs. A trial in the case was held from August 28 through September 6, 2000 on the issues of willfulness and damages. After hearing evidence, the court ruled on September 6, 2000 that MP3.~~COM~~com had willfully infringed UMG’s copyrights and awarded damages to UMG in an amount of $25,000 ~~INC~~per CD. The Court then scheduled a period to allow MP3.com to conduct discovery concerning the certificates of registration for which plaintiffs sought damages. On November 16, 2000, UMG made a motion for entry of judgment in the amount of $53,400,000 in statutory damages, costs, and attorneys’ fees, which MP3.com did not oppose. As a result, a judgment in that amount was entered.

~~NOTES~~MP3.com TOhas ~~CONDENSED~~also ~~CONSOLIDATED~~entered ~~FINANCIAL~~into ~~STATEMENTS~~a license agreement with UMG. ~~(Continued)~~Subject to certain affirmative obligations of MP3.com and other terms and conditions regarding the implementation of the My.MP3 service, MP3.com is

damages. On May 10, 2000, MP3.com voluntarily disabled the plaintiffs’ content within the My.MP3.com service.

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

As a result of the settlements described above, the January 21, 2000 copyright infringement lawsuit was limited to a dispute with UMG Recordings, Inc., which represents two of the original plaintiffs. A trial in the case was held from August 28 through September 6, 2000 on the issues of willfulness and damages. After hearing evidence, the court ruled on September 6, 2000 that MP3.com had willfully infringed UMG’s copyrights and awarded damages to UMG in an amount of $25,000 per CD. A trial is scheduled to commence on November 13, 2000 to determine the number of valid copyright registrations held by UMG, and hence the number of CDs for which UMG will be entitled to recover the per CD damage award. Based on information presently available, the maximum number of such registrations is estimated to be between 3,000 and 7,000. Numerous factors could affect the ultimate size of the determination.

Over the course of 2000, some other independent labels have filed lawsuits against us based on the same set of allegations as the UMG case. These labels include Zomba Recording Corp., Tee Vee Toons, Inc., and Koch Entertainment and Velvel Records LLC. Additionally, several independent labels have sent us demand letters alleging similar claims.

Publisher Lawsuits. On March 14, 2000, two large music-publishing companies, MPL Communications, Inc. and Peer International Corporation, filed a copyright infringement lawsuit against MP3.com in the United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in connection with its My.MP3.com service, made unauthorized copies of approximately 45,000 audio CDs in violation of the Copyright Act, and that MP3.com, in connection with the streaming of audio content to users of the My.MP3.com service, continued to make unauthorized digital phonorecords in violation of the Copyright Act. The complaint further alleges that MP3.com’s actions constituted unauthorized copying and willful infringement of plaintiffs’ copyrights. Plaintiffs seek damages (including statutory damages of up to $150,000 per violation) and injunctive relief prohibiting MP3.com from operating its My.MP3.com service or any other service that uses unauthorized reproductions of plaintiffs’ copyrighted works. Additionally, Zomba Enterprises, Inc. has filed its own music publishing case against us. In view of the court’s rulings in the UMG case, there is a substantial risk that the issues of infringement, fair use, and willfulness may be adjudicated against us in these cases with publishers. This could mean that we would only be able to litigate the issue of damages. A motion has been filed by MPL and Peer to amend their complaint to add many additional copyrighted works to those at issue in the action.

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On October 17, 2000, MP3.com, the National Music Publishers’ Association, Inc. and its licensing subsidiary, The Harry Fox Agency, Inc. entered into a preliminary agreement that — if approved by individual HFA music publisher-principals — would permit the use of up to one million musical compositions on the My.MP3.com service. In addition, MP3.com, MPL and Peer agreed to settle the March 14, 2000 litigation upon finalization of the preliminary agreement, which requires ratification by individual HFA music publisher-principals. MP3.com, MPL and Peer agreed to stay the March 14, 2000 litigation until the ratification process is completed. Accordingly, the court stayed all proceedings in this litigation until January 2, 2001.

The proposed, 3-year licensing arrangement provides that MP3.com will pay up to thirty million dollars ($30,000,000) to HFA for the benefit of up to 25,000 music publishers and their songwriter partners as part of two equal funds. One fund will be used to pay HFA publisher-principals for past uses of music on the My.MP3.com service, in exchange for a release from HFA publisher-principals and their affiliated entities of all claims related to the March 14, 2000 lawsuit and the use of their compositions on the My.MP3.com service. The other fund will provide advance payments toward royalties earned under the prospective license. The terms of the prospective license call for a payment of one quarter cent each time a song is streamed on demand to a customer from his or her My.MP3.com locker, along with a one-time fee per track added to the My.MP3.com service.

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

Settlement Discussions; Charge to Earnings. MP3.com has pursued and continues to actively pursue settlement discussions with the various plaintiffs and claimants in the cases and disputes discussed above. The decision whether to enter into settlement and/or license agreements with each party will be based upon a number of factors related to both the lawsuits and MP3.com’s business in general. We cannot guarantee that we will be able to enter into any additional settlement agreements on terms favorable to MP3.com, if at all, or that any settlement or license agreement will prove beneficial to our business or stockholders. During the quarter ended June 30, 2000, we recorded a charge for litigation and copyright matters of $150.0 million. The charge for litigation and copyright matters represented MP3.com’s estimate of the total costs to be incurred in connection with the resolution of the various litigation and copyright matters associated with the My.MP3.com service, including the lawsuits filed by major recording companies and other parties. Copyright issues associated with the My.MP3.com Service also include but are not limited to publishing rights, non-major label content, and legal and advisory fees. This charge did not reflect or include any amounts paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3.com service, or any additional amounts that might be payable under the most-favored-nations provisions described above. This charge reflected management’s expectations as of July 26, 2000, and

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~was~~permitted to utilize the recordings owned by Warner Music Group, BMG Entertainment, Sony Music, EMI, and UMG as part of the My.MP3 service. The license agreements have terms of approximately three to ten years, and provide for payment of a one-time fee each time a licensor’s recording is added to a separate My.MP3 account. These licenses also provide for on-going royalty payments based on ~~currently~~the ~~available~~greater ~~information~~of as(i) a specified ~~well~~percentage asof net revenues generated from or in ~~significant~~connection ~~assumptions~~with ~~made~~the byMy.MP3 ~~management~~service ~~regarding~~or (ii) a specified amount accrued each time a licensor’s recording is streamed from My.MP3. Although MP3.com has obtained license agreements permitting the use of recordings from BMG Entertainment, Warner ~~litigation~~Music Group, Sony Music, UMG, EMI, and certain other independent labels, we cannot guarantee that MP3.com will be able to secure similar license agreements from any other recording company.

~~During~~Other ~~the~~Record ~~quarter~~Label ~~ended~~Lawsuits. ~~September 30,~~Over ~~2000,~~the wecourse ~~recorded an additional charge for litigation and copyright matters~~ of ~~$20.0 million.~~ ~~This additional charge reflects incremental~~2000, ~~costs~~some ~~that~~other ~~management~~entities ~~estimates~~filed ~~will~~lawsuits beagainst ~~incurred~~us inbased ~~connection with~~on the ~~resolution~~same set of ~~the~~allegations ~~various~~as ~~litigation~~the ~~and~~Major ~~copyright matters~~Label ~~associated with the My~~Lawsuit.~~MP3.com~~ ~~service.~~These ~~The additional~~include: ~~charge~~Tee ~~and~~Vee ~~accrual~~Toons, ~~reflect~~Inc.; ~~management’s~~Zomba ~~expectations~~Recording asCorp. of (the ~~date of this quarterly report and is based on currently~~“Zomba ~~available~~case”); ~~information~~Koch asEntertainment ~~well as significant assumptions made by management regarding the various litigation~~ and ~~copyright matters.~~Velvel ~~Although~~Records weLLC ~~believe that~~ (the ~~expectations and~~ ~~assumptions~~“Koch ~~reflected~~case”); inEMusic.com, ~~this~~Inc., ~~additional~~Fuel ~~charge~~2000 ~~are reasonable~~Records, weSpinart, ~~cannot~~Inc., ~~guarantee~~Gig ~~that~~Records, ~~future~~Fearless ~~events~~Records, orand ~~results will conform to~~Invisible Records ~~such~~(the ~~expectations~~“EMusic orcase”); ~~assumptions. If these expectations~~ and ~~significant~~ ~~assumptions~~Unity ~~prove to be erroneous in light of future~~Entertainment ~~events,~~Corporation (the ~~actual~~“Unity” ~~amounts incurred by MP3~~case).~~com~~ toAdditionally, ~~resolve all~~several ~~matters~~independent ~~could~~labels behave ~~materially~~sent ~~different~~us ~~than~~demand ~~those~~letters ~~recorded~~alleging ~~as of~~similar ~~September 30, 2000~~claims.

~~Cash~~A ~~payments~~jury ~~for~~trial in the ~~settlements~~Tee ~~discussed~~Vee ~~above~~Toons ~~and~~case ~~other~~commenced on ~~payments~~March 26, ~~have~~2001. ~~reduced~~Prior to trial, in reliance on the Court’s ~~cumulative~~rulings ~~amount~~in ~~reserved~~the asMajor Label Lawsuit, the issues of infringement, fair use, and willfulness were adjudicated against us. As a result of, ~~these~~the ~~charges~~jury trial was limited to ~~$116~~the issue of damages.9 The trial concluded on April ~~million~~6, 2001. The jury considered 145 copyright certificates and returned a verdict which the Court tabulated as oftotaling ~~September 30~~$292,968. Subsequently, ~~2000~~two jurors contacted the Court to inform it that the verdict decided upon by the jurors contained discrepancies. ~~Amounts~~The ~~payable~~Court has ~~for~~interviewed ~~past~~all ~~issues~~the injurors ~~connection~~and has set a briefing schedule on the issue of the jury’s verdict. The Court could reform the verdict to an amount consistent with the jury’s ~~HFA/Peer/MPL~~purported ~~agreement~~intention, ~~described~~it ~~above~~could ~~are~~leave ~~included~~the verdict undisturbed and enter judgment in the ~~remaining~~ amount ~~reserved~~originally asset ofby ~~September 30~~the jury, ~~2000~~or it could declare a mistrial. An immediate appeal is likely to be taken by one party or the other depending upon the Court’s ruling.

~~Although~~Discovery ~~MP3.com~~in ~~has~~the ~~obtained~~Zomba ~~license~~case ~~agreements~~is ~~permitting~~currently ~~the use~~being ofconducted ~~recordings~~and ~~from~~is scheduled ~~BMG~~to ~~Entertainment~~close on May 21, ~~Warner~~2001. ~~Music~~The ~~Group,~~final pre-trial ~~Sony~~conference ~~Music~~is ~~and~~scheduled ~~EMI~~for June 29, we2001, ~~cannot~~and ~~guarantee~~the ~~that~~case ~~MP3~~is set for trial on July 9, 2001.~~com~~ ~~will~~Like bethe ~~able~~Tee Vee Toons case, the totrial ~~secure~~in ~~similar~~the ~~license~~Zomba ~~agreements~~case ~~from~~will ~~any~~be ~~other~~limited ~~recording~~to only the issue of ~~company~~damages. ~~Similarly,~~The ~~MP3.com~~Koch case has ~~not~~been ~~yet~~settled ~~secured~~and ~~any~~the ~~final~~case is now ~~publishing~~closed. ~~license~~The orcomplaint ~~other~~in ~~affirmative~~the ~~clearance~~EMusic ~~(whether~~case bywas filed on ~~litigation~~December 14, or2000. ~~otherwise)~~MP3.com’s response to ~~utilize~~the ~~within~~complaint was ~~the~~filed Myon February 8, 2001.~~MP3.com~~ ~~service~~Pursuant to the case management plan, the ~~compositions~~case ~~embodied~~is into ~~the~~be ~~recordings~~ready ~~owned~~for bytrial ~~any~~on ~~recording~~August 20, ~~company~~2001. ~~(including~~The ~~BMG~~Unity ~~Entertainment~~case, ~~Warner~~which ~~Music~~purports to be ~~Group,~~brought ~~Sony~~on ~~Music~~behalf ~~and~~of ~~EMI)~~Unity, ~~nor~~an ~~can~~independent werecord ~~guarantee~~company ~~that any such~~whose ~~license~~works orwere ~~clearance~~allegedly ~~will~~used ~~ever~~in bethe ~~obtained~~My.MP3 Ifservice, aand ~~final~~all ~~publishing~~other similarly ~~license~~situated entities or ~~other~~individuals, ~~affirmative~~was ~~clearance~~filed toon November 7, ~~utilize~~2000. ~~such compositions~~MP3.com, isInc. ~~not~~answered ~~obtained,~~the ~~our~~Complaint ~~ability~~on January 16, to2001. ~~utilize~~On inApril 16, 2001, the ~~My.MP3.com~~ ~~service~~Court ~~recordings~~entered an ~~from~~order ~~any~~denying ~~recording~~plaintiffs’ ~~company~~motion ~~could~~for beclass certification without ~~materially~~prejudice ~~and~~to ~~adversely~~a ~~affected~~renewal of the motion within 45 days.

~~Class Action~~Publisher Lawsuits. WeOn ~~and~~March 14, ~~certain~~2000, oftwo ~~our~~large ~~employees,~~music ~~officers~~publishing ~~and~~companies, ~~directors~~MPL ~~have~~Communications, ~~been~~Inc. ~~named~~and ~~as defendants~~Peer inInternational ~~several~~Corporation, ~~lawsuits~~with ~~alleging~~the ~~violations~~assistance of ~~the~~The ~~federal~~Harry ~~securities~~Fox Agency, ~~laws~~Inc. ~~The complaints~~(“HFA”), ~~which were~~ filed ~~between~~a ~~September~~copyright ~~19,~~infringement ~~2000~~lawsuit ~~and~~against ~~September 29,~~MP3.com ~~2000~~ in the United States District Court for the Southern District of ~~California,~~New ~~each~~York ~~purport~~(the to“MPL/ bePeer case”). ~~brought~~The oncomplaint ~~behalf~~alleged ofthat aMP3.com, ~~class~~in ofconnection with ~~stockholders~~its My.MP3 ~~The~~service, ~~complaints~~made unauthorized copies of audio CDs ~~allege~~containing ~~that~~plaintiffs’ wecopyrighted ~~and~~works ~~the~~in ~~other~~violation of the ~~defendants~~Copyright ~~violated~~Act, ~~the~~and ~~federal~~that MP3.com, in connection with the ~~securities~~streaming ~~laws~~of byaudio ~~issuing~~content ~~materially~~to ~~false~~users ~~and~~of ~~misleading statements~~the ~~and~~My.MP3 ~~failing~~service, continued to ~~disclose~~make ~~material~~unauthorized ~~information~~digital ~~regarding~~phonorecords in violation of ~~our~~the MyCopyright Act. The complaint further alleged that MP3.com’s ~~service~~actions constituted unauthorized copying and willful ~~the~~infringement ~~litigation~~of ~~surrounding~~plaintiffs’ ~~the~~copyrights. Plaintiffs ~~service~~sought damages (including statutory damages of up to $150,000 per violation) and injunctive relief prohibiting MP3.com ~~The~~from operating ~~complaint~~its ~~does~~My.MP3 ~~not~~service ~~specify~~or ~~the~~any ~~dollar~~other ~~amount~~service ofthat uses ~~damages~~unauthorized ~~alleged~~reproductions of plaintiffs’ copyrighted works.

Derivative Lawsuits. Between September 14, 2000 and September 18, 2000, certain stockholders of MP3.com filed shareholder derivative suits against MP3.com and certain of its employees, officers and directors in the Superior Court of the State of California, County of San Diego. These complaints allege various statutory and common law claims relating to the My.MP3.com service.

We cannot assure you that we will be successful in ultimately defending any of these lawsuits, and we may be required to pay license fees or substantial damages, including statutory, punitive or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. At the rate of $25,000 per work, our aggregate potential liability resulting from all of our copyright litigation proceedings could exceed billions of dollars. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

usOn toOctober 17, ~~incur~~2000, ~~legal costs~~MP3.com, ~~lowering~~the ~~our~~National ~~stock~~Music Publishers’ ~~price~~Association, Inc., and ~~public~~its licensing ~~demand~~subsidiary, HFA, entered into a preliminary agreement to be approved by individual HFA music publisher-principals for settlement ~~our~~and ~~stock~~use of musical compositions on the My.MP3 service for a three year term. As a result, MPL and ~~diverting~~Peer ~~management’s~~settled ~~attention~~the ~~away~~MPL/ ~~from~~Peer ~~our~~case ~~primary~~with ~~business~~MP3.com, ~~activities~~and ina ~~general~~stipulation of dismissal with prejudice was subsequently signed by the parties on December 28, 2000 and entered by the Court on January 2, 2001.

~~Note~~ The three-year licensing arrangement provided that MP3.com would pay up to $30 million to HFA for the benefit of up to 25,000 music publishers and their songwriter partners, to be allocated to two equal funds. One fund was used to pay HFA publisher-principals for past uses of music on the My.MP3 service, in exchange for a release from HFA publisher-principals and their affiliated entities of all claims related to those asserted in the MPL/ Peer case and the use of their compositions on the My.MP3 service. The other fund provides advance payments toward royalties earned under the prospective license. The terms of the prospective license call for a payment of one-quarter cent each time a song is streamed on demand to a customer from his or her My.MP3 locker, along with a one-time fee per track added to the My.MP3 service. The preliminary agreement with HFA was finalized on February 28, 2001. Approximately 78% of the publisher-principals HFA represents accepted and are bound by the settlement agreement and approximately 90% accepted and are bound by the licensing agreement. In April 2001, HFA refunded to MP3.com approximately $4.6 million pursuant to the agreement, representing approximately $3.2 —million ~~Acquisition~~and $1.4 million for the proportion of HFA publisher-principals that did not settle or license content to MP3.com, respectively.

InZomba ~~April 2000~~Enterprises, ~~MP3~~Inc.~~com~~ ~~agreed~~has tofiled ~~purchase~~its ~~the~~own ~~remaining~~music ~~53.5%~~publishing case ~~ownership~~against ofus ~~mp3radio.com,~~making aallegations ~~joint~~similar ~~venture~~to ~~with~~those ~~Cox~~set ~~Interactive Media,~~forth ~~Inc. MP3.com paid approximately $4 million~~ in ~~cash,~~the ~~received~~MPL/ ~~tangible~~Peer ~~net~~case. ~~assets of $47~~Additionally,~~000~~ ~~and~~several ~~assumed~~other ~~liabilities~~publishers, not ofaffiliated ~~$231~~with HFA,~~000.~~ ~~During~~have ~~the~~sent ~~transition~~us ~~period~~demand ~~ending~~letters ~~June 30,~~alleging ~~2000,~~similar ~~the~~claims. ~~costs~~In view of ~~relocating~~ the ~~joint venture~~Court’s ~~operations~~ rulings toin ~~San Diego were shared pro rata based upon~~ the ~~parties’~~Tee ~~existing~~Vee ~~ownership~~Toons ~~percentages~~ and ~~included~~Zomba incases, ~~minority~~there ~~interest in~~is ~~loss~~a ofsubstantial anrisk ~~unconsolidated~~that ~~subsidiary. The acquisition was completed during~~ the ~~third quarter of 2000 and was accounted for~~ ~~under~~issues ~~the purchase method~~ of ~~accounting.~~infringement, ~~The excess purchase price over~~ fair ~~value~~use, ofand ~~net~~willfulness ~~assets~~may ~~acquired was generally~~be ~~allocated~~adjudicated toagainst ~~assembled~~us ~~work~~in ~~force;~~any ~~URLs, trademarks~~ and ~~names;~~all ~~a radio~~publisher ~~station agreement; and goodwill~~cases. ~~The excess purchase price~~This ~~over~~would ~~fair~~mean ~~value~~that ofwe ~~the~~would ~~assets~~only ~~acquired~~be ofable ~~$4 million was allocated~~ to ~~certain~~litigate ~~intangible assets and will be amortized over~~ the ~~following~~issue ~~periods using the straight-line method as follows~~of ~~(in thousands):~~damages.

	Amount		Life
Assembled work force	$	50		12 months
URL’s, trademarks and names	$	200		24 months
Radio station agreement	$	1,250		12 months
Goodwill	$	2,500		24 months

Artists’ Class Action. On April 12, 2000, several artists filed a class action lawsuit in the United States District Court for the Southern District of New York against MP3.com and several major recording companies that claimed to own copyrights in sound recordings featuring the artists. The complaint alleged that the recording company defendants in the Major Label Lawsuit claimed rights in plaintiffs’ recordings that they did not possess. In particular, the complaint alleged that the recording company defendants did not possess any copyright protections with respect to plaintiffs’ pre-1972 published and pre-1978 unpublished recordings, did not possess the right to digitally transmit plaintiffs’ pre-1996 recordings over the Internet, and did not possess the right to control the conversion of plaintiffs’ recordings into mp3 files. The complaint further alleged that MP3.com has used the names and likenesses of plaintiffs without their consent or authorization and in a deceptive manner, in violation of the federal Lanham Act, the New York Civil Rights Law, and unspecified unfair competition and misappropriation laws. In their prayer for relief, plaintiffs asked to have their class action certified, to be awarded unspecified damages and attorneys’ fees, to have the defendants enjoined from using plaintiffs’ names and likenesses to promote downloading music over the Internet, and to receive declaratory relief regarding plaintiffs’ rights in their pre- and post-1972 recordings. On August 28, 2000, the Court issued an oral ruling dismissing all claims against MP3.com. On December 7, 2000, judgment was entered dismissing, with prejudice, the federal claims against the defendants. All state claims were dismissed for lack of an independently sufficient jurisdictional basis. Plaintiffs filed a Notice of Appeal on January 5, 2001. Briefing begins on April 24, 2001.

~~Note~~ Copyright ~~4 —~~Settlement ~~Commitments~~Discussions; Charge to Operations. MP3.com has pursued and continues to actively pursue settlement discussions with the various plaintiffs and claimants in the cases and disputes discussed above. The decision whether to enter into settlement and/or license agreements with each party will be based upon a number of factors related to both the lawsuits and MP3.com’s business in general. We cannot guarantee that we will be able to enter into any additional settlement agreements on terms favorable to MP3.com, if at all, or that any settlement or license agreement will prove beneficial to our business or

In July 1999, we entered into an agreement with Montaigne Participations Et Gestion (“MPG”) (formally named Groupe Arnault) under which MPG committed to purchase an aggregate of $150 million in advertising, promotion and marketing services from us over three years. In July 1999, we received prepayments from MPG totaling $45 million, which represented payment for these services through the fourth quarter of 2000. In September 2000, we entered into an amended and restated agreement with MPG. The restated agreement extended our relationship with MPG through 2004, and reduced the aggregate amount of services to be purchased by MPG over the life of the agreement (see the revised commitment schedule below). Both MPG and MP3.com believe that the revised commitment schedule will allow for more efficient use of our marketing services for the benefit of MPG and its various related companies. In addition, the restated agreement provides for a more streamlined media management process and creates certain exceptions to the favored pricing granted to MPG under the original agreement. Under the restated agreement, MPG is now committed to purchase an aggregate of $120 million in advertising, promotion and marketing services from us (including the $45 million purchased through the fourth quarter of 2000). The remaining $75 million owed under the restated agreement remains secured by an irrevocable letter of credit. The restated agreement further provides MPG with potential additional financial incentives of up to an aggregate of $5 million (up to $1 million in any one calendar quarter) based on the number of different companies that use our services

MP3.COM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~under~~stockholders. During the ~~agreement~~year ended December 31, 2000, we recorded a charge for litigation and copyright matters of $170.0 million. The ~~financial~~charge ~~incentives~~for ~~could~~litigation ~~result~~and copyright matters represented our estimate of the total costs to be incurred only in connection with the resolution of the various litigation ~~reduction~~and copyright matters associated with the My.MP3 service, including the lawsuits filed by major recording companies and other parties. Copyright issues associated with the My.MP3 service also include but are not limited to publishing rights, non-major label content, and legal and advisory fees. This charge did not reflect or include any amounts paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3 service. This charge reflects management’s expectations as of the ~~marketing~~date of this report, and ~~promotions~~is ~~commitment~~based ~~during~~on currently available information as well as significant assumptions made by management regarding the various litigation ~~period~~and copyright matters. Cash payments for the settlements and judgments discussed above and other payments have reduced the cumulative amount reserved as a result of this charge to $43.4 million as of March 31, 2001. We cannot guarantee that future events or results will conform to our expectations or assumptions regarding the various litigation and copyright matters. If these expectations and significant assumptions prove to be erroneous in light of future events, the actual amounts incurred by MP3.com to resolve all copyright matters related to the My.MP3 service could be materially different than those recorded as of March 31, 2001, and could far exceed the resources and market capitalization of our company.

Quarterly Commitment Schedule			Commitment Amount
			(in thousands)
2000
	Q4		$	13,500
2001
	Q1		$	15,000
	Q2		$	12,250
	Q3		$	12,250
	Q4		$	12,250
2002
	Q1		$	6,000
	Q2		$	5,000
	Q3		$	5,000
	Q4		$	5,000
2003
	Q1		$	300
	Q2		$	300
	Q3		$	275
	Q4		$	275
2004
	Q1		$	275
	Q2		$	275
	Q3		$	275
	Q4		$	275
		Total	$	88,500

Class Action and Derivative Lawsuits

MP3.com and certain of its employees, officers, and directors have been named as defendants in several lawsuits alleging violations of the federal securities laws. The complaints, which were filed between September 19, 2000 and November 15, 2000 in the United States District Court for the Southern District of California, each purport to be brought on behalf of a class of stockholders. The complaints allege that MP3.com and the other defendants violated the federal securities laws by issuing materially false and misleading statements and failing to disclose material information regarding its My.MP3 service and the litigation surrounding the service. Between September 14, 2000 and October 26, 2000, certain stockholders of MP3.com filed shareholder derivative suits against MP3.com and certain of its employees, officers, and directors in the Superior Court of the State of California, County of San Diego. These complaints allege various statutory and common law claims relating to the My.MP3 service, including breach of fiduciary duty, abuse of control, constructive fraud, gross mismanagement, unjust enrichment, and waste of corporate assets.

MP3.com and the representatives of the various plaintiffs for both the class action lawsuits and derivative lawsuit executed Stipulations of Settlement dated as of March 20, 2001 (“Stipulations”). Under the terms of the Stipulations, the defendants, while continuing to deny all liability, have paid into an escrow account $35,000,000 and agreed to issue 2.5 million shares of MP3.com common stock which MP3.com valued at $5,391,000, in exchange for complete dismissals and releases of all claims with prejudice. The escrow amount and the 2.5 million shares of common stock will be governed by the Stipulations; however, except in certain circumstances, the distribution will not occur prior to March 31, 2002. In addition, under the Stipulations, MP3.com agreed to institute certain corporate governance enhancements. In order to complete the settlement, it will be necessary to secure appropriate approvals from both the State Superior Court and Federal District Court, and to provide notice to members of the class and current stockholders.

Charge Related to Class Action and Derivative Lawsuits. In light of the settlements of the class action and derivative lawsuits, the Company has recorded a charge of $41,428,000 during the three months ended March 31, 2001. The charge includes the cash paid into the escrow account, the value of the 2.5 million shares of common stock to be issued, and other legal costs. While the charge of $41,428,000 excludes any potential recovery from its insurance carriers, the Company is seeking to recover from its carriers the full amount of the settlement together with its legal expenses. If the Company receives insurance proceeds, the Company will record the recovery as a gain in the statement of operations caption “Charge related to class action and derivative lawsuits.”

~~Item 2~~ MP3.COM, ~~Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations~~INC.

~~Forward-Looking~~ NOTES ~~Statements~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

~~Although~~MP3.com weis ~~believe~~also ~~that~~involved ~~the expectations reflected~~ in ~~the forward-looking~~other ~~statements~~legal ~~are~~matters ~~reasonable,~~and weclaims ~~cannot guarantee~~of ~~future~~various ~~events or results~~types, ~~levels~~and offrom ~~activity,~~time ~~performance~~to ~~or achievements,~~time ~~all~~we ~~of which~~ may ~~differ~~also ~~materially.~~be ~~Moreover,~~involved in ~~neither~~litigation werelating ~~nor~~to ~~any~~claims ~~other~~arising ~~person~~out ~~assumes responsibility for the accuracy and completeness~~ of ~~the~~our ~~forward-looking~~operations ~~statements. We~~in ~~are under no obligation to update any of~~ the ~~forward-looking statements~~normal ~~after~~course ~~the filing~~ of ~~this Form 10-Q to conform such statements to actual results or to changes in our expectations~~business.

~~The~~In ~~following~~particular, ~~discussion~~the ~~should~~music beindustry ~~read~~ in ~~conjunction~~the ~~with~~United ~~our~~States is ~~consolidated~~generally ~~financial~~regarded ~~statements~~as ~~and~~extremely ~~the~~litigious ~~related~~in ~~notes~~nature ~~and~~compared ~~the~~to other ~~financial~~industries. ~~information~~As ~~appearing~~a ~~elsewhere~~result, in ~~this~~the future we may be engaged ~~Form 10-Q~~in litigation with others in the music industry, including those entities with whom we have ongoing license arrangements. ~~Readers~~For example, ~~are~~some ~~also~~of ~~urged~~the tomajor ~~carefully~~recording ~~review~~companies ~~and~~that settled ~~consider~~their portion of the ~~various~~Major ~~disclosures~~Label ~~made~~Lawsuit bywith us ~~which~~have ~~attempt~~asserted in writing that they believe the amount paid by MP3.com to UMG ~~describe~~in ~~some~~satisfaction of the ~~factors~~Court’s ~~which~~judgment, ~~affect~~together ~~our~~with ~~business~~the concurrent ~~and~~issuance ~~may~~of warrants to UMG, triggered additional ~~cause~~payments to them under the “most favored nations” clause in their settlement agreement with MP3.com. Although we do not believe they are entitled to any such ~~material~~additional payments, ~~differences~~we cannot assure you that we will be successful in ultimately concluding this particular matter in an amicable fashion, ~~including~~or ~~without~~defending ~~limitation~~any ~~the~~resulting lawsuit. As a result, we may be ~~disclosures~~forced ~~made~~to ~~under~~defend ~~the~~one ~~caption~~or ~~“Risk~~more ~~Factors~~lawsuits on this and other issues in the future,” and in fact may be involved in a number of litigation proceedings with the same group of related plaintiffs. ~~audited~~We ~~financial~~have ~~statements~~not ~~and~~recorded any charge related ~~footnotes~~to ~~included~~any ~~herein~~claims ~~and~~for inadditional ~~our~~“most ~~Form 10-K~~favored ~~dated~~nations” payments as of March 3031, ~~2000~~2001.

~~Overview~~ We cannot assure you that we will be successful in ultimately defending any of these lawsuits, and we may be required to pay license fees or substantial damages, including statutory, punitive, or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. At the rate of $25,000 per work (which is the per CD amount of statutory damages awarded by the court in the Major Label Lawsuit), our aggregate potential liability resulting from all of our copyright litigation proceedings could exceed one billion dollars. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

~~MP3.com,~~Note 3 — ~~Inc.~~Recent ~~(“MP3.com”) has created what it believes~~Events ~~is a unique and robust technology infrastructure for the storage,~~ management, promotion and delivery of digital music. As the Internet’s premier Music Service Provider (“MSP”), MP3.com is dedicated to providing consumers with anytime, anywhere access to their music using any web-enabled device. MP3.com’s web site hosts what MP3.com believes is the largest collection of digital music available on the Internet, with more than 600,000 songs and audio files posted from over 100,000 digital artists and record labels. Dedicated to growing the digital music space, MP3.com’s products and services include on-demand Subscription Music Channels, an innovated Retail Music Program, a Syndicated Radio Division and others. Additionally, through MP3.com’s MSP initiative, MP3.com is partnering with a variety of forward-looking technology companies to expand its digital music strategy.

In ~~addition~~April ~~to the wide variety of music available on our web site~~2001, ~~consumers~~MP3.com ~~have~~loaned athe ~~substantial~~chief ~~amount~~executive ofofficer ~~music already in their personal music collections that they want to access, manage and listen to in a variety~~ of ~~ways. Just as consumers use an Internet Service Provider as~~ the ~~central mechanism through which~~ ~~they~~Company ~~interact~~approximately ~~with the Internet~~$4,820,000. ~~individuals~~The ~~are~~loan ~~increasingly looking~~is ~~for~~secured ~~one~~by ~~central~~no ~~resource, or a “Music Service~~less ~~Provider”~~than ~~(or “MSP”)~~19, ~~that allows them to access~~700, ~~manage~~000 ~~and~~shares ~~listen to all~~ of ~~their music anywhere, anytime. In January 2000,~~ MP3.com ~~launched~~Common ~~the~~Stock ~~foundation~~held ofby ~~its Music Service Provider initiative,~~ the ~~upgraded “My.MP3.com”~~ ~~service.~~officer ~~The~~and ~~My.MP3.com~~certain ~~service was designed to, among a number of~~ other ~~things~~assets, ~~allow users to place CDs~~ and ~~mp3~~accrues ~~files~~interest ~~online, organize~~at ~~their music and receive personalized music services~~6. ~~In order to maintain MP3~~75%.~~com’s position as the premier Music~~ ~~Service~~Principal ~~Provider, MP3.com intends to work through strategic partnerships with leading web sites, application developers, device manufacturers, wireless carriers~~ and ~~connectivity providers~~interest toare ~~enable~~due ~~our~~in ~~users~~April ~~to access their music anytime, anywhere, on any web-enabled device or application~~2002.

MP3.com generates revenue from online advertising, offline advertising and electronic commerce. For the three months ended September 30, 2000, 96.6% of MP3.com’s revenues were from the sale of advertising. Advertising sales include revenue from the sale of space on our website; sponsorship of contests and sweepstakes, e-mail campaigns and greeting cards; and sponsorship of CD samplers, which are distributed free

ofItem ~~charge~~2. toManagement’s ~~consumers~~Discussion and ~~contain~~Analysis ~~collections~~ of ~~music.~~Financial ~~MP3.com sells~~Condition ~~CDs~~and ~~online,~~Results ~~both fully-packaged albums created by artists sold through our Digital Automatic Music system, which we call “DAM CDs.” Although a substantial portion~~ of the My.MP3.com service is currently free to our users, we currently charge customers a subscription or access fee to particular portions of the service and may charge subscription or access fees for the entire service in the future. Operations

~~Since~~Forward-Looking ~~the beginning of 1999, MP3.com’s growth has been~~Statements ~~dramatic. The number of employees increased from 8 on~~ January 1, 1999 to 334 on September 30, 2000. In September 2000, MP3.com added an average of over 180 artists and an average of over 1,300 new songs and audio files each day. During September 2000, visitors to MP3.com’s web site viewed over 147 million web pages and listened to or downloaded over 38.0 million songs.

~~The~~ This ~~Three~~document ~~Months~~contains ~~Ended~~forward-looking ~~September 30~~statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, ~~2000~~you ~~Compared~~can identify forward-looking statements by terminology such as “may,” “will,” “going to,” “should,” “could,” ~~September 30~~“expect,” ~~1999~~“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions and reflect our expectations and assumptions as of the date of this quarterly report based on currently available operating, financial and competitive information.

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

~~Net~~ The ~~Revenues~~following discussion should be read in conjunction with our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to describe some of the factors which affect our business and may cause such material differences, including without limitation, the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and the audited consolidated financial statements and related footnotes included herein and in MP3.com’s Form 10-K dated February 1, 2001 (File No. 000-26697).

Overview ~~For the three months ended September 30, 2000, net revenues~~ were $20,459,000, which were derived from online advertisements on our web site; offline advertisements through various promotions and events that were not hosted on our web site; sponsorship of various contests, sweepstakes, e-mail campaigns, and greeting cards; and the online sale of CDs and music-related merchandise. This compares to $4,051,000 during the same period a year ago. The increase in net revenues during the third quarter over the same period in 1999 was primarily attributable to a significant increase in online and offline advertisements; the introduction of various contests, sweepstakes, e-mail campaigns, and greeting card advertisements; and, to a lesser extent, an increase in CD sales on our web site.

~~Revenues from online advertising~~MP3.com ~~For~~has ~~the~~created ~~quarter~~a ~~ended September 30,~~unique ~~2000,~~and ~~revenues~~robust ~~from online advertising were~~technology ~~$15,628,000~~infrastructure ordesigned ~~76.4% of net revenues compared~~ to ~~$1,971,000~~facilitate ~~or 48.7% of net revenues for~~ the ~~same period a year ago. Online advertising revenues primarily consist of banner~~storage, ~~button~~management, ~~portal~~ promotion, and ~~sponsorship~~delivery ~~advertisements~~of ondigital ~~MP3~~music.~~com’s~~ ~~web~~As ~~site~~the ~~in addition to advertisements placed in e-mail and greeting card campaigns. The duration of MP3.com~~Internet’s ~~online advertising~~ ~~commitments~~premier ~~range~~Music ~~from~~Service ~~one~~Provider ~~month to approximately four years. Banner~~(MSP), ~~button~~we ~~and portal advertisements~~ are ~~impression~~dedicated ~~based,~~to ~~requiring~~providing ~~the~~consumers ~~advertisement~~access to bemusic ~~displayed~~when athey ~~minimum~~want ~~number~~it, ofwhere ~~times~~they ~~over~~want ~~the~~it, ~~contract~~using ~~period.~~any ~~Sponsorship~~web-enabled ~~advertising~~device. ~~contracts~~ Our ~~involve~~web ~~static~~site ~~advertisements,~~hosts what ~~whereby~~we ~~the~~believe ~~advertisement~~ is ~~continually~~ ~~displayed~~the onlargest acollection ~~specified area~~ of ~~the~~digital ~~MP3.com web site~~music available ~~during~~on the ~~contract~~Internet, ~~period.~~with ~~E-mails~~more ~~containing~~than ~~various~~967,000 songs and ~~advertisements~~audio ~~are~~files ~~sent~~posted tofrom ~~MP3.com’s~~over 150,000 digital artists and ~~users of~~record ~~the MP3~~labels.~~com~~ ~~web~~Dedicated ~~site~~to ongrowing athe ~~regular~~digital ~~basis.~~music ~~Greeting~~space, ~~cards also~~our ~~contain~~products ~~advertisements~~ and ~~are~~services ~~sent~~include ~~electronically~~on-demand ~~whenever~~Subscription aMusic ~~user~~Channels, ofan ~~the~~innovative ~~MP3.com~~Business ~~web~~Music ~~site~~Services ~~requests~~program, ~~that~~ a ~~card be delivered to~~Radio Services aprogram ~~person(s)~~and ~~of their choice~~others. ~~The~~Additionally, ~~increase~~through inour ~~revenues from~~MSP ~~online~~technology ~~advertising~~initiative ~~for~~and ~~the~~Music ~~three~~InterOperating ~~months ended September 30~~System, ~~2000~~ aswe ~~compared to the comparable period one year ago was~~are ~~primarily~~partnering ~~due~~with to a ~~significant~~variety ~~increase~~of inforward-looking ~~pageview~~businesses ~~volume~~to ~~resulting~~expand ~~from~~its ~~significant~~digital ~~increases~~music ~~in unique visitors, MP3~~strategy.~~com’s advertiser customer base, and the introduction of~~ ~~new product lines such as e-mail and greeting cards.~~

~~Revenues~~We ~~from~~devoted ~~offline~~much ~~advertising.~~of ~~For~~2000 and the ~~three~~first ~~months ended~~quarter ~~September 30,~~of ~~2000,~~2001 ~~revenues from offline advertising~~to ~~were~~enhancing ~~$4,142,000~~and orimproving 20the MP3.2%com ofweb ~~net~~site ~~revenues~~and ~~compared~~its ~~to $1,667,000~~technology ~~or 41~~infrastructure.2% ofIn ~~net~~January ~~revenues~~2000, ~~for~~we ~~the~~unveiled ~~same~~our ~~period~~upgraded My.MP3 service, a ~~year~~unique ~~ago.~~and ~~During the~~robust ~~third~~service ~~quarter~~designed ofto ~~2000~~facilitate the storage, ~~offline~~management, ~~advertising~~promotion ~~revenues~~and ~~primarily~~ delivery ~~consisted~~ of ~~contests,~~digital music, and to aenable ~~lesser~~users ~~extent~~to ~~advertising sponsorships~~listen ofto CDtheir ~~sampler~~music ~~products.~~when ~~MP3.com~~they ~~held contests during~~want, where ~~the~~they ~~quarter~~want ~~that~~by ~~were~~accessing ~~sponsored~~any byweb-enabled ~~various~~device. ~~advertisers~~The ~~and~~My.MP3 ~~provided~~service ~~prizes~~allows users to ~~the~~create ~~winners~~online ofmusic ~~each~~lockers ~~contest.~~where ~~CD samplers are~~they ~~multi-media~~can ~~CDs containing advertising~~store, ~~free~~organize ~~software, videos~~ and ~~games~~manage astheir ~~well~~favorite assongs ~~collections of music~~ from ~~artists that have~~music posted ~~music~~by digital artists on the MP3.com web site., ~~These~~and ~~CDs are sponsored by~~receive ~~several~~personalized ~~different~~music ~~advertisers~~services. ~~and~~In ~~distributed~~addition, ~~free~~with ofthe ~~charge to~~introduction ~~users~~ of ~~MP3.com’s~~the ~~web~~Beam-It™ ~~site~~and ~~who~~Instant ~~register~~Listening™ tofeatures ~~receive~~of the ~~CD.~~ ~~The~~My.MP3 ~~increase~~service in ~~revenues~~January ~~from~~2000, ~~offline~~we ~~advertising~~began isproviding ~~primarily~~consumers the ~~due~~ability to ~~revenues~~access, ~~from~~add ~~contests~~to ~~that~~and ~~did~~manage ~~not~~their ~~exist~~existing ~~during~~music ~~the same~~CD ~~period~~collections inonline ~~1999,~~without ~~offset~~having byto aencode ~~significant~~and ~~decrease~~store ~~in CD sampler~~tracks ~~products~~themselves. ~~The~~Under ~~decrease~~this insystem, ~~revenues~~once ~~from~~we ~~offline~~are ~~advertising,~~able asto adetermine that ~~percentage~~a ofconsumer ~~total~~purchased ~~revenues,~~a isCD ~~primarily~~(through ~~attributable~~the toInstant ~~the~~Listening ~~significant~~feature), ~~increase~~or was already in ~~online~~possession ~~advertising~~of ~~revenues,~~a ~~both~~CD in(through the ~~absolute~~proprietary ~~dollars~~Beam-It ~~and~~software), aswe amade ~~percentage~~music offrom ~~total~~that ~~revenues~~CD available in the consumer’s music locker.

13 We believe we have developed core competencies and created a technology infrastructure system that will enable us to provide a wide variety of data management and infrastructure services to other businesses. Through our ongoing efforts to develop, maintain and improve the MP3.com web site, we have amassed a significant amount of expertise in data storage, delivery and management; server-side security; and royalty

~~Table of Contents~~13

RevenuesTable from online sales of CDs and other music-related merchandise. For the three months ended September 30, 2000, revenues from online sales of CDs and other music-related merchandise were $689,000 or 3.4% of net revenues compared to $413,000 or 10.2% of net revenues for the same period a year ago. Online e-commerce sales consist of DAM CDs and, to a lesser extent, other music-related merchandise. The increase in revenues from online sales of CDs and other music-related merchandise during the third quarter of 2000 as compared to the same quarter of 1999 was primarily due to an increase in the sales volume of DAM CDs (approximately 36,000 units, or an 80% increase) resulting from increased musical content available on MP3.com’s web site as a result of increased brand awareness. The decrease in revenues from online sales of CDs and other music-related merchandise, as a percentage of total revenue, is primarily attributable to the significant increase in online advertising revenues, both in absolute dollars and as a percentage of total revenues. Contents

~~Revenue~~tracking ~~Concentration~~and payment systems. We ~~expect~~have ~~that~~also ~~most~~created ofa ~~our revenues~~technology infrastructure ~~will~~system ~~continue~~that tostores, bemanages, ~~derived~~tracks ~~from~~and ~~third party advertising~~provides ~~agreements~~statistical ~~like~~analyses ~~those~~on wea ~~have~~real-time ~~with~~basis ~~Montaigne~~for ~~Participations~~digital Etdata for ~~Gestion~~over ~~(“MPG”)~~150,000 artists ~~(formally~~and ~~named~~more ~~Groupe~~than ~~Arnault)~~14. ~~During~~5 million registered ~~the~~users. ~~quarter~~In ~~ended~~March ~~September 30~~2001, ~~2000,~~our ~~MP3.com~~technology ~~recognized~~infrastructure ~~revenue~~system ofmanaged ~~$11,500,000,~~an oraverage ~~56.2%~~ of ~~total~~over ~~revenues, associated with the MPG agreement~~5.5 ~~MPG~~terabytes ~~revenues~~of ~~will~~data beeach ~~distributed between online and offline sources based on a changing percentage from quarter to quarter~~day.

InWe ~~July~~generate ~~1999,~~revenue wefrom ~~entered~~advertising; ~~into~~infrastructure ~~an agreement with MPG under which~~products; ~~MPG~~merchandising ~~committed~~products; tosubscription ~~purchase~~products; anmusic ~~aggregate of $150 million in~~licensing ~~advertising,~~products; ~~promotion~~ and ~~marketing~~business ~~services~~music ~~from us over three years~~services. InFor ~~July~~the ~~1999,~~quarters ~~we received prepayments from MPG totaling~~ended ~~$45~~March ~~million~~31, ~~which~~2001 ~~represented~~and ~~payment for these services through the fourth quarter of~~ 2000~~. In September 2000~~, ~~we entered into an amended and restated agreement with MPG~~92.0% ~~The restated agreement extended our relationship with MPG through 2004,~~ and ~~reduced~~ ~~the aggregate amount of services to be purchased by MPG over the life of the agreement (see the revised commitment schedule below)~~83. ~~Both MPG and MP3.com believe that the revised commitment schedule will allow for more efficient use of our marketing services for the benefit of MPG and its various related companies. In addition~~4%, the restated agreement provides for a more streamlined media management process and creates certain exceptions to the favored pricing granted to MPG under the original agreement. Under the restated agreementrespectively, ~~MPG is now committed to purchase an aggregate~~ of ~~$120 million in~~ ~~advertising,~~our ~~promotion~~revenues ~~and~~were ~~marketing services~~ from ~~us (including the $45 million purchased through the fourth quarter of 2000)~~advertising. ~~The remaining $75 million owed under the restated~~ ~~agreement remains secured by an irrevocable letter of credit. The~~ restated agreement further provides MPG with potential additional financial incentives of up to an aggregate of $5 million (up to $1 million in any one calendar quarter) based on the number of different

14 MP3.com was incorporated in March 1998. During 1998, our operations consisted largely of developing the infrastructure necessary to download and stream music from the Internet. Although we have experienced a slight drop in headcount during the first quarter of 2001, since the beginning of 1999 our growth has been dramatic. The number of employees increased from eight on December 31, 1998 to 274 on December 31, 1999 to 308 on December 31, 2000 and decreased to 303 on March 31, 2001. In March 2001, we added over 200 artists and over 1,300 new song and audio files on average each day, which is an increase from over 100 artists and over 1,000 new song and audio files that were added on average each day in March 2000. During March 2001, visitors to our web site viewed over 165 million web pages and listened to or downloaded over 59.0 million songs, which is an increase from March 2000 when visitors viewed over 142 million web pages and listened to or downloaded over 27.7 million songs.

~~Table~~The ofThree ~~Contents~~Months Ended March 31, 2001 Compared to March 31, 2000

~~companies~~Results ~~that use our services under the agreement. The financial incentives could result in the reduction~~ of ~~the marketing~~Consolidated ~~and promotions commitment during the period incurred.~~Operations

Quarterly Commitment Schedule:			Commitment Amount
			(in thousands):
2000
	Q4		$	13,500
2001
	Q1		$	15,000
	Q2		$	12,250
	Q3		$	12,250
	Q4		$	12,250
2002
	Q1		$	6,000
	Q2		$	5,000
	Q3		$	5,000
	Q4		$	5,000
2003
	Q1		$	300
	Q2		$	300
	Q3		$	275
	Q4		$	275
2004
	Q1		$	275
	Q2		$	275
	Q3		$	275
	Q4		$	275
		Total:	$	88,500

Net Revenues

~~During~~For ~~1999~~the ~~and~~three ~~2000~~months ended March 31, we2001, ~~have~~total ~~made~~net revenues ~~certain~~were ~~strategic~~$21,750,000 ~~investments~~compared to $17,495,000 during the ~~and~~same ~~entered~~period ~~into~~a ~~certain~~year ~~marketing~~ago, representing an increase of $4,255,000 or 24.3%. Total net revenues are derived from two primary sources: advertising based products and ~~promotion~~non-advertising ~~arrangements~~based products and services. InAdvertising based product revenues primarily ~~certain~~consist ~~circumstances,~~of wetraditional ~~have~~web-based ~~recognized~~advertisements; advertisements ~~revenue~~placed in ~~connection~~e-mail campaigns and electronic ~~with~~greeting ~~these~~cards; ~~marketing~~advertising spots on syndicated radio programs; and ~~promotion~~sponsorships ~~arrangements~~of ~~pursuant~~free toCD products. The duration of our ~~accounting~~advertising ~~policies.~~commitments ~~Due~~range from one month to ~~the~~over ~~recent~~three years. ~~financial~~Non-advertising ~~uncertainty~~based products and services primarily ~~related~~consist toof ~~certain~~contests ~~strategic~~and ~~investments,~~sweepstakes; weonline ~~have~~sales ~~determined~~of ~~that~~Digital Automatic weMusic ~~are~~(“DAM”) ~~unable~~CDs and other music-related merchandise; infrastructure and music licensing programs; subscriptions to ~~recognize~~various ~~revenue~~music inand ~~connection~~artist-related ~~with~~services; ~~certain~~and ~~marketing~~web-based business music services. Infrastructure and ~~promotion~~music licensing ~~arrangements~~programs ~~until~~represent revenues derived from the ~~significant~~licensing ~~uncertainties~~of ~~have~~various ~~been~~technologies ~~satisfactorily~~and ~~resolved~~artist content to outside third parties. ~~These~~Subscription ~~above~~revenues consist of fees paid to access ~~factors~~the enhanced version of the My.MP3 service, ~~current~~various ~~financial~~music channels and ~~economic~~premium ~~conditions,~~services for artists. The business music services program provides web-based management and ~~the~~delivery of ~~current~~in-store ~~litigation~~music ~~could~~and ~~have~~messaging andirectly ~~adverse~~to ~~effect~~businesses onfor ~~MP3.com’s~~a monthly ~~future revenues~~fee.

~~Cost~~ Revenues from Advertising. For the quarter ended March 31, 2001, revenues from advertising based products were $20,011,000 or 92.0% of ~~Revenues~~total net revenues compared to $14,584,000 or 83.4% of total net revenues for the same period a year ago. The increase in advertising based product revenues was primarily due to increases in traditional web-based advertising products, an increase in e-mail and greeting card revenues and, to a lesser extent, the introduction of syndicated radio programs. These increases were offset by a decrease in the sponsorship of free CD products.

~~Cost~~Revenues offrom ~~revenues~~Non-Advertising ~~for~~Products and Services. For the three months ended ~~September~~March 3031, 2001, revenues from ~~2000~~non-advertising based products and services were $31,~~746~~739,000 or 18 8.30% of net revenues compared to $12,~~687~~911,000 or 4116.6% of total net revenues ~~during~~for the same period a year ago~~, resulting in gross margins of 81~~.7% ~~and 58.4%, respectively.~~ The ~~increase~~decrease in revenues ~~cost~~from ofnon-advertising ~~revenues,~~based inproducts ~~absolute dollar~~and ~~terms,~~services was primarily due to ~~increases in bandwidth requirements, royalties to artists, and costs related to contests and sweepstakes, offset by~~ a significant ~~decrease~~portion inof CDthe ~~sampler~~Montaigne ~~costs.~~Participations ~~The~~Et ~~increase~~Gestion ~~in gross margins was primarily due to a significant amount of the~~ (“MPG”) revenues allocated to ~~online advertising, which has higher gross margins. Additionally, revenue from offline~~ contests ~~typically have increased gross margins when compared to other offline product margins. CD~~ and ~~other~~ ~~music-related~~sweepstakes ~~merchandise~~during ~~sales~~the ~~typically~~first ~~have~~quarter ~~lower~~of ~~gross~~2000 ~~margins~~offset ~~which~~by ~~decrease~~ the ~~higher~~introduction ~~gross~~of ~~margins~~new ~~from online and offline advertising~~ products. ~~MP3.com~~such ~~anticipates that future~~as ~~gross~~infrastructure ~~margins~~and ~~will~~music ~~fluctuate~~licensing ~~depending~~programs, onsubscriptions ~~changes in its revenue~~and ~~mix~~business ~~and~~music ~~the~~services ~~timing of expenditures in web site~~ and ~~fulfillment operations. Additionally~~, ~~future~~to ~~gross~~a ~~margins~~lesser ~~could~~extent, ~~fluctuate depending~~an onincrease in the ~~amount of MPG quarterly revenues allocated between~~ online ~~and~~sale ~~offline~~of ~~advertising~~DAM ~~products~~CDs. ~~Further, when we~~ ~~begin using certain multimedia licenses obtained as part of our~~ ~~settlement with~~

1514

~~certain~~Revenue ~~major~~Concentration. ~~recording~~For ~~companies~~the three months ended March 31, we2001 ~~expect~~and to2000, ~~include~~92.0% inand ~~cost~~ 83.4%, respectively, of total net revenues were from advertising. Additionally, during the ~~amortization~~three months ended March 31, 2001 and 2000, we recognized revenue of ~~prepaid~~$14,459,000 ~~royalties~~(net ~~that~~of ~~could~~certain financial ~~result~~incentives inof ~~cost~~$541,000) or 66.5% of total net revenues ~~increasing~~and $6,845,000 ~~substantially~~or ~~both~~39.1% of total net revenues, respectively, associated with our agreement with MPG. The significant increase in MPG related revenues of $7,614,000 or 111.2% is related to ~~absolute~~MPG’s ~~dollars~~commitment to purchase advertising, promotion, and marketing asservices from us through 2004. MPG’s commitment to purchase advertising, promotion, and marketing services from us during each of the remaining calendar quarters of 2001 is $12,250,000 with the possibility to earn financial incentives during each of these quarters of an amount not to exceed $1,000,000. Further, MPG’s quarterly advertising commitments are scheduled to decline after December 2001, from approximately $12 million during the fourth quarter of 2001 to approximately $6 million in the first quarter of 2002. For at least the remainder of this fiscal year, we expect that a significant ~~percentage~~amount of ~~revenue~~our revenues will continue to be derived from advertising products and our relationship with MPG.

~~Sales~~Cost ~~and~~of ~~Marketing~~Revenues

~~During~~Cost of revenues for the three months ended ~~September~~March 3031, ~~2000, sales and~~2001 ~~marketing~~were ~~expense was~~ $144,~~029~~875,000 or 6822.64% of net revenues compared to $83,~~897~~756,000 or ~~219~~21.65% of net revenues during the same period a year ago., resulting ~~The~~in ~~increase~~gross inmargins ~~sales~~of 77.6% and ~~marketing expense~~78.5%, respectively. The increase in ~~absolute~~cost ~~dollar~~of ~~amounts,~~revenues ~~was~~and ~~primarily~~resulting adecrease ~~result~~in ofgross margins, as a ~~charge~~percentage of $2net revenues,~~587,000~~ ~~associated~~was ~~with~~primarily due to increases in the ~~impairment~~amortization of ~~certain~~ prepaid ~~marketing~~ ~~expenses~~multimedia inroyalty licensing ~~connection with~~ arrangements with ~~internationally~~ ~~known~~certain ~~artists,~~major anrecording ~~increase~~companies of ~~approximately~~ $~~700~~1,956,000 ~~in sales~~ and ~~marketing~~bandwidth ~~payroll~~charges ~~and related expenses, an increase~~ of ~~approximately~~ $31,~~000~~068,000, ~~related~~offset ~~to the cost of our~~by ~~Payback~~decreases ~~for~~in ~~Playback~~contest ~~program, new~~ and ~~increased~~sweepstakes ~~marketing programs~~costs of ~~approximately~~ $1,~~669~~680,000,. ~~and~~ Those costs associated with ~~the~~ ~~growth~~prepaid ofmultimedia ~~our~~royalty ~~business. Additionally, these increases were~~licensing ~~offset~~arrangements byare ~~approximately~~included ~~$1,241,000~~ in ~~stock-based~~cost ~~charges associated with acceleration~~ of ~~stock~~revenues ~~option~~at ~~vesting~~the ~~and~~greater of ~~approximately~~straight-line ~~$2,114,000~~amortization ~~related~~or tounits ~~marketing~~of ~~and~~measure. ~~promotion costs~~Currently, listening ~~associated~~activity ~~with~~dictates ~~the~~that ~~1999~~we ~~Alanis~~amortize ~~Morissette~~the ~~and~~licenses ~~Tori~~on ~~Amos~~a ~~“5 1/2~~straight-line ~~Weeks”~~basis; ~~Summer~~however, ~~tour~~if ~~sponsorship~~future ~~that~~activity ~~were~~increases, ~~incurred~~thereby ~~during~~requiring ~~the~~us ~~third~~to ~~quarter~~expense ofthe ~~1999~~licenses ~~but~~using ~~did~~the ~~not~~units ~~occur~~of ~~during~~measure ~~the~~method, ~~same~~costs ~~quarter~~of ~~ended~~revenues incould ~~2000~~increase accordingly. ~~The~~We will ~~decrease~~continue into ~~sales~~monitor ~~and marketing~~the ~~costs~~prepaid asroyalty alicensing arrangements ~~percentage~~for ofany ~~revenues~~indication isthat ~~primarily~~the ~~due~~asset’s tovalue has ~~the~~been ~~significant~~impaired. ~~increase~~If inactivity ~~net~~does ~~revenues~~not ~~and~~increase ~~decreased~~to ~~costs~~a inlevel that ~~connection~~more ~~with~~approximates ~~stock~~straight-~~based~~line ~~charges~~amortization, ~~associated~~this ~~with~~may ~~the~~be an ~~acceleration~~indication ofthat ~~stock~~the ~~option~~value ~~vesting,~~of ~~and~~these ~~marketing~~prepaid ~~and~~royalty ~~promotion~~licenses could ~~costs~~be ~~associated~~impaired ~~with~~which ~~the~~could ~~1999~~result ~~Alanis~~in ~~Morissette~~a ~~and~~charge ~~Tori~~to ~~Amos~~earnings of ~~“5 1/2 Weeks”~~a ~~Summer~~significant ~~tour~~portion ~~sponsorship.~~of ~~These costs~~the ~~were~~prepaid ~~offset~~royalty bylicense ~~the~~value. An impairment ofcharge ~~certain~~could ~~prepaid~~have ~~marketing expenses~~a ~~related~~material toadverse ~~arrangements~~effect ~~with~~on ~~internationally known~~our ~~artists~~financial ~~and~~performance ~~our~~during ~~Payback~~the ~~for~~period ~~Playback~~it ~~program.~~is ~~MP3~~recorded.~~com anticipates~~ Additionally, ~~that~~we ~~overall~~anticipate ~~sales~~that ~~and~~future ~~marketing~~gross ~~expense~~margins will fluctuate ~~continue~~depending ~~to increase~~on ~~significantly~~changes in ~~the~~our ~~foreseeable~~revenue ~~future;~~mix ~~however, sales~~ and ~~marketing~~the ~~expense~~amount of asMPG aquarterly ~~percentage~~revenues ofallocated ~~net~~between ~~revenues~~various ~~may~~advertising ~~fluctuate~~products, ~~depending~~some onof ~~the~~which ~~timing~~have ofsignificantly ~~new~~lower ~~marketing~~gross ~~programs and~~margins ~~the~~than ~~addition~~other ofadvertising ~~sales and marketing personnel~~products.

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

~~Engineering~~ During the three months ended March 31, 2001, sales and marketing ~~Product~~expense ~~Development~~was $10,491,000 or 48.2% of net revenues compared to $17,002,000 or 97.2% of net revenues during the same period a year ago. The decrease in sales and marketing expense, in both absolute dollar amounts and as a percentage of net revenues, was primarily due to a decrease in cash and stock-based compensation associated with the acceleration of stock option vesting of approximately $6,401,000, a decrease in amortization of various prepaid marketing costs of approximately $2,394,000 and a decrease in sales and marketing payroll and related expenses of approximately $936,000. These decreases were offset by an increase in the cost of our Payback for Playback program of approximately $2,383,000, an increase in commissions paid to our affiliates of approximately $547,000 and an increase in advertising of $358,000. We anticipate that overall sales and marketing expense, in absolute dollar terms, will increase in the foreseeable future; however, sales and marketing expense as a percentage of total net revenues may fluctuate depending on the level of future total net revenues, the timing of new marketing programs and the addition of sales and marketing personnel.

~~During~~Engineering ~~the three months ended September 30, 2000, engineering~~ and ~~product~~Product ~~development expense was $6,067,000 or~~Development ~~29.7% of net revenues compared to $2,373,000 or 58.6% of net~~ revenues during the same period a year ago. The increase in the level of engineering and product development expense, in absolute dollar amounts, was primarily due to an increase in payroll and related expenses of approximately $1,791,000, increased computer equipment depreciation of approximately $1,215,000, increased consulting and temporary labor, and costs associated with the growth of MP3.com’s business. The decrease in engineering and product development expense as a percentage of net revenue is primarily due to the significant increase in net revenues. MP3.com anticipates that overall engineering and product development expenses will increase in the foreseeable future; however, engineering and product development expenses as a percentage of net revenues may fluctuate depending on the level of future net revenues and the timing of investments in engineering and product development and hiring.

~~General~~ During the three months ended March 31, 2001, engineering and ~~Administrative~~product development expense was $5,595,000 or 25.7% of net revenues compared to $5,279,000 or 30.2% of net revenues during the same period a year ago. The increase in the level of engineering and product development expense, in absolute dollar

15 ~~General and administrative expense was $8,896,000 or 43.5% of net~~ revenues during the quarter ended September 30, 2000 compared to $3,110,000 or 76.8% of net revenues during the same period a year ago. The increase in general and administrative expense, in absolute dollar amounts, was primarily a result of an increase in finance and administrative payroll and related expenses of approximately $1,700,000; legal expenses of approximately $1,207,000; bad debt expense of approximately $934,000; amortization of goodwill

16 Table of Contents

~~Table~~ amounts, was primarily due to an increase in computer and equipment depreciation of ~~Contents~~$683,000 and an increase in rent and facility related expenses of approximately $232,000, offset by decreases in equipment and software expense of approximately $382,000 and decreased consulting and temporary labor of approximately $222,000. The decrease in engineering and product development expense as a percentage of total net revenues is primarily due to an increase in total net revenues. We anticipate that overall engineering and product development expenses, in absolute dollar terms, will continue to increase in the foreseeable future; however, engineering and product development expenses as a percentage of net revenues may fluctuate depending on the level of future net revenues and the timing of expenditures for engineering and product development and hiring.

of approximately $975,000; consulting; insurance costs; and costs associated with the growth of MP3.com’s business. Additionally, the increase was reduced by a non-cash charge associated with the relocation of our new facility of approximately $815,000 that was incurred during the third quarter of 1999 but not incurred during the same quarter ended in 2000. General and ~~administrative expenses as a percentage of net~~Administrative ~~revenues decreased primarily due to the significant increase in~~ net revenues. MP3.com anticipates that overall general and administrative expense will increase in the foreseeable future; however, general and administrative expenses as a percentage of net revenues may fluctuate depending on the level of future net revenues and the timing of additional investments in general and administrative infrastructure.

~~Charge~~ During ~~for~~the ~~Litigation~~three months ended March 31, 2001, general and administrative ~~Copyright~~expense ~~Matters~~was $6,218,000 or 28.6% of net revenues compared to $7,762,000 or 44.4% of net revenues during the same period a year ago. The decrease in general and administrative expense, both in absolute dollar amounts and as a percentage of net revenues, was primarily due to a decrease in legal and accounting expenses of approximately $1,370,000, a decrease in bad debt expense of approximately $1,036,000 and a decrease in rent and facility related expenses of approximately $383,000. These decreases were offset by an increase in the amortization of goodwill associated with our purchase of the remaining interest in mp3radio.com from Cox Interactive Media, Inc. of approximately $662,000 and increased insurance costs of approximately $646,000. We anticipate that overall sales and marketing expense, in absolute dollar terms, will increase in the foreseeable future; however, general and administrative expense as a percentage of total net revenues may fluctuate depending on the level of future total net revenues and the timing of additional expenditures for general and administrative infrastructure.

~~Record~~Charge ~~Label~~Related ~~Lawsuits.~~to ~~On January~~Class ~~21,~~Action 2000, ten major recording companies filed a copyright infringement lawsuit against MP3.com in the United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in connection with certain content available in its My.MP3.com service, made unauthorized copies of tens of thousands of audio CDs in violation of the Copyright Act. On April 28, 2000, the court granted plaintiffs’ motion for summary judgment and ~~held that MP3.com was liable for~~Derivative ~~infringing plaintiffs’ copyrights, and the litigation~~Lawsuits ~~proceeded with discovery on the issues of willfulness and~~ ~~damages. On May 10, 2000, MP3.com voluntarily disabled the plaintiffs’ content within the My.MP3.com service.~~

~~Between June and August 2000,~~ MP3.com ~~entered into settlement~~ and ~~license~~certain ~~agreements~~of ~~with~~its ~~Warner~~employees, ~~Music Group~~officers, ~~BMG~~and ~~Entertainment,~~directors ~~Sony~~have ~~Music~~been ~~and~~named ~~Capitol~~as ~~Records,~~defendants ~~Inc.(EMI),~~in ~~which~~several ~~together~~lawsuits alleging ~~represented~~violations ~~eight~~ of the ~~ten~~federal ~~major~~securities ~~recording~~laws. ~~companies~~The ~~that~~complaints, ~~filed~~which were ~~the~~filed ~~copyright~~between ~~infringement lawsuit on January~~September 2119, 2000. ~~The~~ and ~~settlement agreements provide for a settlement amount to be paid~~November 15, 2000 in ~~cash~~the byUnited ~~MP3.com~~States inDistrict ~~exchange~~Court for ~~a release from~~ the ~~settling~~Southern ~~plaintiffs~~District ~~and~~of ~~their~~California, ~~affiliated~~each ~~entities~~purport ~~(as~~to ~~defined~~be inbrought ~~the settlement~~on ~~agreements)~~behalf of a ~~all~~class ~~claims~~of ~~related~~stockholders. toThe ~~the January 21,~~complaints ~~2000~~allege ~~lawsuit~~that ~~and the My.~~MP3.com ~~service.~~and ~~Most-favored-nations~~the ~~provisions~~other indefendants ~~these~~violated ~~settlement~~the ~~agreements require~~federal ~~additional~~securities ~~settlement~~laws ~~amounts to be paid under certain~~by ~~circumstances.~~issuing ~~MP3.com~~materially ~~made~~false noand ~~admission~~misleading ofstatements ~~wrongdoing~~and infailing ~~connection with these settlements. Subject~~ to ~~certain~~disclose ~~affirmative~~ material ~~obligations~~information ~~of MP3.com and other terms and conditions~~ regarding ~~the~~ ~~implementation~~its ~~of the~~ My.MP3~~.com~~ service, and the ~~license agreements~~litigation ~~permit~~surrounding ~~MP3~~the service.~~com~~ ~~to utilize recordings owned by Warner~~Between ~~Music Group~~September 14, ~~BMG~~2000 ~~Entertainment, Sony Music~~ and ~~EMI~~October 26, as2000, ~~part~~certain stockholders of ~~the My.~~MP3.com ~~service.~~filed ~~The~~shareholder ~~license~~derivative ~~agreements~~suits against ~~have~~MP3.com ~~terms~~and certain of ~~approximately~~ ~~three~~its toemployees, ~~ten years~~officers, and directors ~~provide~~in ~~for~~the ~~on-going royalty~~Superior ~~payments~~Court ~~based~~of on the ~~greater~~State of ~~(i) a specified~~California, ~~percentage~~County of ~~net~~San ~~revenues~~Diego. ~~generated~~These ~~from~~complaints ~~the~~allege ~~My.MP3.com~~various ~~service~~statutory orand ~~(ii) a~~common ~~specified~~law ~~amount~~claims ~~accrued~~relating ~~each~~to ~~time~~the ~~a licensor recording is streamed from~~ My.MP3~~.com.~~ ~~In addition~~service, ~~the licenses~~including ~~provide~~breach ~~for~~of ~~on-going~~fiduciary ~~royalty~~duty, ~~payments~~abuse ~~based~~of oncontrol, ~~the~~constructive ~~number of~~fraud, ~~times~~gross amismanagement, ~~licensor~~unjust ~~recording~~enrichment, isand ~~added~~waste toof Mycorporate assets.~~MP3.com accounts.~~

AsMP3.com aand ~~result~~the representatives of the ~~settlements~~various ~~described~~plaintiffs ~~above,~~for both the ~~January 21,~~ ~~2000~~class ~~copyright~~action ~~infringement~~lawsuits ~~lawsuit~~and ~~was~~derivative ~~limited~~lawsuit executed toStipulations aof ~~dispute~~Settlement ~~with~~dated ~~UMG~~as ~~Recordings,~~of ~~Inc.~~March 20, ~~which represents two of~~2001 ~~the original plaintiffs~~(“Stipulations”). AUnder ~~trial in~~ the ~~case~~terms ~~was~~of ~~held~~the ~~from~~Stipulations, ~~August 28~~the ~~through September 6~~defendants, ~~2000~~while oncontinuing ~~the~~to ~~issues~~deny ofall liability, have ~~willfulness~~paid ~~and~~into ~~damages.~~an ~~After~~escrow ~~hearing~~account ~~evidence~~$35,000,000 ~~the~~and ~~court~~agreed ~~ruled on~~to ~~September~~issue 2.5 6,million ~~2000~~shares ~~that~~of MP3.com ~~had~~common ~~willfully~~stock ~~infringed~~which MP3.com ~~UMG’s~~valued ~~copyrights~~at ~~and~~$5,391,000, ~~awarded~~in ~~damages~~exchange tofor ~~UMG~~complete indismissals anand releases ~~amount~~ of ~~$25,000~~ ~~per~~all ~~CD.~~claims Awith ~~trial~~prejudice. isThe ~~scheduled~~escrow toamount ~~commence~~and onthe ~~November~~2.5 ~~13,~~million ~~2000~~shares toof ~~determine~~common ~~the~~stock ~~number~~will ofbe ~~valid~~governed ~~copyright~~by the Stipulations; ~~registrations~~however, ~~held~~except byin ~~UMG~~certain circumstances, ~~and~~the distribution ~~hence~~will ~~the~~not ~~number~~occur ofprior ~~CDs~~to ~~for~~March 31, ~~which~~2002. In addition, ~~UMG~~under ~~will~~the beStipulations, ~~entitled~~MP3.com agreed to ~~recover~~institute certain ~~the~~corporate ~~per~~governance CDenhancements. ~~damage~~In ~~award.~~order ~~Based~~to complete onthe ~~information~~settlement, ~~presently~~it ~~available,~~will ~~the~~be ~~maximum~~necessary ~~number~~to ofsecure ~~such~~appropriate ~~registrations~~approvals isfrom ~~estimated~~both tothe beState ~~between~~Superior ~~3,000~~Court and ~~7,000.~~Federal ~~Numerous~~District ~~factors~~Court, ~~could~~and ~~affect~~to ~~the~~provide ~~ultimate~~notice ~~size~~to members of the class ~~determination~~and current stockholders.

~~Over~~Charge Related to Class Action and Derivative Lawsuits. In light of the ~~course~~settlements of ~~2000~~the class action and derivative lawsuits, ~~some~~the ~~other~~Company ~~independent~~has ~~labels~~recorded ~~have~~a ~~filed~~charge of $41,428,000 ~~lawsuits~~during ~~against~~the usthree ~~based~~months onended March 31, 2001. The charge includes the ~~same~~cash ~~set~~paid ofinto ~~allegations~~the asescrow account, the ~~UMG~~value ~~case.~~of ~~These~~the ~~labels~~2.5 million ~~include~~shares ~~Zomba~~of ~~Recording~~common ~~Corp.,~~stock ~~Tee~~to ~~Vee~~be ~~Toons~~issued, ~~Inc~~and other legal costs. While the charge of $41,428,000 excludes ~~and~~any ~~Koch~~potential ~~Entertainment~~recovery ~~and~~from ~~Velvel~~its ~~Records~~insurance ~~LLC. Additionally~~carriers, ~~several~~the Company ~~independent~~is ~~labels~~seeking ~~have~~to ~~sent~~recover usfrom ~~demand~~its carriers the full amount ~~letters~~of ~~alleging~~the ~~similar~~settlement ~~claims~~together with its legal expenses. If the Company receives insurance proceeds, the Company will

16 ~~Publisher Lawsuits. On March 14, 2000, two large~~ ~~music-publishing companies, MPL Communications, Inc. and Peer~~ ~~International Corporation, filed a copyright infringement lawsuit against MP3.com in the United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in~~

17 Table of Contents

~~Table~~ record the recovery as a gain in the statement of ~~Contents~~operations caption “Charge related to class action and derivative lawsuits.”

~~connection~~Amortization ~~with its My.MP3.com service, made unauthorized copies~~ of ~~approximately~~Deferred ~~45,000 audio CDs in violation of the Copyright~~Compensation ~~Act, and that MP3.com, in connection with the streaming of audio~~ content to users of the My.MP3.com service, continued to make unauthorized digital phonorecords in violation of the Copyright Act. The complaint further alleges that MP3.com’s actions constituted unauthorized copying and willful infringement of plaintiffs’ copyrights. Plaintiffs seek damages (including statutory damages of up to $150,000 per violation) and injunctive relief prohibiting MP3.com from operating its My.MP3.com service or any other service that uses unauthorized reproductions of plaintiffs’ copyrighted works. Additionally, Zomba Enterprises, Inc. has filed its own music publishing case against us. In view of the court’s rulings in the UMG case, there is a substantial risk that the issues of infringement, fair use, and willfulness may be adjudicated against us in these cases with publishers. This could mean that we would only be able to litigate the issue of damages. A motion has been filed by MPL and Peer to amend their complaint to add many additional copyrighted works to those at issue in the action.

OnDuring ~~October 17, 2000, MP3.com,~~ the ~~National~~quarter ~~Music Publishers’~~ended ~~Association~~March 31, ~~Inc.~~2001, ~~and~~total ~~its licensing subsidiary,~~deferred ~~The~~compensation ~~Harry~~of ~~Fox Agency~~$971,000 ~~Inc.~~was ~~entered~~amortized ~~into~~to aexpense ~~preliminary~~compared ~~agreement~~to ~~that —~~$4,402,000 ifduring ~~approved~~the byquarter ~~individual~~ended ~~HFA~~March 31, ~~music~~2000. ~~publisher-principals —~~Deferred ~~would~~compensation ~~permit~~is ~~the~~being ~~use~~amortized ofover upthe tovesting period ~~one~~of ~~million musical compositions on~~ the ~~My.MP3.com~~relevant ~~service.~~granted ~~In addition,~~stock ~~MP3.com~~options, ~~MPL~~which ~~and~~is ~~Peer~~generally ~~agreed~~four years. toThe ~~settle~~decrease ~~the March 14,~~in ~~2000~~amortization ~~litigation~~is ~~upon~~primarily ~~finalization~~a result of the ~~preliminary~~accelerated ~~agreement,~~amortization ~~which~~method ~~requires~~(as ~~ratification~~provided byfor ~~individual~~in FASB ~~HFA~~Interpretation ~~music publisher-principals~~No. 28) ~~MP3.com,~~to ~~MPL~~amortize ~~and~~deferred ~~Peer~~compensation, which ~~agreed~~resulted ~~to stay~~in ~~the~~a ~~March 14,~~greater ~~2000~~amount ~~litigation~~of ~~until~~amortization ~~the~~expense ~~ratification~~in ~~process~~the isearlier ~~completed.~~years ~~Accordingly,~~of the ~~court~~amortization ~~stayed all proceedings in this litigation until January 2, 2001~~period.

~~The~~Costs ~~proposed,~~Related ~~3-year licensing arrangement provides that MP3.com will pay up~~ to ~~thirty~~Acquisition ~~million dollars ($30,000,000) to HFA for~~Activities ~~the benefit of up to 25,000 music publishers and their songwriter~~ partners as part of two equal funds. One fund will be used to pay HFA publisher-principals for past uses of music on the My.MP3.com service, in exchange for a release from HFA publisher-principals and their affiliated entities of all claims related to the March 14, 2000 lawsuit and the use of their compositions on the My.MP3.com service. The other fund will provide advance payments toward royalties earned under the prospective license. The terms of the prospective license call for a payment of one quarter cent each time a song is streamed on demand to a customer from his or her My.MP3.com locker, along with a one-time fee per track added to the My.MP3.com service.

~~Artists’~~Acquisition ~~Class Action.~~related Oncosts ~~April 12, 2000, several artists filed a class action lawsuit in the United States District Court~~ for the ~~Southern~~first ~~District~~quarter of ~~New York against~~2001 ~~MP3.com and several major recording companies that~~were ~~claimed~~zero compared to ~~own~~$1,704,000 ~~copyrights~~for ~~in sound recordings featuring~~ the ~~artists.~~ ~~The~~same ~~complaint~~period ~~alleges~~one ~~that~~year ~~the recording company defendants, in their separate lawsuit against MP3~~ago.~~com (filed on~~ ~~January 21,~~The ~~2000 —~~decrease ~~see above), are claiming rights~~ in ~~plaintiffs’~~these ~~recordings~~costs ~~that~~was ~~they~~a doresult ~~not~~of ~~possess.~~certain Incosts ~~particular,~~charged ~~the~~to ~~complaint~~expense ~~alleges~~in ~~that~~2000 ~~the~~associated ~~recording company defendants do not possess any copyright protections~~ with ~~respect to plaintiffs’ pre-1972 published and pre-1978 unpublished recordings, do not possess~~ the ~~right~~acquisition ~~to digitally transmit~~of ~~plaintiffs’~~TransComputing ~~pre-1996~~International ~~recordings~~Corporation ~~over~~(d.b.a. ~~the Internet~~seeUthere.com), which ~~and~~was do not ~~possess the right to control the conversion of plaintiffs’ recordings into mp3 files~~completed. ~~The complaint further alleges that~~ MP3.com has ~~used~~not ~~the~~incurred ~~names~~any ~~and~~such ~~likenesses of~~costs ~~plaintiffs~~during ~~without their consent or authorization and in a deceptive manner, in violation of~~ the ~~federal~~three ~~Lanham~~months ~~Act,~~ended ~~the New York Civil Rights Law~~March 31, ~~and unspecified unfair competition and misappropriation laws~~2001. ~~In their prayer for relief, plaintiffs ask~~ ~~to have their class action certified, to be awarded unspecified~~ damages and attorneys’ fees, to have the defendants enjoined from using plaintiffs’ names and likenesses to promote downloading music over the Internet, and to receive declaratory relief regarding plaintiffs’ rights in their pre- and post-1972 recordings. This case has been dismissed in its entirety with prejudice at the pleadings stage, and we have been informed that the plaintiffs intend to appeal.

~~Settlement~~Interest Discussions; Charge to Earnings. MP3.com has pursued and continues to actively pursue settlement discussions with the various plaintiffs and claimants in the cases and disputes discussed above. The decision whether to enter into settlement and/or license agreements with each party will be based upon a number of factors related to both the lawsuits and MP3.com’s business in general. We cannot guarantee that we will be able to enter into any additional settlement agreements on terms favorable to MP3.comIncome, ~~if at all, or that any settlement~~Net ~~or license agreement will prove beneficial to our business or~~ ~~stockholders. During the~~

18 During the three months ended March 31, 2001, interest income (net of interest expense) was $1,700,000 compared to $5,678,000 during the same period a year ago. The decrease in interest income was primarily due to a reduction in cash, cash equivalents and short-term investments in marketable securities from $369,290,000 at March 31, 2000 to $91,211,000 at March 31, 2001. The decrease in cash, cash equivalents and short-term investments in marketable securities is primarily a result of payments associated with litigation and copyright matters, class action and derivative lawsuits, prepayments for multimedia royalty licensing arrangements with certain major recording companies, purchases of property and equipment, purchases of strategic investments, the acquisition of the remaining interest in mp3radio.com from Cox Interactive Media, Inc. and normal operating costs.

~~Table~~Provision offor ~~Contents~~Income Taxes

~~quarter~~Due ~~ended June 30, 2000, we recorded a charge for litigation and copyright matters of $150.0 million. The charge for litigation and copyright matters represented MP3.com’s estimate of the total costs~~ to ~~be incurred in connection with~~ the ~~resolution~~loss offrom ~~the~~operations ~~various~~for ~~litigation~~both ~~and copyright~~book ~~matters associated with the My.MP3.com service, including the lawsuits filed by major recording companies~~ and ~~other~~ ~~parties.~~tax ~~Copyright issues associated with the My.MP3.com Service also include but are not limited to publishing rights~~purposes, ~~non-major~~no ~~label~~provision ~~content, and legal and advisory fees. This charge did not reflect~~ or ~~include~~benefit ~~any~~for ~~amounts~~income ~~paid~~taxes orwas ~~payable~~recorded ~~in connection~~for ~~with forward-looking licenses to use music recordings~~either orthe ~~compositions~~three inmonths ~~connection~~ended ~~with~~March ~~the~~31, ~~My.MP3.com~~2001 ~~service~~ or ~~any additional amounts that might be payable under the most-favored-nations provisions described above~~2000. ~~This~~Currently, ~~charge~~we ~~reflected~~provide ~~management’s~~a ~~expectations~~valuation asallowance offor ~~July 26, 2000,~~all ~~and~~future ~~was~~tax ~~based~~benefits ~~on currently available information~~ as ~~well as~~ utilization ~~significant~~of ~~assumptions~~the ~~made~~future bytax ~~management~~benefits ~~regarding~~are ~~the litigation~~not known.

~~During~~Minority ~~the~~Interest quarter ended September 30, 2000, we recorded an additional charge for litigation and copyright matters of $20.0 million. This additional charge reflects incremental costs that management estimates will be incurred in ~~connection with~~Losses ~~the resolution~~ of ~~the~~an ~~various litigation and copyright~~Unconsolidated ~~matters associated with the My.MP3.com service. The additional~~Subsidiary ~~charge and accrual reflect management’s expectations as of~~ the date of this quarterly report and is based on currently available information as well as significant assumptions made by management regarding the various litigation and copyright matters. Although we believe that the expectations and assumptions reflected in this additional charge are reasonable, we cannot guarantee that future events or results will conform to such expectations or assumptions. If these expectations and significant assumptions prove to be erroneous in light of future events, the actual amounts incurred by MP3.com to resolve all matters could be materially different than those recorded as of September 30, 2000.

~~Cash~~Minority ~~payments~~interest ~~for~~in losses of an unconsolidated subsidiary during the ~~settlements~~quarter ~~described~~ended ~~above~~March 31, ~~and~~2001 ~~other~~was zero compared ~~payments~~to ~~have~~$1,405,000 ~~reduced~~for the ~~cumulative~~same ~~amount~~period ~~reserved~~a asyear aago. ~~result~~The decrease in minority interest in losses of ~~these~~an ~~charges~~unconsolidated subsidiary is directly related to ~~$116.9 million~~our asacquisition of ~~September 30~~the remaining 53.5% of mp3radio.com, our former joint venture with Cox Interactive ~~2000~~Media, Inc. ~~Amounts~~We ~~payable~~accounted for ~~past~~the ~~issues~~acquisition inunder ~~connection~~the ~~with~~purchase method of accounting, whereby the excess purchase price over ~~HFA/Peer/MPL~~fair value of net assets acquired of $4,000,000 was generally allocated to assembled work force; URLs, trademarks and names; a radio station agreement; ~~described~~and ~~above~~goodwill. These intangibles are amortized ~~included~~over intwelve to twenty-four months using the ~~remaining~~straight-line ~~amount~~method. ~~reserved~~The asamortization of ~~September 30,~~goodwill ~~2000~~is included in general and administrative expense.

~~Although~~Liquidity ~~MP3.com has obtained license agreements permitting the use of recordings from BMG Entertainment, Warner Music Group, Sony Music~~ and ~~EMI,~~Capital ~~we cannot guarantee that MP3.com will be able~~Resources ~~to secure similar license agreements from any other recording~~ company. Similarly, MP3.com has not yet secured any final publishing license or other affirmative clearance (whether by litigation or otherwise) to utilize within the My.MP3.com service the compositions embodied in the recordings owned by any recording company (including BMG Entertainment, Warner Music Group, Sony Music and EMI), nor can we guarantee that any such license or clearance will ever be obtained. If a final publishing license or other affirmative clearance to utilize such compositions is not obtained, our ability to utilize in the My.MP3.com service recordings from any recording company could be materially and adversely affected.

Overview ~~Class Action Lawsuits. We and certain of our~~ employees, officers and directors have been named as defendants in several lawsuits alleging violations of the federal securities laws. The complaints, which were filed between September 19, 2000 and September 29, 2000 in the United States District Court for the Southern District of California, each purport to be brought on behalf of a class of stockholders. The complaints allege that we and the other the defendants violated the federal securities laws by issuing materially false and misleading statements and failing to disclose material information regarding our My.MP3.com service and the litigation surrounding the service. The complaint does not specify the dollar amount of damages alleged.

~~Derivative~~To ~~Lawsuits~~date, MP3.com’s ~~Between~~operations ~~September 14,~~have ~~2000~~been ~~and~~financed from ~~September 18,~~internally ~~2000~~generated cash, ~~certain~~proceeds ~~stockholders~~from ofthe ~~MP3.com~~sale ~~filed~~of convertible ~~shareholder~~preferred ~~derivative~~stock, ~~suits~~the ~~against~~proceeds ~~MP3.com~~from ~~and~~our ~~certain~~initial ofpublic ~~its~~offering ~~employees~~and, ~~officers~~to ~~and~~a ~~directors~~lesser inextent, the ~~Superior~~exercise ~~Court~~ of ~~the~~stock options and ~~State~~equipment offinancing ~~California,~~through ~~County~~a line of ~~San Diego~~credit. ~~These~~As ~~complaints allege~~of March 31, ~~various~~2001, ~~statutory~~MP3.com ~~and~~had ~~common~~approximately $91.2 million ~~law~~in ~~claims~~cash ~~relating~~and tocash ~~the My~~equivalents.~~MP3.com service.~~

17 ~~We cannot assure you that we will be successful in ultimately~~ ~~defending any of these lawsuits, and we may be required to pay~~ license fees or substantial damages, including statutory, punitive or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable.

19 Table of Contents

~~Table~~Operating ~~of Contents~~Activities

AtNet ~~the~~cash ~~rate~~used ofin ~~$25,000~~operating ~~per~~activities ~~work,~~during ~~our~~the ~~aggregate~~quarter ~~potential~~ended ~~liability resulting from all of our copyright litigation proceedings could exceed billions of dollars. If successful~~March 31, ~~any one~~2001 ofwas ~~these~~approximately ~~lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful~~$5, ~~these lawsuits still can harm our business severely by damaging our reputation~~197, ~~requiring us to incur legal costs~~000, ~~lowering our stock~~consisting primarily ~~price~~of ~~and~~the ~~public demand for our stock, and diverting~~following: ~~management’s attention away from our primary business activities in general.~~

~~Amortization~~• net loss of ~~Deferred~~approximately ~~Compensation~~ $46,128,000; • depreciation, amortization of goodwill and amortization of prepaid multimedia royalty licenses of approximately $4,581,000; • amortization of deferred compensation of approximately $971,000; • non-cash charge related to class action and derivative lawsuits of $5,391,000; • a decrease in restricted cash of $30,000,000; • a decrease in accounts and unbilled receivables of approximately $359,000; • a decrease in prepaid expenses and other current assets of approximately $2,743,000; • a decrease in accounts payable and accrued expenses of approximately $888,000; • a decrease in the reserve for litigation and copyright matters of approximately $2,776,000; and • an increase in deferred revenue of approximately $550,000.

~~During~~The ~~the~~decrease ~~quarter~~in ~~ended~~restricted ~~September 30,~~cash ~~2000,~~was ~~total~~a ~~deferred compensation~~result of ~~$1,460,000 was amortized to expense compared to $12,370,000 during~~ the ~~quarter ended September 30, 1999.~~expiration ~~Deferred compensation is being amortized over the vesting period~~ of the ~~relevant~~restrictions ~~granted~~in ~~stock~~an ~~options,~~escrow ~~which~~arrangement isin ~~generally~~February ~~four years~~2001. The ~~decrease~~entire inprincipal ~~the~~amount ~~amortization~~of is$30,000,000 ~~primarily~~became ~~a result of~~unrestricted ~~the~~and ~~accelerated~~freely ~~amortization~~available ~~method (as provided~~ for ingeneral ~~FASB Interpretation~~working ~~No. 28)~~capital topurposes ~~amortize deferred compensation, which resulted~~ in ~~a greater amount of amortization expense in the~~ February ~~earlier years of the amortization period~~2001.

~~Interest~~Investing ~~Income, Net~~Activities

~~Interest~~Net ~~income~~cash ~~(net~~provided ofby ~~interest~~investing ~~expense)~~activities during the quarter ended ~~September~~March 3031, ~~2000~~2001 was ~~$4,039,000~~approximately ~~compared to~~ $412,~~517~~134,000 ~~during the same period a year ago. Interest income during the quarter ended September 30~~, ~~2000 is directly~~ ~~related~~consisting toprimarily ~~interest~~of ~~earned~~net onmaturities ~~cash,~~of ~~cash equivalent balances and~~ marketable securities ~~associated with proceeds~~ of ~~an aggregate of approximately~~ $~~426~~14,~~300~~977,000 ~~during 1999 from (i) the issuance of common stock in connection with MP3.com’s initial public offering in July 1999~~, ~~(ii) the~~purchases ~~exercise~~ of ~~stock~~ ~~options~~prepaid ~~and~~multimedia aroyalty ~~warrant for the purchase of common stock, and~~licenses ~~(iii) the issuance~~ of ~~Series A~~$1, B626,000 and Cproperty ~~convertible preferred stock. The net decrease in interest income is mainly attributed to the decrease in our cash, cash equivalent balances~~ and ~~marketable~~equipment ~~securities~~expenditures ~~average balances offset by an increase~~of ~~in the weighted average interest rate earned on such invested balances~~$1,227,000.

~~Impairment~~Financing ~~of Strategic Investments~~Activities

~~During~~Net cash provided by financing activities during the quarter ended ~~September~~March 3031, ~~2000,~~2001 ~~MP3.com recorded~~was aapproximately ~~charge of~~ $19404,000,~~000~~ ~~for the estimated impairment of~~consisting ~~its~~of ~~strategic~~proceeds ~~investment~~from ~~portfolio~~the ~~and~~issuance ~~short-term~~of ~~investments. The~~common ~~impairment~~stock isin ~~associated~~connection with our aemployee ~~decrease~~stock inpurchase ~~fair~~plan ~~value of certain strategic investments~~ and ~~an investment classified as short-term investments where~~ the ~~decrease~~exercise ~~in the fair market value~~ of ~~the~~ stock ~~is considered other than temporary~~ options.

~~Provision~~Financial ~~for Income Taxes~~Commitments

~~Due~~As toof ~~the~~March 31, ~~loss~~2001, ~~from~~we ~~operations~~have ~~for~~no ~~both~~material ~~book~~financial commitments ~~and~~other ~~tax~~than ~~purposes, no~~obligations ~~provision~~under orour ~~benefit~~operating ~~for~~leases and ~~income~~funding ~~taxes~~a ~~was~~note ~~recorded~~receivable for ~~the three~~approximately ~~months ended September 30~~$4,800,000 ~~2000~~to our ~~and~~chief ~~1999~~executive officer. ~~Currently, we~~We ~~provide~~expect ato ~~valuation~~continue ~~allowance~~to ~~for~~make investments ~~all~~in ~~future~~the ~~tax benefits.~~following:

~~The~~• ~~Nine~~web ~~Months~~site ~~Ended~~computer ~~September 30,~~equipment; ~~2000~~• ~~Compared~~bandwidth ~~to September 30,~~and ~~1999~~ networking equipment and infrastructure; and • additional sales and marketing employees;.

~~Results~~ We expect to pay these expenses principally in cash, though we may elect to enter into additional financing arrangements or expand existing financing arrangements to pay certain types and amounts of ~~Consolidated~~expenses. ~~Operations~~Additionally, we prepaid substantial multimedia content royalties in connection with certain litigation settlements. In the future, we may continue to advance prepaid multimedia content royalties as we settle certain independent music label copyright claims. Capital requirements in any particular period will depend on the timing of these expenditures.

~~Net Revenues~~18

ForTable the nine months ended September 30, 2000, net revenues were $58,132,000, which were derived from online advertisements on our web site; offline advertisements through various promotions and events that were not hosted on our web site; sponsorship of various contests, sweepstakes, e-mail campaigns, greeting cards and the “MP3 Summit”; and the online sale of CDs and music-related merchandise. This compares to $6,628,000 during the same period a year ago. The increase in net revenues during the first nine months of 2000 over the same period in 1999 was mostly attributable to a significant increase in online advertisements and introduction of new online advertisement products such as e-mail campaigns and greeting card advertisements; the introduction of various offline advertisement products such as contests and sweepstakes; and to a lesser extent an increase in CD sales on our web site. Contents

20Recent Event

~~Table~~ In April 2001, we loaned our chief executive officer approximately $4,820,000. The loan is secured by no less than 19,700,000 shares of ~~Contents~~MP3.com Common Stock held by the officer and certain other assets, and accrues interest at 6.75%. Principal and interest are due in April 2002.

~~Revenues~~Future ~~from~~Capital ~~online advertising. For the nine months~~Requirements ~~ended September 30, 2000, revenues from online advertising~~ were $45,036,000 or 77.5% of net revenues compared to $3,796,000 or 57.2% of net revenues for the same period a year ago. Online advertising revenues primarily consist of banner, button, portal and sponsorship advertisements on MP3.com’s web site in addition to advertisements placed in e-mail and greeting card campaigns. The duration of MP3.com’s online advertising commitments range from one month to approximately four years. Banner, button and portal advertisements are impression based, requiring the advertisement to be displayed a minimum number of times over the contract period. Sponsorship advertising contracts involve static advertisements, whereby the advertisement is continually displayed on a specified area of the MP3.com web site during the contract period. E-mails containing various advertisements are sent to MP3.com’s artists and users of the MP3.com web site on a regular basis. Greeting cards also contain advertisements and are sent electronically whenever a user of the MP3.com web site requests that a card be delivered to a person(s) of their choice. The increase in revenues from online advertising for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 was primarily due to a significant increase in pageview volume resulting from significant increases in unique visitors, MP3.com’s advertiser customer base, and the introduction of new online advertisement product lines such as e-mail and greeting cards.

~~Revenues~~We ~~from~~believe ~~offline~~that ~~advertising.~~our ~~For~~cash ~~the~~and ~~nine~~cash ~~months ended~~equivalent ~~September 30,~~balances ~~2000,~~will ~~revenues from offline advertising~~be ~~were~~sufficient ~~$10,988,000 or 18.9% of net revenues compared~~ to ~~$2,079,000 or~~satisfy ~~31.4%~~our ofcash ~~net~~requirements ~~revenues~~ for ~~the~~at ~~same~~least ~~period a year ago. During~~ the next ~~first nine~~ 12 months ~~of 2000~~, ~~offline~~after ~~advertising~~taking ~~revenues primarily~~into ~~consisted~~consideration ~~of contests and sweepstakes, and to a lesser extent advertising sponsorships of CD sampler products. MP3.com held contests and sweepstakes during~~ the ~~year that were sponsored~~payment ~~by various advertisers and provided prizes to the winners~~ of ~~each~~ ~~contest.~~our CDreserves ~~samplers~~for ~~are~~litigation ~~multi-media CDs containing advertising, free software, videos~~ and ~~games~~copyright asmatters ~~well~~accrued as ~~collections~~ of ~~music~~March 31, ~~from artists that have posted music on the MP3~~2001.~~com~~ ~~web~~We ~~site.~~intend ~~These CDs are sponsored by several different advertisers and distributed free of charge~~ to ~~users~~invest ~~of MP3.com’s~~our ~~web~~cash ~~site who register to receive the CD. The increase~~ in ~~revenues from offline advertising is primarily due to~~excess ~~the introduction~~ of ~~contests~~current ~~and~~operating ~~sweepstakes,~~requirements ~~and to a lesser extent increased revenues associated with the “MP3 Summit.” The decrease~~ in ~~revenues from offline advertising~~short-term, ~~as a percentage of total net revenues~~interest-bearing, isinvestment-grade ~~primarily attributable to the significant increase in online advertising revenues, both in absolute dollars and as a percentage of total revenues~~securities.

~~Revenues~~To ~~from~~the ~~online~~extent ~~sales~~our ofnet ~~CDs~~revenues ~~and~~increase ~~other~~in ~~music-related merchandise. For~~ the ~~nine months ended September 30~~future, we ~~2000,~~anticipate ~~revenues~~increases ~~from~~in ~~online~~our ~~sales~~working ofcapital ~~CDs~~requirements ~~and other music-related~~to ~~merchandise~~finance ~~were~~higher ~~$2,108,000~~relative orlevels ~~3.6%~~ of ~~net~~associated ~~revenues compared to~~accounts ~~$753~~receivable,~~000~~ orunbilled ~~11.4%~~receivables ~~of net revenues for the same period a year ago. Online e-commerce sales consist of DAM~~ and ~~compilation~~other ~~CDs and~~assets, to aoffset ~~lesser extent, other music-related merchandise. The increase~~by increases in ~~revenues~~accounts ~~from~~payable ~~online sales of CDs~~ and other ~~music-related merchandise~~liabilities. ~~during the first nine months of 2000 as compared to the same period one year ago was primarily due to an increase in the sales volume of DAM CDs (an increase of approximately 170~~However,~~000~~ ~~units or 227%) resulting from increased musical content~~we ~~available~~do onnot ~~MP3.com’s~~expect ~~web~~that ~~site as a result of increased brand awareness and an increase in~~ the ~~average~~increases ~~selling price of CDs. The decrease~~ in ~~revenue~~accounts ~~from~~payable ~~online sales of CDs~~ and other ~~music-related~~liabilities ~~merchandise,~~will asoffset athe ~~percentage~~increases ofin ~~total~~accounts ~~revenues~~receivable, is ~~primarily~~unbilled ~~attributable~~receivables ~~to the significant increase in, both absolute dollars~~ and asother ~~a percentage of total revenues, online advertising revenues~~assets.

~~Revenue~~We ~~Concentration.~~may Weneed ~~expect~~to ~~that~~raise ~~most~~additional ofcapital if our ~~revenues~~business expands more ~~will~~rapidly ~~continue~~than initially planned, to besatisfy ~~derived~~any ~~from~~damage awards ~~third~~or ~~party~~unanticipated ~~advertising agreements~~settlement ~~like~~costs ~~those~~related weto ~~have~~our ~~with~~current or ~~MPG.~~potential ~~During~~future ~~the~~litigation ~~nine~~proceedings, ~~months~~to finance ~~ended~~unanticipated ~~September 30~~working capital requirements, ~~2000~~to obtain additional licenses in order to provide certain music services and/or specific content to consumers, ~~MP3.com~~to ~~recognized~~develop ~~revenue~~new ofor enhance ~~$26~~existing services or products,~~845~~ to fund distribution relationships,~~000~~ to respond to competitive pressures, or 46to acquire complementary businesses, technologies, content or products.2% If additional funds are raised through the sale of equity or convertible debt securities, the ~~total~~percentage ~~revenues~~ownership of our stockholders will be reduced, ~~associated~~our ~~with~~stockholders ~~the~~may ~~MPG~~experience ~~agreement~~additional dilution and these securities may have rights, preferences or privileges senior to those of our stockholders. ~~MPG~~There ~~revenues~~can be no assurance that additional financing will be ~~distributed~~available ~~between~~at ~~online~~all or on terms favorable to us. ~~and~~If ~~offline~~adequate ~~sources~~funds ~~based~~are not available or are not available on acceptable aterms, ~~changing~~our ~~percentage~~ability ~~from~~to ~~quarter~~fund our expansion, take advantage of unanticipated opportunities, develop or enhance products or services or otherwise respond to ~~quarter~~competitive pressures could be significantly limited. Our business may be harmed by these limitations.

19 ~~In July 1999, we entered into an agreement with MPG under which~~ MPG committed to purchase an aggregate of $150 million in advertising, promotion and marketing services from us over three years. In July 1999, we received prepayments from MPG totaling $45 million, which represented payment for these services through the fourth quarter of 2000. In September 2000, we entered into an amended and restated agreement with MPG. The restated agreement extended our relationship with MPG through 2004, and reduced the aggregate amount of services to be purchased by MPG over the life of the agreement (see the revised

21 Table of Contents

~~Table~~RISK ~~of Contents~~FACTORS

~~commitment~~Litigation ~~schedule below). Both MPG and MP3.com believe that the~~Risk ~~revised commitment schedule will allow for more efficient use of~~ our marketing services for the benefit of MPG and its various related companies. In addition, the restated agreement provides for a more streamlined media management process and creates certain exceptions to the favored pricing granted to MPG under the original agreement. Under the restated agreement, MPG is now committed to purchase an aggregate of $120 million in advertising, promotion and marketing services from us (including the $45 million purchased through the fourth quarter of 2000). The remaining $75 million owed under the restated agreement remains secured by an irrevocable letter of credit. The restated agreement further provides MPG with potential additional financial incentives of up to an aggregate of $5 million (up to $1 million in any one calendar quarter) based on the number of different companies that use our services under the agreement. The financial incentives could result in the reduction of the marketing and promotions commitment during the period incurred.

Quarterly Payment Schedule:			Purchase Amount
			(in thousands):
2000
	Q4		$	13,500
2001
	Q1		$	15,000
	Q2		$	12,250
	Q3		$	12,250
	Q4		$	12,250
2002
	Q1		$	6,000
	Q2		$	5,000
	Q3		$	5,000
	Q4		$	5,000
2003
	Q1		$	300
	Q2		$	300
	Q3		$	275
	Q4		$	275
2004
	Q1		$	275
	Q2		$	275
	Q3		$	275
	Q4		$	275
		Total:	$	88,500

We Have Been And Are Engaged In A Number Of Ongoing Lawsuits. We Have Settled Some Of The Lawsuits At Significant Expense, And These Expenses Together With Any Monetary Damages And/Or Settlement Expenses From Remaining Lawsuits Could Severely Impact Our Financial Condition. Litigation Could Also Result In The Discontinuation Or Interruption Of Services To Our Consumers.

~~During~~We ~~1999~~are ~~and~~currently ~~2000,~~a wenamed ~~have~~defendant ~~made~~in ~~certain~~a ~~strategic~~number ~~investments~~of copyright lawsuits, including a class-action lawsuit and ~~entered~~several individual ~~into~~lawsuits ~~certain~~brought ~~marketing~~by independent record companies and publishers, ~~promotion~~each ~~arrangements~~alleging that, among other things, portions of our My.MP3 Inand related services violated their respective copyrights. ~~certain~~See ~~circumstances~~“Part II — Item 1 — weLegal ~~have~~Proceedings”. ~~recognized~~We ~~revenue~~were also involved in ~~connection with~~similar ~~these~~significant ~~marketing~~litigation ~~and~~proceedings ~~promotion~~that either ~~arrangements~~settled ~~pursuant~~or were brought to ~~our~~judgment in 2000 or the first ~~accounting~~quarter ~~policies~~of 2001. ~~Due~~These toincluded a lawsuit brought by two major publishing companies and a lawsuit brought by ten major music recording companies (the ~~recent~~“UMG ~~financial~~case”), ~~uncertainty~~each concerning ~~related~~copyright toclaims ~~certain~~like ~~strategic~~those ~~investments~~described above. In the UMG case, we were found by the court to have ~~determined~~willfully infringed plaintiffs’ copyrights. Eight plaintiffs in that case settled wethrough ~~are~~various ~~unable~~agreements toand ~~recognize~~two ~~revenue~~plaintiffs in ~~connection~~that case ~~with~~proceeded ~~certain~~through judgment. In reliance upon the ~~marketing~~court’s ~~and~~rulings ~~promotion~~in ~~arrangements~~the ~~until~~UMG case, the ~~significant~~issues of ~~uncertainties~~infringement, fair use, and willfulness have been ~~satisfactorily~~adjudicated against ~~resolved~~us in other copyright cases still pending. ~~These~~Thus, ~~above~~we are ~~factors,~~only ~~current~~able ~~financial~~to ~~and~~litigate ~~economic~~the ~~conditions~~issue of damages. At this juncture, ~~and~~we are unable to determine the number of valid copyright ~~current~~registration ~~litigation~~certificates ~~could~~that ~~have~~may be appropriately subject to an ~~adverse~~award ~~effect~~of onstatutory ~~MP3~~or actual damages in these pending cases.~~com’s~~ We ~~future~~do ~~revenues~~not yet know, for example, whether other plaintiffs will ultimately elect to recover statutory damages in lieu of actual damages, nor are we able to speculate as to the likely size of any award of statutory damages in these cases. At the rate of $25,000 per work (which is the per CD amount of statutory damages awarded by the court in the UMG case), our aggregate potential liability resulting from all of our copyright litigation proceedings could still exceed one billion dollars.

~~Cost~~ During the year ended December 31, 2000, we recorded a charge for litigation and copyright matters of $170.0 million. ~~Revenues~~The charge for litigation and copyright matters represented our estimate of the total costs to be incurred only in connection with the resolution of the various litigation and copyright matters associated with the My.MP3 service, including the lawsuits filed by major recording companies and other parties. Copyright issues associated with the My.MP3 service also include but are not limited to publishing rights, non-major label content, and legal and advisory fees. This charge did not reflect or include any amounts paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3 service. This charge reflects management’s expectations as of the date of this report, and is based on currently available information as well as significant assumptions made by management regarding the various litigation and copyright matters. Cash payments for the settlements and judgments discussed above and other payments have reduced the cumulative amount reserved as a result of this charge to $43.4 million as of March 31, 2001. We cannot guarantee that future events or results will conform to our expectations or assumptions regarding the various litigation and copyright matters. If these expectations and significant assumptions prove to be erroneous in light of future events, the actual amounts incurred by MP3.com to resolve all copyright matters related to the My.MP3 service could be materially different than those recorded as of March 31, 2001, and could far exceed the resources and market capitalization of our company.

~~Cost~~In addition to the copyright litigation discussed above, we and certain of ~~revenues~~our ~~for~~employees, officers and directors have been named as defendants in several lawsuits alleging violations of the federal ~~nine~~securities ~~months~~laws. ~~ended~~The complaints, which were filed between September 3019, 2000 ~~were~~and ~~$11~~November 15,~~314,000~~ or2000 ~~19.5%~~in the ofUnited ~~net~~States ~~revenues~~District ~~compared~~Court tofor the Southern District of $2California,~~704,000~~ oreach ~~40.8%~~purport to be brought on behalf of ~~net~~a ~~revenues~~class ~~during~~of stockholders. The complaints allege that we and the ~~same~~other ~~period~~the defendants aviolated ~~year~~the federal securities laws by issuing materially ~~ago,~~false ~~resulting~~and inmisleading ~~gross~~statements ~~margins~~and offailing 80to disclose material information regarding our My.5%MP3 service and the 59litigation surrounding the service.2% Also, between ~~respectively~~September 14, 2000 and October 26, 2000, certain stockholders of MP3.com ~~The~~filed ~~increase~~shareholder inderivative ~~cost~~suits against MP3.com and certain of ~~revenues~~its employees, inofficers ~~absolute~~and ~~dollar~~directors ~~amounts~~in the Superior Court of the State of California, County of San Diego. These complaints allege various statutory and common law claims relating to the My.MP3 service.

2220

~~was~~MP3.com ~~primarily~~and ~~due~~the torepresentatives ~~increases~~of inthe ~~bandwidth~~various ~~requirements,~~plaintiffs for ~~royalties~~both tothe ~~artists,~~class ~~costs~~action ~~related~~lawsuits toand ~~contests~~derivative ~~and~~lawsuit ~~sweepstakes,~~executed ~~and~~stipulations toof asettlement ~~lesser~~dated ~~extent~~as anof ~~increase~~March 20, ~~in costs related to the~~2001 (“~~MP3 Summit.~~Stipulations”). ~~The~~Under ~~increase~~the interms ~~gross~~of ~~margins~~the ~~was~~Stipulations, ~~primarily~~the ~~due~~defendants, towhile acontinuing ~~significant~~to ~~amount~~deny ofall ~~the~~liability, ~~MPG revenues~~have ~~allocated~~paid tointo ~~online~~an ~~advertising,~~escrow ~~which~~account ~~has higher gross margins. Additionally~~$35,000,000 ~~revenue~~and ~~from~~agreed ~~offline~~to ~~contests and sweepstakes~~issue ~~typically~~2.5 million ~~have~~shares ~~increased~~of ~~gross~~MP3.com’s ~~margins~~common ~~when~~stock ~~compared to other~~which ~~offline~~MP3.com ~~product~~valued ~~margins.~~at CD$5,391,000, ~~and~~in ~~other~~exchange ~~music-related~~for ~~merchandise~~complete ~~sales~~dismissals ~~typically~~and ~~have~~releases ~~lower~~of ~~gross~~all ~~margins~~claims ~~which~~with ~~decrease~~prejudice. ~~the~~The escrow ~~higher~~amount ~~gross margins from online~~ and ~~offline~~the ~~advertising products~~2.5 ~~MP3.com~~million ~~anticipates~~shares ~~that~~of ~~future~~common ~~gross~~stock ~~margins~~ will be ~~fluctuate~~governed ~~depending~~by onthe ~~changes~~Stipulations; inhowever, ~~its~~except ~~revenue~~in ~~mix~~certain circumstances, ~~and~~ the ~~timing of~~distribution ~~expenditures~~will innot ~~web~~occur ~~site~~prior ~~and~~to ~~fulfillment operations.~~March ~~Additionally~~31, ~~future~~2002. ~~gross~~In ~~margins~~addition, ~~could~~under ~~fluctuate depending on~~ the ~~amount~~Stipulations, ofMP3.com ~~MPG~~agreed ~~quarterly revenues allocated between online and~~to institute ~~offline~~certain ~~advertising~~corporate ~~products~~governance enhancements. ~~When~~In weorder ~~begin using certain music~~to ~~and~~complete ~~video~~the ~~licenses~~settlement, weit ~~expect~~will tobe ~~include~~necessary into ~~cost~~secure appropriate ofapprovals ~~revenues amortization~~from ofboth ~~certain~~the ~~royalty~~State ~~licensing~~Superior ~~arrangements~~Court ~~with~~and ~~certain~~Federal ~~major~~District ~~recording~~Court, ~~companies~~and ~~that~~to ~~could~~provide ~~result~~notice into ~~cost~~members of the ~~revenues~~class ~~increasing substantially both in absolute dollars~~ and as current ~~a percentage of revenue~~stockholders.

~~Sales~~ We are also involved in other legal matters and ~~Marketing~~claims of various types, and from time to time may also be involved in litigation relating to claims arising out of our operations in the normal course of business. We cannot assure you that we will be successful in ultimately defending any of these lawsuits, and we may be required to pay license fees or substantial damages, including statutory, punitive or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

~~During~~Risks ~~the~~Related ~~nine~~To ~~months~~Our ~~ended~~Business ~~September 30, 2000, sales and~~Model ~~marketing expense was $42,992,000 or 74.0% of net revenues~~ compared to $12,227,000 or 184.5% of net revenues during the same period a year ago. The increase in sales and marketing expense, in absolute dollar amounts, was primarily due to stock-based charges of approximately $5,758,000 associated with the acceleration of stock option vesting, the cost of our Payback for Playback program of approximately $5,845,000, an increase in sales and marketing payroll and related expenses of approximately $7,588,000, a charge associated with the impairment of certain prepaid marketing expenses related to arrangements with internationally known artists of approximately $2,587,000, new and increased marketing programs of approximately $9,017,000, and costs associated with the growth of our business. Additionally, the increase was reduced by marketing and promotion costs of approximately $2,114,000 associated with the 1999 Alanis Morissette and Tori Amos “5 1/2 Weeks” Summer tour sponsorship, and the contribution of 100,000 shares of our common stock to the MP3 Foundation of $767,000 that were incurred during the third quarter of 1999 but not incurred during the same quarter ended in 2000. The decrease in sales and marketing costs as a percentage of revenues is primarily due to the significant increase in net revenues. MP3.com anticipates that overall sales and marketing expense will continue to increase significantly in the foreseeable future; however, sales and marketing expense as a percentage of net revenues may fluctuate depending on the timing of new marketing programs and the addition of sales and marketing personnel.

InWe ~~the~~Have ~~future,~~A ~~MP3.com~~Limited ~~may~~Operating ~~enter~~History ~~into~~That ~~arrangements~~Makes ~~with additional~~An ~~artists and creative talent agencies to secure their~~Evaluation ~~promotional~~Of ~~and~~Our ~~marketing~~Business ~~services and obtain rights to their music~~Difficult. ~~Future expenses may include costs related to promotional~~ ~~events, which will be expensed to sales and marketing in the~~ period the event is held. Proceeds from these events, if any, will be credited against promotional expenses incurred. Depending upon the terms and timing of promotional activities, substantial sales and marketing expenses may be incurred in any quarterly or annual period.

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

~~During~~Our ~~the~~Business ~~nine~~Model ~~months~~Is ~~ended~~Not ~~September 30,~~Typical ~~2000,~~Of ~~engineering and product development expense was $17~~Traditional,~~471,000~~ ~~or 30.1% of net~~More ~~revenues~~Established ~~compared~~Business toEnterprises ~~$3,444,000~~And orMay ~~52.0%~~Not ofGenerate ~~net revenues during~~Sufficient ~~the~~Revenues ~~same~~For ~~period~~Our aBusiness ~~year~~To ~~ago~~Survive. ~~The increase in the level of~~ ~~engineering and product development expense, in absolute dollar~~ amounts, was primarily due to an increase in payroll and related expenses of approximately $7,913,000, increased computer equipment depreciation of approximately $3,267,000, increased consulting and temporary labor of $926,000, expensed computer supplies and maintenance of approximately $842,000, and costs associated with the growth of MP3.com’s business. The decrease in engineering and product development expense as a percentage of net revenue is primarily due to a significant increase in net revenues. MP3.com anticipates that overall engineering and product development expenses will increase in the foreseeable future; however, engineering and product development expenses as a percentage of net revenues may fluctuate depending on the level of future net revenues and the timing of investments in engineering and product development and hiring.

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

~~Table~~• web site advertising fees from third parties; • online sales of ~~Contents~~CDs and music-related merchandise; • syndicated radio advertising revenues; • business music services revenues; • subscription channel revenues; • artist and consumer data; • label promotional activity fees; • My.MP3 subscription revenues; and • service and licensing fees from our technology infrastructure.

~~General~~ Our historical revenue sources and ~~Administrative~~our projected revenue sources have changed as our business has evolved, and our revenue sources may change significantly in the future. Since our business may continue to evolve

21 ~~During the nine months ended September 30, 2000, general and~~ ~~administrative expense was $23,255,000 or 40.0% of net revenues~~ compared to $4,874,000 or 73.5% of net revenues during the same period a year ago. The increase in general and administrative expense, in absolute dollar amounts, was primarily a result of an increase in finance and administrative payroll and related expenses of approximately $6,784,000; increased legal, accounting, and public relations expenses of approximately $4,468,000; insurance costs of approximately $1,509,000; bad debt expense of approximately $1,798,000; goodwill amortization of approximately $975,000; consulting and temporary labor of approximately $1,346,000; and costs associated with the growth of MP3.com’s business. General and administrative expense as a percentage of net revenues decreased primarily due to increased net revenues. MP3.com anticipates that overall general and administrative expenses will increase in the foreseeable future; however, general and administrative expense as a percentage of net revenues may fluctuate depending on the level of future net revenues and the timing of additional investments in general and administrative infrastructure.

ChargeTable forof Litigation and Copyright Matters Contents

~~Record Label Lawsuits. On January 21~~rapidly, ~~2000, ten major recording companies filed a copyright infringement lawsuit against MP3.com in~~ the ~~United~~above ~~States~~sources ~~District Court for the Southern District~~ of ~~New~~revenues, ~~York.~~including ~~The~~those ~~complaint alleged that~~derived ~~MP3.com,~~from inour ~~connection with certain content available in its~~ My.MP3~~.com~~ ~~service,~~and ~~made~~other ~~unauthorized~~MSP-related ~~copies~~services ~~of tens of thousands of audio CDs~~ in ~~violation of the Copyright Act. On April 28~~development, ~~2000, the court granted plaintiffs’ motion~~ ~~for~~may ~~summary judgment and held that MP3.com was liable for infringing plaintiffs’ copyrights~~change, ~~and~~or ~~the~~increase ~~litigation proceeded~~or ~~with~~decrease ~~discovery~~in ~~on the issues of willfulness and damages~~importance. ~~On May 10, 2000, MP3.com voluntarily disabled the~~ ~~plaintiffs’ content within the My.MP3.com service.~~

~~Between~~It ~~June~~is ~~and~~uncertain ~~August~~whether ~~2000,~~a ~~MP3.com~~music-based ~~entered~~web ~~into~~site ~~settlement~~that ~~and~~relies on attracting ~~license~~people ~~agreements~~to ~~with~~learn ~~Warner~~about, ~~Music~~listen ~~Group,~~to ~~BMG~~and ~~Entertainment~~download music, ~~Sony~~mostly ~~Music~~from ~~and~~lesser-known ~~Capitol Records~~artists, ~~Inc.(EMI),~~or ~~which~~a ~~together represented~~company ~~eight~~that ofmarkets the technology ~~ten~~and ~~major~~related ~~recording~~services ~~companies~~ that ~~filed~~ drive the ~~copyright~~web ~~infringement~~site, ~~lawsuit~~can generate onsufficient ~~January 21,~~revenues ~~2000~~to survive. ~~The~~ We ~~settlement~~cannot ~~agreements~~assure ~~provide~~you that ~~for~~our abusiness ~~settlement~~model ~~amount~~will tosucceed beor ~~paid~~ will inbe ~~cash~~sustainable byas our ~~MP3~~business grows.~~com~~ inIn ~~exchange~~order for aour ~~release~~business ~~from~~to ~~the~~be ~~settling~~successful, ~~plaintiffs~~we ~~and~~must ~~their~~not ~~affiliated~~only ~~entities~~develop ~~(as~~services ~~defined~~that indirectly ~~the~~generate ~~settlement~~revenue, ~~agreements)~~but ofalso ~~all~~provide ~~claims~~content ~~related~~and toservices ~~the~~that attract ~~January 21,~~consumers ~~2000 lawsuit~~ and ~~the~~businesses ~~My.MP3.com~~to ~~service. Most-favored-nations~~our ~~provisions~~web insite ~~these~~frequently. ~~settlement~~We ~~agreements~~will ~~require~~need ~~additional~~to ~~settlement~~develop ~~amounts~~new toofferings beas ~~paid~~consumer ~~under~~and ~~certain~~business ~~circumstances.~~preferences ~~MP3.com~~change ~~made~~and nonew ~~admission~~competitors ofemerge. ~~wrongdoing~~We incannot assure ~~connection~~you ~~with~~that ~~these~~we ~~settlements.~~will ~~Subject~~be able to ~~certain~~provide ~~affirmative~~ consumers ~~obligations~~with ofan ~~MP3.com~~acceptable blend ~~and~~of ~~other~~products, ~~terms~~services, and ~~conditions~~informational ~~regarding~~and community ~~the~~offerings ~~implementation~~that ofwill ~~the~~attract ~~My.MP3.com~~consumers ~~service,~~and ~~the~~businesses ~~license agreements~~to ~~permit~~our ~~MP3~~web site frequently.~~com~~ toWe ~~utilize~~provide ~~recordings~~many ~~owned~~of byour ~~Warner Music~~products ~~Group,~~and ~~BMG~~services without ~~Entertainment~~charge, ~~Sony~~and ~~Music~~we ~~and~~may ~~EMI~~not asbe ~~part~~able ofto ~~the~~generate sufficient revenue ~~My.MP3.com~~to ~~service.~~pay ~~The~~for ~~license~~these ~~agreements~~products ~~have~~and ~~terms~~services. ofMoreover, for ~~approximately~~those ~~three~~services tothat ~~ten~~we ~~years, and~~ provide for ~~on-going royalty~~a ~~payments~~fee, ~~based~~we onmay ~~the~~not ~~greater~~generate sufficient ofrevenue ~~(i) a~~to ~~specified percentage~~offset ofthe ~~net~~loss ~~revenues~~of ~~generated~~advertising ~~from~~revenue ~~the~~on those ~~My.MP3.com~~services, ~~service~~ or ~~(ii) a~~to ~~specified~~cover ~~amount~~the ~~accrued~~cost ~~each~~of ~~time~~the aroyalties ~~licensor~~that we ~~recording~~must ispay ~~streamed~~to ~~from~~content Myproviders.~~MP3.com.~~ ~~In addition~~Accordingly, ~~the~~we ~~licenses provide~~are ~~for~~not ~~on-going~~certain that ~~royalty~~our ~~payments~~business ~~based~~model onwill ~~the~~be ~~number~~successful ~~of times~~or athat ~~licensor~~we ~~recording~~can sustain isrevenue ~~added~~growth toor ~~My.MP3.com~~be ~~accounts~~profitable.

AsWe aRecently ~~result~~Re-Introduced ofOur ~~the~~My.MP3 ~~settlements described above~~Service, ~~the January 21,~~Which ~~2000~~May ~~copyright infringement lawsuit was limited~~Not toBe aSuccessful, ~~dispute~~And ~~with~~Which ~~UMG~~May ~~Recordings,~~Adversely ~~Inc.,~~Impact ~~which~~Our ~~represents two of~~Overall ~~the~~Business ~~original~~By ~~plaintiffs.~~Requiring A ~~trial~~Substantial inInvestment ~~the case was held from~~And ~~August 28~~Disproportionate ~~through~~Amount ~~September 6,~~Of ~~2000~~Attention onFrom ~~the~~Our ~~issues~~Management ofAnd ~~willfulness and damages~~Employees. ~~After hearing evidence~~Also, ~~the~~Our ~~court ruled on September 6, 2000 that MP3~~My.~~com~~MP3 ~~had~~Service ~~willfully~~May ~~infringed UMG’s~~Not ~~copyrights~~Generate ~~and awarded damages to UMG in an amount of~~Sufficient ~~$25,000~~Revenues ~~per~~To ~~CD.~~Offset AOur ~~trial~~Ongoing isRoyalty ~~scheduled~~Obligations toTo ~~commence on~~Licensors. ~~November 13,~~In ~~2000 to determine the number of valid copyright registrations held by UMG~~Addition, ~~and~~We ~~hence~~Will ~~the~~Likely ~~number~~Need ofAdditional ~~CDs~~Licenses ~~for~~To ~~which~~Enhance The ~~UMG~~Attractiveness ~~will~~Of beThe ~~entitled to recover the per CD damage award~~My.MP3 ~~Based on~~Services ~~information~~To ~~presently available, the maximum number of such registrations is estimated to be between 3,000 and 7,000~~Consumers. ~~Numerous factors could affect the ultimate size of the~~ ~~determination.~~

~~Over~~In ~~the~~December ~~course of~~ 2000, ~~some~~we ~~other~~re-introduced ~~independent~~the ~~labels~~My.MP3 ~~have~~service ~~filed~~and began offering ~~lawsuits~~the ~~against~~service usto ~~based~~customers onin two versions. A limited version of the ~~same~~service ~~set~~contains advertising and is offered for free. A premier version of ~~allegations~~My.MP3 ascontains ~~the~~less advertising than ~~UMG~~the ~~case~~free service. These ~~labels~~and ~~include~~our ~~Zomba~~other ~~Recording~~efforts ~~Corp~~to generate revenue from My.,MP3 ~~Tee~~and ~~Vee~~other MSP services in development may ~~Toons,~~not ~~Inc~~be successful or may meet significant consumer resistance. The development, maintenance and growth of the My.MP3 service will continue to require substantial resources and a substantial amount of management’s time and focus. If the revenues recognized as a result of the My.MP3 service are not sufficient to offset this investment of resources and time, our business may be harmed substantially.

24 Also, in connection with the launch of our upgraded My.MP3 service in 2000 and the subsequent litigation proceedings involving My.MP3, we entered into several license agreements with major recording companies covering the use of certain master recordings in My.MP3. These license agreements provide for payment of a one-time fee each time a licensor’s recording is added to a separate My.MP3 account. These licenses also provide for on-going royalty payments based on the greater of (i) a specified percentage of net revenues generated from or in connection with the My.MP3 service or (ii) a specified amount accrued each time a licensor’s recording is streamed from My.MP3. Similarly, we entered into an agreement with the National Music Publishers’ Association, Inc. and its licensing subsidiary, The Harry Fox Agency, Inc., covering the use of certain musical compositions in My.MP3. The terms of this license with HFA call for a payment of one-quarter cent each time a song is streamed on demand to a customer from his or her My.MP3 locker, along with a one-time fee per track added to the My.MP3 service. Some of our master recording and musical composition licenses required us to make advance payments toward royalties earned under the respective license, and we may be required to make similar payments in the future. We cannot assure you that such advance payments will be fully recouped over the term of the relevant licenses, if ever, nor can we assure you that we will be able to generate revenues from the My.MP3 service in a manner sufficient to cover our ongoing royalty obligations under our various license agreements. If the revenues generated by the My.MP3 service are not sufficient to offset our ongoing royalty obligations, our business may be harmed substantially. Accordingly, we are not certain that our business model will be successful or that we can sustain revenue growth or be profitable. Also, in the event we are unable to fully recoup any advance payments made under our various license agreements, we may be required to write-off a significant portion of the prepaid amounts. This may

~~Table of Contents~~22

KochTable Entertainmentof and Velvel Records LLC. Additionally, several independent labels have sent us demand letters alleging similar claims. Contents

~~Publisher~~result ~~Lawsuits. On March 14, 2000, two large music-publishing companies, MPL Communications, Inc. and Peer International Corporation, filed a copyright infringement lawsuit against MP3.com~~ in ~~the~~one United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in connection with its My.MP3.com service, made unauthorized copies of approximately 45,000 audio CDs in violation of the Copyright Act, and that MP3.com, in connection with the streaming of audio content to users of the My.MP3.com service, continued to make unauthorized digital phonorecords in violation of the Copyright Act. The complaint further alleges that MP3.com’s actions constituted unauthorized copying and willful infringement of plaintiffs’ copyrights. Plaintiffs seek damages (including statutory damages of up to $150,000 per violation) and injunctive relief prohibiting MP3.com from operating its My.MP3.com service or ~~any~~more ~~other~~future ~~service~~quarters ~~that~~where ~~uses unauthorized~~our ~~reproductions of plaintiffs’ copyrighted works.~~financial results Additionally, Zomba Enterprises, Inc. has filed its own music publishing case against us. In view of the court’s rulings in the UMG case, there is a substantial risk that the issues of infringement, fair use, and willfulness may befall ~~adjudicated against~~below ~~us in these cases with publishers. This would mean that we would only be able to litigate~~ the ~~issue~~expectation of ~~damages.~~analysts ~~A motion has been filed by MPL~~ and ~~Peer to amend their complaint to add~~ ~~many additional copyrighted works to those at issue in the action~~investors. OnAs ~~October 17, 2000, MP3.com, the National Music Publishers’ Association, Inc. and its licensing subsidiary, The Harry Fox Agency, Inc. entered into~~ a ~~preliminary agreement that — if approved by individual HFA music publisher-principals — would permit the use of up to one million musical compositions on the My.MP3.com service. In addition~~result, ~~MP3.com, MPL and Peer agreed to settle~~ the ~~March 14,~~ ~~2000~~trading ~~litigation~~price ~~upon finalization~~ of ~~the preliminary~~our ~~agreement,~~common ~~which requires ratification by individual~~stock ~~HFA~~might ~~music~~decline ~~publisher-principals~~significantly. ~~MP3.com, MPL and Peer agreed to~~ ~~stay the March 14, 2000 litigation until the ratification process is completed. Accordingly, the court stayed all proceedings in this litigation until January 2, 2001.~~

~~The~~Consumers ~~proposed,~~May ~~3-year~~Not ~~licensing~~React ~~arrangement~~Favorably ~~provides~~To ~~that~~The ~~MP3.com~~Current ~~will~~Configuration ~~pay~~Of upOur to thirty million dollars ($30,000,000) to HFA for the benefit of up to 25,000 music publishers and their songwriter partners as part of two equal funds. One fund will be used to pay HFA publisher-principals for past uses of music on the My.MP3~~.com~~ ~~service,~~Service; inWe ~~exchange~~Will ~~for~~Need aAdditional Licenses ~~release~~From ~~from~~A ~~HFA publisher-principals~~Large ~~and~~Number ~~their~~Of ~~affiliated~~Third ~~entities~~Parties ofIn ~~all~~Order ~~claims~~To ~~related~~Enhance to the ~~March 14,~~Attractiveness ~~2000~~Of ~~lawsuit~~The ~~and the use of their compositions on the~~ My.MP3~~.com~~ ~~service.~~Service ~~The~~And ~~other fund will~~Deliver ~~provide~~Some ~~advance payments toward royalties earned under the prospective license~~Content. ~~The~~We ~~terms~~May ofNot ~~the~~Be ~~prospective~~Able ~~license~~To ~~call for~~Secure aA ~~payment~~Sufficient ~~of one quarter cent each time a song is streamed on~~Number Of ~~demand~~Licenses toOn aAcceptable ~~customer~~Terms ~~from~~In ~~his~~Order orTo ~~her~~Provide ~~My.MP3.com~~A ~~locker, along~~Necessary ~~with~~Level aOf ~~one-time fee per track added to the My~~Service.~~MP3.com service.~~

~~Artists’~~In ~~Class Action.~~light Onof ~~April 12,~~our ~~2000~~past litigation proceedings, ~~several~~ ~~artists~~we ~~filed~~have amodified the ~~class~~My.MP3 ~~action~~service ~~lawsuit~~so inthat ~~the~~individual ~~United~~tracks ~~States~~are made available only ~~District~~if ~~Court~~they ~~for~~are ~~the~~covered ~~Southern~~by ~~District~~one of ~~New~~our ~~York~~master ~~against~~recording and ~~MP3~~musical composition licenses.~~com~~ ~~and~~Currently, ~~several~~significantly ~~major~~less ~~recording~~than all ~~companies~~of ~~that~~the ~~claimed~~tracks tocontained ~~own~~ on ~~copyrights~~any inone ~~sound~~CD ~~recordings~~may ~~featuring~~be ~~the~~made ~~artists~~available through My.MP3’s ~~The~~Beam-It and Instant Listening features. In ~~complaint~~order ~~alleges~~to ~~that~~enhance the ~~recording~~attractiveness ~~company~~of ~~defendants,~~the inMy.MP3 ~~their~~service to consumers, ~~separate~~and ~~lawsuit~~relatedly ~~against~~increase ~~MP3.com~~the ~~(filed~~potential onrevenues ~~January 21,~~to ~~2000~~be generated —by ~~see~~the ~~above)~~service, ~~are~~we ~~claiming~~will ~~rights~~need into ~~plaintiffs’~~obtain additional ~~recordings~~licenses ~~that~~covering ~~they~~more docontent ~~not~~from ~~possess.~~record Incompanies, ~~particular~~music publishing companies, ~~the~~performing ~~complaint~~arts societies and other third parties, ~~alleges~~and ~~that~~allowing users outside the ~~recording~~current ~~company~~licensed territories ~~defendants~~to doaccess ~~not~~restricted ~~possess~~content. ~~any~~Although we have obtained ~~copyright~~several ~~protections~~such ~~with~~licenses, ~~respect~~including tosome ~~plaintiffs’~~in ~~pre-1972~~connection ~~published~~with ~~and~~the ~~pre-1978~~settlement ~~unpublished~~of ~~recordings,~~lawsuits doas ~~not~~described ~~possess~~above, the success of ~~right~~the toMy.MP3 ~~digitally~~service ~~transmit~~may ~~plaintiffs’~~require ~~pre-1996~~that ~~recordings~~ we ~~over~~be ~~the~~able ~~Internet,~~to ~~and~~obtain licenses dofrom ~~not~~enough ~~possess~~parties ~~the~~to ~~right~~be able to ~~control~~offer ~~the~~a broad range ~~conversion~~of content. Because of ~~plaintiffs’~~the ~~recordings~~large ~~into~~number ~~mp3~~of ~~files.~~potential ~~The~~parties ~~complaint~~from ~~further~~which ~~alleges~~we ~~that~~must ~~MP3.com~~obtain ~~has~~a ~~used~~license, ~~the~~we ~~names~~may ~~and~~never be able to ~~likenesses~~obtain a sufficient number of ~~plaintiffs~~licenses ~~without~~to ~~their~~allow ~~consent~~us orto ~~authorization~~provide ~~and~~services inthat awill ~~deceptive~~meet ~~manner,~~our incustomers’ ~~violation~~expectations. The difficulty of ~~the~~obtaining ~~federal~~negotiated ~~Lanham Act,~~license agreements with all the ~~New~~various ~~York~~third ~~Civil~~parties ~~Rights~~in ~~Law,~~the ~~and~~fragmented ~~unspecified~~music ~~unfair competition~~recording and publishing ~~misappropriation~~industries ~~laws.~~continues Into ~~their~~pose ~~prayer~~a ~~for~~substantial obstacle ~~relief,~~to ~~plaintiffs~~our ~~ask~~efforts to ~~have~~provide ~~their~~consumers ~~class~~with ~~action~~a ~~certified,~~fully tosatisfactory beproduct. ~~awarded~~In ~~unspecified~~particular, ~~damages~~users ~~and~~of ~~attorneys’~~our ~~fees,~~My.MP3 toservice ~~have~~may decide ~~the~~that ~~defendants~~we ~~enjoined~~are ~~from~~not ~~using~~able ~~plaintiffs’~~to ~~names~~provide ~~and likenesses~~them with access to ~~promote~~enough ~~downloading~~of their music ~~over~~to make the ~~Internet~~service valuable, and tothey may choose not ~~receive~~to ~~declaratory~~subscribe ~~relief~~to ~~regarding~~the ~~plaintiffs’~~fee-based ~~rights~~My.MP3 inservice or to use other ~~their~~methods ~~pre-~~of ~~and~~accessing ~~post-1972~~their ~~recordings~~music altogether. ~~This~~Even ~~case~~if ~~has~~we ~~been~~are ~~dismissed~~able to inobtain ~~its~~a ~~entirety~~sufficient ~~with~~number ~~prejudice~~of atlicenses, ~~the~~those ~~pleadings~~licenses ~~stage~~may not be on favorable terms, and we may have ~~been~~to ~~informed~~increase the amount that we charge consumers for our services in order to cover the ~~plaintiffs~~costs ~~intend~~of these licenses. Consumers may not be willing to ~~appeal~~pay the increased costs, and may discontinue the use of our services.

A Substantial Portion Of Our Revenues For At Least The Next ~~Settlement~~Year ~~Discussions;~~Will ~~Charge~~Come toFrom ~~Earnings~~MPG. ~~MP3.com~~If ~~has~~Other Significant Sources Of Revenue ~~pursued~~Are ~~and~~Not ~~continues~~Developed toOr ~~actively~~If ~~pursue~~This ~~settlement~~Relationship ~~discussions~~Is Prematurely ~~with~~Terminated, ~~the~~Modified ~~various~~Substantially ~~plaintiffs~~Or ~~and~~Is ~~claimants~~Not inRenewed, ~~the~~We ~~cases~~May ~~and~~Not ~~disputes~~Have ~~discussed~~Sufficient ~~above.~~Revenues ~~The~~To Sustain Our Growth And Our Stock Price May Fall.

25 In July 1999, we entered into an advertising, promotion and marketing agreement with MPG. This agreement was amended effective September 2000. As amended, the agreement provides for a significant scheduled decrease in advertising commitments over the next two years, which we may not be able to make up in revenue from other sources. For the quarter ended March 31, 2001, 66.5% of our revenues came from sales of our advertising, promotion and marketing services under this agreement. We anticipate that if we do not develop significant alternative revenue sources, a substantial portion of our revenues for the next year will come from sales under this agreement. Further, MPG’s quarterly advertising commitments are scheduled to decline after December 2001, from approximately $12 million during the fourth quarter of 2001 to approximately $6 million in the first quarter of 2002. Moreover, after December 2002, MPG’s quarterly commitments are scheduled to sharply decrease again, to only 2% or less of the scheduled quarterly commitment for the first quarter of 2001.

~~Table~~ MPG is under no obligation to renew its relationship with us after the current agreement terminates at the end of ~~Contents~~December 2004 or to increase its advertising commitments with us when they significantly decrease under the agreement at the end of December 2001. If MPG does not increase its advertising commitments with us when they significantly decrease under the agreement at the end of December 2001 or renew its relationship after termination of the current agreement at the end of December 2004, and we do not gain alternative revenue sources, our revenues or growth rate will decline. In addition, if the parties agree to terminate or to substantially modify the agreement prior to its scheduled termination, our revenues, growth rate and stock price may also drop dramatically. We may not be able to develop enough additional revenue to offset the loss

23 ~~decision whether to enter into settlement and/or license~~ ~~agreements with each party will be based upon a number of factors~~ related to both the lawsuits and MP3.com’s business in general. We cannot guarantee that we will be able to enter into any additional settlement agreements on terms favorable to MP3.com, if at all, or that any settlement or license agreement will prove beneficial to our business or stockholders. During the quarter ended June 30, 2000, we recorded a charge for litigation and copyright matters of $150.0 million. The charge for litigation and copyright matters represented MP3.com’s estimate of the total costs to be incurred in connection with the resolution of the various litigation and copyright matters associated with the My.MP3.com service, including the lawsuits filed by major recording companies and other parties. Copyright issues associated with the My.MP3.com Service also include but are not limited to publishing rights, non-major label content, and legal and advisory fees. This charge did not reflect or include any amounts paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3.com service, or any additional amounts that might be payable under the most-favored-nations provisions described above. This charge reflected management’s expectations as of July 26, 2000, and was based on currently available information as well as significant assumptions made by management regarding the litigation.

DuringTable the quarter ended September 30, 2000, we recorded an additional charge for litigation and copyright matters of $20.0 million. This additional charge reflects incremental costs that management estimates will be incurred in connection with the resolution of the various litigation and copyright matters associated with the My.MP3.com service. The additional charge and accrual reflect management’s expectations as of the date of this quarterly report and is based on currently available information as well as significant assumptions made by management regarding the various litigation and copyright matters. Although we believe that the expectations and assumptions reflected in this additional charge are reasonable, we cannot guarantee that future events or results will conform to such expectations or assumptions. If these expectations and significant assumptions prove to be erroneous in light of future events, the actual amounts incurred by MP3.com to resolve all matters could be materially different than those recorded as of September 30, 2000. Contents

~~Cash~~of ~~payments~~revenues ~~for~~that ~~the~~is ~~settlements~~scheduled ~~described~~to ~~above~~take ~~and~~place ~~other~~under the MPG ~~payments~~agreement, ~~have~~or ~~reduced~~that ~~the~~would ~~cumulative~~result ~~amount~~in ~~reserved~~the asabsence, aor ~~result~~the significant modification, of ~~these~~our ~~charges~~agreement with MPG. Moreover, the other revenue sources we may develop will be sufficient to maintain ~~$116~~our past rate of revenue growth.~~9 million~~ asIf any of ~~September 30,~~the ~~2000.~~aforementioned ~~Amounts~~risks ~~payable~~cause ~~for~~our ~~past~~revenues ~~issues~~or inour ~~connection~~revenue ~~with~~growth rate ~~the~~to be substantially reduced, we may not have sufficient ~~HFA/Peer/MPL~~revenues ~~agreement~~to ~~described~~support ~~above~~our ~~are~~business, ~~included~~we inmay ~~the~~never become profitable ~~remaining~~and ~~amount~~the ~~reserved~~market asprice of ~~September 30,~~our ~~2000~~stock may fall.

~~Although~~We ~~MP3.com~~Face ~~has~~Tremendous ~~obtained~~Competition ~~license~~For ~~agreements~~Online ~~permitting~~Users ~~the~~Of ~~use~~File-Sharing ofApplications ~~recordings~~And ~~from~~Web ~~BMG Entertainment, Warner Music Group, Sony Music and EMI, we cannot guarantee that MP3~~Sites.~~com will be able~~ ~~to secure similar license agreements from any other recording~~ company. Similarly, MP3.com has not yet secured any final publishing license or other affirmative clearance (whether by litigation or otherwise) to utilize within the My.MP3.com service the compositions embodied in the recordings owned by any recording company (including BMG Entertainment, Warner Music Group, Sony Music and EMI), nor can we guarantee that any such license or clearance will ever be obtained. If a final publishing license or other affirmative clearance to utilize such compositions is not obtained, our ability to utilize in the My.MP3.com service recordings from any recording company could be materially and adversely affected.

~~Class Action~~There ~~Lawsuits.~~are Wea number of so-called “file-sharing” applications and ~~certain~~web ofsites ~~our~~which allow users to “swap” ~~employees~~music files online such as Napster, ~~officers~~Freenet, Napigator and Gnutella. ~~directors~~Although ~~have~~the ~~been~~legality ~~named~~of assuch ~~defendants~~applications is currently in ~~several~~question, ~~lawsuits~~these ~~alleging~~applications ~~violations~~boast large numbers of online ~~the~~users ~~federal~~which ~~securities~~ far ~~laws.~~exceed ~~The~~our ~~complaints,~~current ~~which~~user ~~were~~base. ~~filed~~The ~~between~~alleged ~~September 19,~~popularity ~~2000~~of ~~and~~these ~~September 29,~~applications ~~2000~~and inweb ~~the~~sites ~~United~~may continue indefinitely ~~States~~whether ~~District~~or ~~Court~~not ~~for~~such ~~the~~applications ~~Southern~~and/or ~~District~~web ~~of California,~~sites ~~each~~may ~~purport~~be todeemed beillegal ~~brought~~in oncertain ~~behalf~~jurisdictions. ofMoreover, ain November ~~class~~2000 ofNapster ~~stockholders~~Inc. ~~The~~ ~~complaints~~entered ~~allege~~into ~~that~~a wepartnership ~~and~~with Bertelsmann ~~the~~AG ~~other~~to ~~the~~potentially ~~defendants~~develop a record industry-friendly ~~violated~~version ~~the~~of ~~federal~~its ~~securities~~file-sharing ~~laws~~application. byThe ~~issuing~~success ~~materially~~of ~~false~~these relationships and ~~misleading~~the ~~statements~~continued development and ~~failing~~proliferation toof file-sharing ~~disclose~~applications ~~material information~~in ~~regarding~~general ~~our~~may ~~My.MP3.com~~serve ~~service~~to ~~and~~decrease the ~~litigation~~ ~~surrounding~~number ~~the~~of ~~service.~~persons ~~The~~that ~~complaint~~turn ~~does~~to ~~not~~our ~~specify~~company ~~the~~to obtain and listen ~~dollar~~to ~~amount~~music, ofand ~~damages~~may ~~alleged~~harm our overall business.

~~Derivative~~Our ~~Lawsuits~~My. ~~Between September 14, 2000 and September 18, 2000, certain stockholders of~~ MP3~~.com~~ ~~filed shareholder~~Licenses ~~derivative~~Could ~~suits~~Result ~~against~~In ~~MP3.com~~Operational ~~and certain of its~~Complexity ~~employees,~~That ~~officers~~May ~~and~~Divert ~~directors~~Resources inOr ~~the~~Make ~~Superior~~Our ~~Court~~Business ofMore ~~the State~~Expensive ~~of California, County of San Diego. These complaints allege~~To ~~various statutory and common law claims relating to the My~~Conduct.~~MP3.com service.~~

26 The large number of licenses which we have to maintain also creates operational difficulties in connection with tracking the rights that we have acquired and the royalty payments that we must pay. For example, we have modified the My.MP3 service so that individual tracks are made available only if they are covered by one of our master recording and musical composition licenses. We are largely dependent on third party information when determining whether a track is covered by a license. Third parties erroneously may indicate themselves as the appropriate rights holder with respect to a particular track, or we may misinterpret data sent to us by our numerous licensors. As a result, we may inadvertently activate a track in the My.MP3 service that is not covered by one of our licenses, and accordingly may face litigation related to that track. In addition, our licensing agreements typically allow the third party to audit our royalty tracking and payment mechanisms to ensure that we are accurately reporting and paying the royalties owed. If we are unable to accurately track the numerous parties that we must pay in connection with each delivery of a musical work and deliver the appropriate payment in a timely fashion, we may risk termination of certain licenses.

~~Table~~We ofMay ~~Contents~~Encounter Problems With Our Copyright Licenses, Which May Negatively Impact Our Ability To Provide Our Services.

We ~~cannot~~have ~~assure~~significant ~~you~~licensing ~~that~~arrangements wewith ~~will~~major berecord labels ~~successful~~and inmusic ~~ultimately defending~~publishers ~~any~~that ofwere ~~these~~only ~~lawsuits~~recently entered into, and wewere ~~may~~structured bein ~~required~~the tocontext ~~pay~~of litigation ~~license~~settlements ~~fees~~ or ~~substantial~~judgments ~~damages,~~rather ~~including~~than ~~statutory,~~in the pursuit of mutual ~~punitive~~business orobjectives ~~other~~on ~~damages~~an ~~that~~arms-length ~~far~~basis. ~~exceed~~As ~~the~~a ~~resources~~result, ~~and~~we may ~~overall~~face ~~market~~problems ~~capitalization~~trying ofto ~~MP3.com,~~run inour ~~which~~business ~~event~~under wethese ~~might~~agreements, which may have toterms ~~significantly~~that ~~limit~~are orless ~~terminate~~favorable ~~our~~to ~~business~~us than would ~~operations,~~have ~~particularly~~been ~~because~~the ~~our~~case ~~business~~had isthey ~~not~~been ~~yet profitable.~~negotiated Atoutside of the litigation ~~rate~~context. ofOur ~~$25,000~~ability ~~per~~to ~~work~~utilize, ~~our~~for ~~aggregate~~example, ~~potential~~recordings ~~liability~~from ~~resulting~~recording ~~from~~companies ~~all~~in ofthe ~~our~~My.MP3 ~~copyright~~service could ~~litigation~~be ~~proceedings~~materially ~~could~~and ~~exceed~~adversely ~~billions~~affected ofby ~~dollars.~~current Iflitigation and ~~successful~~future settlements, ~~any~~and ~~one~~also ofby ~~these~~difficulties ~~lawsuits~~involved ~~could~~with operating ~~seriously~~under ~~harm~~ our existing settlement and licensing ~~business~~arrangements. byOver ~~forcing~~time, uswe will be forced to ~~cease~~periodically ~~providing~~renew these ~~services~~licenses in order to continue to provide our My.MP3 ~~consumers~~service. orWhen ~~requiring~~the uscurrent tolicenses ~~pay~~expire ~~monetary~~we ~~damages.~~may ~~Even~~not ifbe able to ~~unsuccessful,~~secure renewals of these ~~lawsuits~~licenses ~~still~~on ~~can~~favorable ~~harm~~terms, ~~our~~or ~~business~~at ~~severely~~all, and bythe ~~damaging~~other ~~our~~parties ~~reputation,~~may ~~requiring~~demand usgreater toroyalties ~~incur~~as ~~legal~~a condition ~~costs~~of renewal. Also, we may encounter further disputes ~~lowering~~with ~~our~~the ~~stock~~other ~~price~~parties ~~and~~to ~~public~~these ~~demand~~licenses ~~for~~as ~~our~~they ~~stock,~~are ~~and~~performed ~~diverting~~because ~~management’s~~they ~~attention~~may ~~away~~contain ~~from~~provisions ~~our~~that ~~primary~~are difficult to ~~business~~implement, ~~activities~~create disagreement or are economically unattractive when applied in ~~general~~the regular course of operating our business.

~~Costs Related to Acquisition Activities~~24

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

~~Amortization~~The ofUnited ~~Deferred~~States ~~Compensation~~Music Industry Is Extremely Litigious; We May Continue To Be Engaged In Litigation Even After All Copyright Issues Related To The My.MP3 Service Are Resolved. Expenses Related to This Ongoing Litigation Could Severely Impact Our Financial Condition, And Could Also Result In The Discontinuation Or Interruption Of Services To Our Consumers.

~~During~~The ~~the~~music ~~nine~~industry ~~months~~in ~~ended~~the ~~September 30,~~United ~~2000,~~States ~~total deferred~~is ~~compensation~~generally ofregarded ~~$7,796,000~~as extremely ~~was~~litigious ~~amortized~~in tonature ~~expense~~ compared to ~~$15~~other industries. As a result,~~833,000~~ ~~during~~in the ~~same~~future ~~period~~we ~~one~~may ~~year~~be ~~ago.~~engaged in litigation with ~~Deferred~~others ~~compensation~~in isthe ~~being~~music ~~amortized~~industry, ~~over~~including ~~the~~those ~~vesting~~entities ~~period~~with whom we have ongoing license arrangements. For example, some of the major ~~relevant~~recording ~~granted~~companies ~~stock~~that ~~options,~~settled ~~which~~their isportion ~~generally~~of ~~four~~the UMG ~~years.~~case ~~The~~with ~~decrease~~us have asserted in writing that they believe the amount ~~amortization~~paid isby ~~primarily~~MP3.com ato ~~result~~UMG in satisfaction of the Court’s judgment, together with the ~~accelerated~~concurrent ~~amortization~~issuance ~~method~~of warrants ~~(as~~to ~~provided~~UMG, ~~for~~triggered additional payments to them under the “most favored nations” clause in ~~FASB~~their settlement ~~Interpretation~~agreement Nowith MP3.com. ~~28)~~Although we do not believe they are entitled to ~~amortize~~any ~~deferred~~such ~~compensation~~additional payments, ~~which~~we cannot assure you ~~resulted~~that we will be successful in ultimately concluding this matter in an amicable fashion, or defending any resulting lawsuit. As a result, ~~greater~~we ~~amount~~may ofbe ~~amortization~~forced ~~expense~~to defend one or more lawsuits on this and other issues in the ~~earlier~~ ~~years~~future, and in fact may be involved in a number of litigation proceedings with the ~~amortization~~same ~~period~~group of related plaintiffs. ~~Additionally,~~These welawsuits could harm our business severely by ~~recognized~~damaging ~~the~~our ~~intrinsic~~reputation, ~~value~~requiring ofus ~~$369~~to incur legal costs,~~000~~ lowering ofour stock~~-based compensation~~ ~~during~~price ~~the~~and ~~nine~~public ~~months~~demand ~~ended~~for ~~September 30~~our stock, ~~1999~~and diverting ~~that~~management’s ~~was~~attention away from our primary business activities in general. We have not ~~present~~recorded ~~during~~any ~~the~~charge related ~~same~~to ~~period~~claims for additional “most favored nations” payments as of ~~2000~~March 31, 2001.

~~Interest~~Because ~~Income~~Our My.MP3 Licenses Cover Limited Geographic Regions, We ~~Net~~May Encounter Copyright Problems Outside The Licensed Territory, Which May Negatively Impact Our Ability To Provide Our Services.

~~Interest~~Our ~~income~~My.MP3 ~~(net~~licenses ofare ~~interest~~geographically ~~expense)~~limited ~~during~~in ~~the~~scope ~~nine~~and ~~months~~do ~~ended~~not ~~September 30~~authorize us, ~~2000~~by ~~was~~their ~~$14~~own terms,~~833,000~~ ~~compared~~ to provide our My.MP3 and ~~$4,836,000~~certain ~~during~~other ~~the~~MSP-related ~~same~~services ~~period~~on a ~~year~~worldwide ~~ago~~basis. ~~Interest income~~We ~~during~~attempt ~~the~~to ~~quarter~~restrict ~~ended~~persons ~~September 30,~~located ~~2000~~outside isthe ~~directly~~licensed ~~related~~territories tofrom ~~interest~~accessing ~~earned~~restricted oncontent ~~cash~~within the My.MP3 service. However, ~~cash~~because ~~equivalent~~the ~~balances~~Internet ~~and~~cannot be constrained by ~~marketable~~any ~~securities~~geographic ~~associated~~limitations we are unable to ensure with ~~proceeds~~any certainty ofthat anindividuals ~~aggregate~~outside ofthe territory will not be able ~~approximately~~to ~~$426~~access restricted content. As a result,~~300,000~~ ~~during~~we ~~1999~~may ~~from~~face copyright ~~(i)~~ litigation in countries outside the licensed ~~issuance~~territories stemming from the ability of ~~common~~foreign ~~stock~~users into ~~connection~~access restricted content with the My.MP3 service.~~com’s~~ We cannot assure you ~~initial~~that ~~public~~we ~~offering~~would inbe ~~July~~successful ~~1999,~~in ~~(ii) the~~ultimately ~~exercise~~defending any of these ~~stock~~lawsuits, ~~options~~ and awe ~~warrant~~may ~~for~~be ~~the~~required ~~purchase~~to pay license fees or damages as a result of ~~common~~any ~~stock~~such litigation, ~~and~~or we might have to significantly ~~(iii)~~ limit or terminate the ~~issuance~~My.MP3 service. If successful, any one of ~~Series A~~these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, Bthese lawsuits still can harm our business severely by damaging our reputation, ~~and~~requiring Cus ~~convertible~~to incur legal ~~preferred~~costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

~~Impairment~~We ofAre ~~Strategic~~Competing ~~Investments~~In A New Market Which May Not Develop Or Where We May Fail To Gain Market Acceptance For Our Products And Services.

~~During~~The ~~the~~market ~~nine~~for ~~months~~online ~~ended~~music ~~September 30,~~promotion ~~2000~~and distribution is new and rapidly evolving. As a result, ~~MP3~~demand and market acceptance for our products and services expose us to a high degree of uncertainty and risk.~~com~~ We have historically and are now largely ~~recorded~~attempting to capitalize on a ~~reserve~~talent pool of ~~$40~~artists not currently served by the traditional recording industry. We cannot assure you that consumers will continue to be interested in listening to or purchasing music from our artists or that the traditional music industry will not successfully serve these artists in the future. If this new market fails to develop,~~670~~ develops more slowly than expected or becomes saturated with competitors,~~000~~ ~~for~~or our products and services do not achieve or sustain market acceptance, our business could be harmed. We believe the ~~estimated~~future ~~impairment~~popularity of downloadable digital music will depend, ~~its~~in ~~strategic~~part, ~~investment~~on ~~portfolio~~the availability of portable devices to store and ~~short-term~~replay ~~investments~~this music. In addition, we are attempting to ~~The~~develop ~~impairment~~new isfeatures ~~associated~~and ~~with~~services afor ~~decrease~~our inconsumers ~~fair~~based ~~value~~on ofour ~~certain~~My.MP3 ~~strategic~~and ~~investments~~other MSP-related services to allow consumers additional ways to access, manage and anlisten ~~investment~~to ~~classified~~their asmusic on ~~short~~any web-~~term~~enabled ~~investments~~device ~~where~~or ~~the~~application. ~~decrease~~These inefforts may not be successful and may meet significant consumer and industry resistance. To the ~~fair~~extent ~~market~~that consumer acceptance or ~~value~~distribution of ~~the~~these ~~stock~~portable isdevices ~~considered~~and/or ~~other~~MSP ~~than~~services ~~temporary.~~is

~~Provision for Income Taxes~~25

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

~~Minority~~ delayed ~~Interest~~or inthese ~~Losses~~devices ofor anservices ~~Unconsolidated~~are not available at ~~Subsidiary~~affordable prices, our market and thus a portion of our revenues, may not grow at a sufficient pace and our business could ultimately be harmed.

~~Minority~~As ~~interest~~Currently inContemplated, ~~the~~The ~~losses~~Success ofOf anOur ~~unconsolidated~~Business ~~subsidiary~~Model ~~during~~Depends ~~the~~On ~~nine~~Our ~~months~~Ability ~~ended~~To ~~September 30,~~Generate ~~2000~~Substantially ~~was~~Increased ~~$1,668,000~~Revenues ~~compared~~From toSubscription-Based ~~zero~~Products ~~for~~And ~~the~~Services ~~same~~Such ~~period~~As Our aSubscription ~~year~~Channels ~~ago~~And My.MP3 ~~The~~Services. ~~increase in minority interest~~

27 In May 2000, our first subscription channel, offering classical music to our consumers, was introduced. Since then, we have also launched a children’s music channel, and we intend to pursue the creation of additional channels. When we re-introduced our My.MP3 service, we included a subscription-based alternative to the free service. The creation of these services is costly, both in terms of the cost of the required licenses and in the labor and systems expenses we incur to develop and maintain them. Consumers, who are accustomed to purchasing CDs and then listening to them for free, may not be willing to pay for such music again on a subscription basis. Previous efforts by other companies to convince consumers to adopt a subscription-based music delivery model have been relatively unsuccessful when compared to traditional methods of music distribution. If consumers resist our subscription-based programs, we may never generate sufficient revenues from our subscription channels or other subscription-based services to overcome the high cost of providing such services.

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

inThe market for the ~~loss~~online promotion and distribution of anmusic and ~~unconsolidated~~music-related ~~subsidiary~~products is ~~directly~~competitive. ~~related~~Barriers to entry on the Internet are relatively low, and we expect competition to increase ~~mp3radio~~significantly in the future.~~com~~ Although we have secured licenses from record companies and other third parties for some of the content that we deliver, these licenses are generally non-exclusive. Moreover, much of our ~~former~~technology, ~~joint~~including ~~venture~~our Beam-it ~~with~~and ~~Cox~~Instant ~~Interactive~~Listening services, subscription channels, ~~Media~~the business music services and web site technology and software, ~~Inc.~~are currently not protected by patents or other protection which would prevent third parties, including record companies and ~~reflects~~other ~~expenses~~rights ~~incurred~~holders, tofrom ~~grow~~duplicating the ~~mp3radio~~technology and providing services identical to ours.~~com~~ ~~business~~Although ~~and~~we have applied for patents with regard to ~~transition~~a ~~the~~number of these and other core technologies of our business, tonone ~~San~~of these patents ~~Diego~~have yet been issued, ~~California~~nor is there any guarantee that they will ever be issued in the future. We face competitive pressures from numerous actual and potential competitors, many of which have longer operating histories, greater brand name recognition, larger consumer bases and significantly greater financial, technical and marketing resources than we do.

InFor ~~April 2000~~example, ~~MP3.com~~Sony ~~agreed~~Music toEntertainment ~~purchase~~and ~~the~~Universal ~~remaining~~Music ~~53.5%~~Group, ~~ownership~~two of ~~mp3radio.com,~~the aworld’s ~~joint~~largest ~~venture~~music ~~with~~companies, ~~Cox Interactive~~recently ~~Media,~~announced ~~Inc.,~~the ~~and~~roll-out ~~paid~~of ~~approximately~~a ~~$4 million~~new insubscription ~~cash.~~service, called ~~During~~Duet, on the ~~transition~~Internet ~~period~~portal ~~ending~~Yahoo!. ~~June 30,~~In ~~2000~~addition, ~~the~~Warner ~~costs~~Music Group, ofBMG ~~relocating~~Entertainment ~~the~~and ~~joint~~EMI ~~venture’s~~Recorded ~~operations~~Music, tothe ~~San~~other ~~Diego~~three ~~were~~major ~~shared~~music ~~pro~~companies, ~~rata~~announced ~~based~~the ~~upon~~formation ~~the~~of ~~parties’~~a ~~existing~~similar ~~ownership~~service, ~~percentages~~called ~~and~~MusicNet, ~~included~~offered inthrough ~~minority~~America ~~interest~~Online ~~in losses~~and elsewhere. ofBoth anservices ~~unconsolidated~~are ~~subsidiary.~~expected ~~The~~to ~~acquisition~~offer ~~was~~music ~~completed~~for ~~during~~downloading ~~the~~and ~~third~~streaming ~~quarter~~for ofa ~~2000~~monthly ~~and~~fee. ~~was~~There ~~accounted~~is ~~for~~also ~~under~~ the ~~purchase~~possibility ~~method~~that ofone ~~accounting.~~combined ~~The~~service ~~excess~~would ~~purchase~~offer ~~price~~music ~~over~~from all ~~fair~~five ~~value~~ of ~~net~~these ~~assets~~music ~~acquired~~companies. ~~was~~In ~~generally~~addition, ~~allocated~~MTVi ~~to assembled work force; URL’s~~Group, ~~trademarks and names;~~ a ~~radio~~music ~~station~~entertainment ~~agreement;~~company, and ~~goodwill.~~web ~~The~~site ~~excess~~operator ~~purchase price over~~RioPort.com ~~fair~~announced ~~value~~that ofthey ~~the~~will ~~assets~~offer ~~acquired~~paid ofmusic ~~$4.0~~downloads ~~million~~by ~~was~~song ~~allocated~~from toall ~~certain~~five ~~assets~~major ~~and~~music ~~amortized over twelve to twenty-four months using the straight-line method~~companies.

~~Liquidity~~ We cannot assure you that the web sites, software or services offered by our existing and ~~Capital~~potential ~~Resources~~competitors will not be perceived by consumers, artists, talent management companies and other music-related vendors or advertisers as being superior to ours. We also cannot assure you that we will be able to maintain or increase our web site traffic levels, purchase inquiries and number of click-throughs on our online advertisements or that competitors will not experience greater growth in these areas than we do. Increased competition could result in advertising price reduction, reduced margins or loss of market share, any of which could damage the long-term or short-term prospects of our business.

~~Overview~~26

ToTable date, MP3.com has generated cash from internal operations, proceeds from the sale of convertible preferred stock, the proceeds from its initial public offering and, to a lesser extent, the exercise of stock options and equipment financing through a line of credit. As of September 30, 2000, MP3.com had approximately $235,986,000 in cash, cash equivalents and marketable securities. Contents

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

~~Net~~Although ~~cash~~our ~~used~~business inmodel ~~operating~~contemplates ~~activities~~multiple ~~during~~sources of revenue, we anticipate that in the ~~nine~~foreseeable ~~months~~future we will depend substantially on revenue from advertising. During the quarter ended ~~September~~March 3031, ~~2000~~2001, ~~was~~revenue from advertising accounted for 92.0% of our net revenues, an increase of approximately ~~$79~~9% from the comparable quarter one year ago. We currently depend on a small group of customers for our revenue from advertising. During the first quarter of 2001,~~715~~ one customer accounted for approximately 66.5% of net revenues,~~000~~ and our top ten customers accounted for approximately 83.8% of net revenues. We expect that most of our revenues will continue to be derived from third party advertising agreements. If any of our important customers were to leave us, our business could be harmed. ~~consisting~~Similarly, ~~primarily~~our revenues may also be adversely affected by the future insolvency of individual major customers or multiple other customers within the ~~following~~volatile Internet and technology industries. If we do not increase revenue from online advertising, our business may not grow or survive. Increasing our revenue from online advertising depends largely on our ability to:

• ~~net~~conduct ~~loss~~successful ofselling ~~approximately $243,905,000; • amortization of deferred compensation of approximately $7,846,000; • depreciation of property~~ and ~~equipment and amortization of goodwill of approximately $5,513,000; • amortization of stock based~~ marketing ~~costs~~efforts ofaimed ~~approximately~~at ~~$3,142,000~~advertisers; • ~~stock-based~~increase ~~charges associated with~~ the ~~acceleration~~size of ~~stock~~the ~~option~~MP3.com ~~vesting~~audience ofby ~~approximately~~increasing ~~$6,471,000;~~both •our ~~impairment~~artist ~~of strategic investments of $40,670,000; • a charge for litigation~~ and ~~copyright~~consumer ~~matters of $170,000,000~~bases; • an increase inor ~~prepaid~~at ~~expenses~~least ~~and~~maintain ~~other~~the ~~assets~~amount of ~~approximately~~revenues ~~$2,280,000;~~per •advertisement ~~a decrease~~ in ~~accounts~~the ~~payable~~face of ~~approximately $1,276,000; •~~ a ~~net~~recent ~~decrease~~industry-wide decline in ~~accrued~~online ~~expenses~~advertising ~~and~~prices ~~accrued amounts for copyright claims of approximately $41,246,000;~~ and ~~• a decrease in deferred revenue of approximately $25,530,000.~~use;

~~Investing~~• ~~Activities~~ increase the size of our sales force, where appropriate; • target advertising to appropriate segments of our audience; and • measure accurately the size and demographic characteristics of our audience.

~~Net~~Our ~~cash~~failure ~~provided~~to byachieve ~~investing~~these ~~activities~~objectives ~~during~~could ~~the~~reduce ~~nine~~our ~~months~~revenue ~~ended~~from ~~September 30,~~online ~~2000~~advertising ~~was approximately $71,641,000, consisting primarily of net maturities of marketable securities of $167,176,000 reduced by property~~ and ~~equipment~~ultimately ~~expenditures~~prevent of us ~~$10,620,000, purchases of strategic equity investments of~~from ~~approximately~~generating ~~$39,738,000, issuance of a note receivable of $4,000,000, prepaid multimedia content royalties of $35,500,000, and~~ the ~~acquisition~~revenues ofwe ~~the remaining 53~~expect.~~5% of mp3radio.com of~~ ~~$3,816,000.~~

28The Market For Online Advertising Is Currently Undergoing An Industry-Wide Decline In Prices, Usage And Perceived Desirability Which May Cripple Our Ability To Generate Revenue.

~~Table~~ Standard industry-wide rates for online advertising have declined during the past year, and many advertising customers are using the Internet less for advertising, as well as demanding lower rates per advertisement. Our revenues depend heavily on online advertising and our company may not be able to survive a sustained continuation of ~~Contents~~this industry-wide decline in prices and the decreased desirability of online advertising in general. There has also been a decline in the number of viable “dot-com” businesses and technology companies in general, and the private and public equity markets on which those companies previously relied for capital have become increasingly unreceptive. As a result, even those companies that remain viable can be expected to continue to spend less on advertising, which may make it increasingly difficult for us to meet existing revenue expectations.

~~Financing~~Many ~~Activities~~Of Our New Business Initiatives Are Untested And May Not Be Successful. Our Syndicated Radio, Business Services Or Infrastructure Licensing Initiatives May Not Succeed Due To Technological Challenges, Intense Competition And The Type Of Music That We Deliver.

~~Net~~During ~~cash~~2000 ~~used~~we inlaunched ~~financing~~several ~~activities~~new ~~during~~business ~~the~~initiatives, ~~nine~~which are ~~months~~untested and may not be successful. We expect to launch new ~~ended~~initiatives ~~September 30~~in the future, ~~2000~~such ~~was~~as ~~approximately~~label $1marketing and promotion,~~907~~ which will be similarly challenging. Several of these initiatives are based on a subscription model,~~000,~~ which may not ~~consisting~~successfully ~~primarily~~generate ofrevenue. ~~the~~We ~~repurchase~~also ofmay ~~common~~not ~~stock~~successfully extend ~~from~~our anbusiness to serve personal Internet devices or new ~~executive~~international ~~officer~~regions. ~~offset~~These bynew ~~the~~initiatives ~~exercise~~require significant investment of ~~stock~~resources ~~options~~and time that could strain our resources beyond capacity. We may never realize benefits sufficient to offset such investment.

~~MP3.com~~For ~~has~~example, nowe ~~material~~hope ~~financial~~to ~~commitments.~~grow ~~MP3.com~~our ~~expects~~syndicated toradio and business music ~~substantially~~services ~~increase~~divisions ~~expenditures~~into ~~for~~significant ~~the~~revenue-generating components ~~following:~~of our business. However, our ability to syndicate and sell content to radio

• computer equipment and furniture and fixtures associated with new employees and facility expansion; • web site computer equipment; • bandwidth and networking equipment and infrastructure; • additional sales and marketing employees; • equipment and additional employees related to product development; • increased advertising, promotion and branding efforts; • investments in entities with whom we have collaborative arrangements; and • development and acquisition of content.27

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

~~Future~~ businesses ~~Capital~~or ~~Requirements~~provide a comprehensive music solution to retail and other business establishments may be significantly limited by existing competition, which can be intense, from current content providers in these industries. The business music industry is currently served by competitors who have a substantially longer track record and operating history, have established distribution channels and production facilities, and are able to provide music by well-known artists. These companies include Muzak LLC, AEI Music Network, Inc., Music Choice, Play Network Inc., and DMX Music, Inc., as well as Internet-driven competitors such as American Music Environments, Inc. We may not be able to compete with these companies effectively. In addition, our ability to deliver music to business establishments is dependent upon each location of the business having a fast, reliable connection to the Internet. Most retail establishments connect to the Internet through a standard telephone line using a dial-up connection and a modem. This type of connection may not be able to support the implementation of our business music delivery platform in many businesses. Also, we may encounter resistance from both radio stations and retail business establishments to utilizing our content since we feature content from lesser-known artists that is usually available for free streaming or download on our web site. In addition, most of the potential customers for our business music services already have entered into long term contracts with other providers that are not easily terminated. This is likely to result in extremely long sales cycles, which may negatively impact our ability to attract and sell our business music services. These divisions may not be able to attract a sufficient number of customers in order to be significant sources of revenues, and we may never realize the revenue levels that we have projected for this services. As a result, the financial performance of our company may be harmed.

~~MP3.com~~Our ~~believes~~infrastructure ~~that~~licensing initiative is in its ~~cash~~infancy, and our ~~cash~~ability ~~equivalent~~to ~~balances~~provide ~~and~~a comprehensive technology infrastructure ~~marketable~~solution ~~securities~~to ~~will~~other bebusinesses ~~sufficient~~may tobe ~~satisfy~~significantly ~~its~~limited ~~cash~~by ~~requirements~~existing ~~for~~competition. atThe ~~least~~business ~~the~~music ~~next~~industry ~~12 months,~~is ~~including~~currently ~~certain~~served ~~litigation~~by ~~settlement~~competitors ~~payments~~who ~~that~~have ~~may~~a besubstantially ~~required~~longer intrack ~~connection~~record ~~with~~and ~~claims~~operating ~~related~~history toand ~~our~~have Myestablished customer relationships.~~MP3.com~~ ~~service~~We may not be able to ~~the~~compete with these ~~extent~~companies weeffectively. ~~have~~This ~~accrued~~initiative ~~such~~may ~~amounts~~not asbe ofable ~~September 30,~~to ~~2000.~~attract ~~MP3.com~~a ~~intends~~sufficient tonumber ~~invest~~of ~~its~~customers ~~cash~~ in ~~excess~~order ofto ~~current~~be a ~~operating~~significant ~~requirements~~source inof ~~short-term~~revenues, ~~interest-bearing,~~and we may never realize revenue ~~investment-grade~~from ~~securities~~infrastructure licensing.

ToRecord ~~the~~Companies ~~extent~~With ~~MP3.com’s~~Whom ~~net~~We ~~revenues~~Enter ~~increase~~Into inMarketing ~~the future,~~And Promotional ~~MP3.com~~Arrangements ~~anticipates~~May ~~significant~~Choose ~~increases~~Not inTo ~~its~~Renew ~~working capital~~Their Arrangements ~~requirements~~With ~~to finance higher relative levels of associated accounts receivable~~Us, ~~unbilled~~If ~~receivables and other assets~~Any, ~~offset~~ byAnd ~~increases~~We inMay ~~accounts~~Lose ~~payable~~The ~~and other liabilities.~~Promotional ~~However,~~Value ~~MP3.com~~Of ~~does~~Being ~~not~~Able ~~expect~~To ~~that~~Feature ~~the~~Their ~~increases~~Well-Known inArtists ~~accounts payable~~On ~~and other liabilities will offset the increases in~~Our ~~accounts~~Web ~~receivable, unbilled receivables and other assets~~Site.

~~MP3.com~~In ~~may~~December ~~need~~2000, towe ~~raise~~entered ~~additional~~into ~~capital~~an ifagreement itwith ~~expands~~a ~~more~~major ~~rapidly~~label ~~than~~record ~~initially~~company ~~planned,~~ to ~~develop~~provide, ~~new~~among orother ~~enhanced~~things, targeted ~~products~~promotional ~~and/or~~ services, toin ~~pay~~exchange ~~any~~for ~~damage~~the ~~awards~~right orto ~~settlement~~feature ~~costs~~well-known ~~related~~artists toon our ~~current~~web ~~litigation~~site. ~~proceedings,~~We tointend ~~respond~~ to ~~competitive~~enter ~~pressures~~into ~~or to acquire complementary products,~~more ~~content,~~such ~~businesses~~agreements orin ~~technologies~~the future. If ~~additional funds are raised through~~ the ~~sale~~record ofcompanies ~~equity or convertible debt securities,~~decide that ~~the~~our ~~percentage~~services ~~ownership~~are ofnot ~~MP3.com’s~~as ~~stockholders~~valuable ~~will~~as ~~be reduced,~~an ~~its~~alternative ~~stockholders~~means ~~may experience additional dilution and~~of ~~these~~marketing ~~securities may have rights, preferences~~ or ~~privileges senior~~develop tosubstantially ~~those~~equivalent ~~of its stockholders. There can be no assurance~~promotional ~~that~~abilities ~~additional~~themselves, ~~financing~~then ~~will~~they bemay ~~available~~choose atnot ~~all or on terms favorable~~ to ~~MP3.com.~~sign ~~If adequate funds are not available~~ or ~~are~~renew ~~not~~such ~~available on acceptable terms~~agreements, ~~MP3.com’s~~and ~~ability~~we towill ~~fund~~ lose ~~its~~the ~~expansion,~~additional ~~take advantage of unanticipated opportunities,~~exposure ~~develop~~associated orwith ~~enhance~~being ~~products~~able ~~or services, pay unexpected damage awards or otherwise respond~~ to ~~competitive~~feature ~~pressures~~well-known ~~could be~~artists, ~~significantly~~consequently ~~limited.~~harming ~~MP3.com’s~~our business ~~may be harmed by these limitations~~.

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

InSince ~~July~~our ~~1999~~inception in March of 1998 until recently, we ~~entered~~have experienced ~~into~~extended anperiods ~~agreement~~of ~~with~~rapid ~~Montaigne~~expansion in our web site ~~Participations~~traffic, Etpersonnel, ~~Gestion~~facilities ~~(“MPG”)~~and ~~(formally~~infrastructure. ~~named~~For example, ~~Groupe~~the ~~Arnault)~~number ~~under~~of ~~which~~monthly ~~MPG~~page ~~committed~~views toon ~~purchase~~our anweb site increased ~~aggregate~~approximately of18% ~~$150 million~~from inMarch ~~advertising,~~2000 ~~promotion~~to ~~and~~December 2000, but ~~marketing~~decreased ~~services~~modestly by approximately 1% from usDecember ~~over~~2000 ~~three~~to March ~~years~~2001. In ~~July~~addition, our employees increased from eight on December 31, 1998, to 274 on December 31, 1999, weto 308 ~~received~~on ~~prepayments~~December 31, ~~from~~2000, ~~MPG~~but ~~totaling~~decreased ~~$45~~slightly ~~million~~to 303 on March 31, ~~which~~2001. Further expansion may be required to ~~represented~~address ~~payment~~potential ~~for~~growth ~~these~~in ~~services~~our ~~through~~artist ~~the~~and ~~fourth~~consumer ~~quarter~~bases, the breadth of ~~2000~~our product and service offerings, and other opportunities. InOur ~~September~~expansion ~~2000~~has placed, and we ~~entered~~expect ~~into~~it anwill continue ~~amended~~to ~~and~~place, a significant strain on our management, ~~restated~~operational ~~agreement~~and ~~with~~financial ~~MPG~~resources. ~~The~~Our failure to manage growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

2928

~~restated~~Mp3 ~~agreement~~Technology ~~extended~~Is ~~our~~Controversial ~~relationship~~Within ~~with~~The ~~MPG~~Traditional ~~through~~Music ~~2004,~~Industry ~~and~~And ~~reduced~~May ~~the~~Face ~~aggregate~~Continued ~~amount~~Opposition, ofWhich ~~services~~May ~~to be~~Negatively ~~purchased~~Affect byThe ~~MPG~~Perception ~~over~~Of ~~the~~Our life of the agreement (see the revised commitment schedule below). Both MPG and MP3.com believe that the revised commitment schedule will allow for more efficient use of our marketing services for the benefit of MPG and its various related companies. In additionBusiness, ~~the~~Lead ~~restated~~To ~~agreement~~Market ~~provides for a more streamlined media management process and creates certain exceptions to the favored pricing granted to MPG under the original agreement. Under the restated agreement~~Confusion, ~~MPG is now~~ ~~committed~~Alienate toAdvertisers ~~purchase~~And ~~an aggregate of $120 million in advertising~~Consumers, ~~promotion~~And ~~and~~Reduce ~~marketing~~Our ~~services from us (including the $45 million purchased through the fourth quarter of 2000)~~Revenue. ~~The remaining $75 million owed under the restated~~ ~~agreement remains secured by an irrevocable letter of credit. The~~ restated agreement further provides MPG with potential additional financial incentives of up to an aggregate of $5 million (up to $1 million in any one calendar quarter) based on the number of different companies that use our services under the agreement. The financial incentives could result in the reduction of the marketing and promotions commitment beginning with the latest period.

Quarterly Payment Schedule			Purchase Amount
			(in thousands)
2000
	Q4		$	13,500
2001
	Q1		$	15,000
	Q2		$	12,250
	Q3		$	12,250
	Q4		$	12,250
2002
	Q1		$	6,000
	Q2		$	5,000
	Q3		$	5,000
	Q4		$	5,000
2003
	Q1		$	300
	Q2		$	300
	Q3		$	275
	Q4		$	275
2004
	Q1		$	275
	Q2		$	275
	Q3		$	275
	Q4		$	275
		Total	$	88,500

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

~~During~~We ~~1999~~May ~~and~~Have ~~2000,~~Difficulty weCompeting ~~have~~For ~~made~~Or ~~certain~~Executing ~~strategic investments~~Business ~~and~~Partnerships ~~entered~~And ~~into~~Making ~~certain~~Acquisitions ~~marketing~~That ~~and~~We ~~promotion~~May ~~arrangements.~~Need In To ~~certain circumstances we have recognized revenue in connection~~Expand ~~with~~Our ~~these~~Content ~~marketing~~And ~~and~~Distribution ~~promotion arrangements pursuant to our accounting policies. Due to the recent financial uncertainty related to certain strategic investments~~Channels, weWhich ~~have~~Could ~~determined~~Impair ~~that~~Our Overall weStrategic ~~are unable to recognize revenue in connection with certain marketing and promotion arrangements until the significant uncertainties have been satisfactorily resolved~~Goals. ~~These above~~ ~~factors, current financial and economic conditions, and the~~ ~~current litigation could have an adverse effect on MP3.com’s future revenues.~~

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

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

~~Risks~~ Without ~~Related~~the Tocontinued ~~Our~~development ~~Business~~and ~~Model~~maintenance of the Internet infrastructure, we could fail to meet our overall strategic objectives and ultimately fail to generate the web site traffic and revenues we expect. This continued development of the Internet includes maintenance of a reliable network with the necessary speed, data capacity and security, as well as timely development of complementary products including high speed modems, hand-held Internet devices or “personal digital assistants,” for providing reliable Internet access and services. The success of our business will rely on the continued improvement of the Internet and related products and services as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of music.

We Our ~~Are~~business ~~Currently~~will ~~Engaged~~depend Inon Athe ~~Number~~ability Ofof ~~Ongoing~~our ~~Lawsuits~~artists ~~Relating~~and consumers Toto continue to upload and download mp3 and other music files, as well as to conduct commercial transactions with us, without significant delays or aggravation that may be associated with decreased availability of Internet bandwidth and access to our web site. Our Mypenetration of a broader consumer market will depend, in part, on continued proliferation of high speed Internet access.~~MP3.com~~ ~~Service~~Even compressed in mp3 format, ~~Which~~a ~~May~~typical ~~Result~~three minute Insong ~~Monetary~~file ~~Damages~~can ~~Substantially~~occupy ~~Greater~~more ~~Than~~than ~~Our~~three ~~Overall~~megabytes ~~Market~~of ~~Capitalization~~storage space. ~~And~~This ~~The~~file ~~Discontinuation~~could Ortake ~~Interruption~~as Ofmuch ~~Services~~as Totwo ~~Our~~minutes ~~Consumers~~to download over an xDSL or cable modem compared to 10 to 20 minutes over a conventional 56Kbps modem. Since the Internet is likely to continue to experience significant growth in the numbers of users and amount of traffic, the Internet

29 ~~We are currently a named defendant in a number of lawsuits,~~ ~~including an action initially brought by ten major music~~ recording companies, a lawsuit filed by two major music publishing companies, an artist’s class-action lawsuit in which we are named as co-defendants with several major recording companies, lawsuits brought by independent record companies (each alleging that, among other things, portions of our My.MP3.com and related services violated their respective copyrights and/or misappropriated artists’ names and likenesses), several class action lawsuits alleging securities law violations, and certain derivative lawsuits alleging statutory and common law claims.

AsTable of September 30, 2000, we have only reached settlement with four major recording companies, which together represent eight plaintiffs in the lawsuit brought by the ten major music recording companies. We cannot assure you that we will be successful in reaching settlements with any additional parties to such litigation proceedings or in defending these lawsuits, and we may be required to pay license fees or substantial damages, including punitive, statutory or other damages that far exceed the resources and overall market capitalization of our company, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. Moreover, MP3.com has not yet secured any final publishing license or other affirmative clearance to utilize within the My.MP3.com service the compositions embodied in the recordings owned by any recording company (including those with whom we have reached settlement agreements), nor can we guarantee that any such license or clearance will ever be obtained. If a final publishing license or other affirmative clearance to utilize such compositions is not obtained, our ability to utilize in the My.MP3.com service recordings from any recording company could be materially and adversely affected. At the maximum statutory rate of $150,000 per work, our aggregate potential liability resulting from all of our litigation proceedings could exceed billions of dollars. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general. Contents

~~During~~infrastructure ~~the~~may ~~quarter~~be ~~ended~~unable ~~September 30,~~to ~~2000,~~support wethe ~~recorded~~demands ~~an additional~~placed ~~charge for litigation and copyright matters of~~on ~~$20~~it.~~0 million.~~ ~~This~~In ~~additional~~addition, ~~charge~~increased ~~reflects~~users ~~incremental costs~~or ~~that~~bandwidth ~~management~~requirements ~~estimates will be incurred in connection~~may ~~with~~harm the ~~resolution~~performance of the ~~various~~Internet. ~~litigation~~The ~~and~~Internet ~~copyright~~has ~~matters~~experienced ~~associated~~a ~~with~~variety ~~the~~of ~~My.MP3.com~~outages ~~service. The additional charge~~ and ~~accrual~~other ~~reflect~~delays ~~management’s~~as ~~expectations~~a asresult of ~~the~~damage ~~date~~to portions of ~~this~~its ~~quarterly~~infrastructure, ~~report~~ and isit ~~based~~could ~~on currently~~face ~~available~~outages ~~information~~and asdelays ~~well~~in asthe ~~significant~~future. ~~assumptions~~The ~~made~~infrastructure byand ~~management~~complementary ~~regarding~~products ~~the~~or ~~various~~services ~~litigation~~necessary ~~and~~to ~~copyright matters.~~make ~~Although we believe that~~ the Internet ~~expectations~~a ~~and assumptions~~viable ~~reflected~~commercial inmarketplace ~~this~~for ~~additional~~the ~~charge~~long ~~are~~term ~~reasonable,~~may wenot ~~cannot~~be ~~guarantee~~developed ~~that~~successfully ~~future events~~ or ~~results~~in ~~will~~a ~~conform~~timely ~~to such expectations or assumptions~~manner. IfEven if these ~~expectations~~products ~~and significant~~or ~~assumptions~~services ~~prove~~are ~~to be erroneous in light of future events~~developed, the ~~actual~~Internet ~~amounts~~may ~~incurred by MP3.com to resolve all~~not ~~matters~~become ~~could~~a beviable ~~materially~~commercial ~~different~~marketplace ~~than~~for ~~those~~the ~~recorded~~products ~~as of~~or ~~September 30,~~services ~~2000~~that we offer.

Our Business ~~Model~~Strategy IsDepends ~~Not~~In ~~Typical~~Part OfOn ~~Traditional,~~Our ~~More~~Ability ~~Established~~To Deliver ~~Business~~Music ~~Enterprises~~To Non-PC Devices And We May Not ~~Generate~~Be ~~Sufficient~~Successful ~~Revenues~~In Developing ~~For~~A Version Of Our ~~Business~~Service ToThat ~~Survive~~Will Operate On Such Devices, That Manufacturers Of Such Devices Will Incorporate Into Their Products, And That Will Gain Widespread Adoption By Users.

~~Our~~In ~~model~~the ~~for~~coming ~~conducting~~years, ~~business~~the number of individuals who access the Internet through devices other than a personal computer, such as personal digital assistants and ~~generating~~cellular ~~revenues~~telephones, isas ~~new~~well as automobile, portable and ~~unproven~~component or home-based Internet-enabled radios and ~~may~~television ~~evolve~~set-top ~~rapidly~~devices, is expected to increase dramatically. ~~Our~~A key part of our business strategy ~~model~~as ~~depends~~an MSP is to deliver music digitally to as many of ~~upon~~these ~~our~~types ~~ability~~of devices as possible. Our services are designed to use ~~generate~~rich ~~revenue~~graphical, ~~streams~~audio ~~from~~and ~~multiple~~other resources such as those ~~sources~~available on personal and laptop computers. The lower resolution, poorer sound quality, lower functionality, lower memory and typically slower Internet access speeds associated with alternative devices may make the use of our services through such devices difficult and we may be unsuccessful in our efforts ~~web~~to ~~site~~modify our services to provide a compelling service for users of alternative devices. As we have limited experience to date in operating versions of our service developed or optimized for users of alternative devices, ~~including:~~it is difficult to predict the problems we may encounter in doing so and we may need to devote significant resources to the creation, support and maintenance of such versions.

• If ~~subscription~~we ~~revenues;~~are •unsuccessful ~~retail~~in developing versions of our services that can be distributed to alternative device users or if we are unable to attract and retain a substantial number of alternative device users to our online services, we will fail to capture a sufficient share of an increasingly important portion of the market for digital music delivery. Further, as the majority of our revenues; •are ~~syndicated~~derived ~~radio~~through the sale of banner and other advertising optimized for a personal computer screen, we may not be successful at developing a viable strategy for deriving substantial revenues; from the delivery of digital music to users through alternative devices. Any failure to develop revenue-generating services that are adopted by a significant number of alternative device users could limit our growth and prevent us from becoming profitable, which could negatively impact our stock price.

31Third-Party Manufacturers Must Choose To Develop, And Consumers Must Purchase, Alternative Music Delivery Devices Through Which We Can Deliver Music To Consumers. If They Do Not, We May Not Be Able To Operate As An MSP As We Have Described, And Our Business May Fail.

~~Table~~ Currently, substantially all of ~~Contents~~the music that we deliver is delivered to consumers on their personal computers, since relatively few alternative devices are available that have the capability to receive and use digitally distributed music. In order for our business to be successful, third parties must design and manufacture such alternative devices, including automobile, portable and home-based Internet radios, personal digital assistants and mobile phones that are compatible with the technology that we use to deliver music. We cannot guarantee that such devices will ever become available or that they will be purchased by consumers. If they are not manufactured and purchased, we will not be able to operate as an MSP as we have described in this report and elsewhere, and our revenues and stock price may fall.

~~• web site advertising fees from third parties; • promotional activity fees; • marketing our artist and consumer information; and • online sales of CDs and music-related merchandise.~~30

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

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

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

As a result of our limited operating history, we do not have historical financial data for a significant number of periods upon which to forecast quarterly revenues and results of operations. We ~~Have~~believe Athat ~~Limited~~period-to-period ~~Operating~~comparisons ~~History~~of ~~That~~our operating ~~Makes~~results Anmay not be meaningful and should not be relied ~~Evaluation~~upon Ofas ~~Our~~indicators ~~Business~~of ~~Difficult~~future performance. In addition, our revenue and earnings may vary substantially as a result of seasonal Internet use and/or the business cycles of the music industry, online advertisers and of Internet commerce in general. Moreover, our gross margin and net losses may fluctuate from quarter-to-quarter due to changes in our revenue mix and the timing of expenditures in our web site and operating expenses. However, the actual effect of these factors on the price of our stock will be difficult to assess due to our limited operating history. In one or more future quarters our results of operations may fall below the expectations of securities analysts and investors, and the trading price of our common stock may be affected.

~~MP3.com~~We ~~was~~Expect ~~incorporated~~Net inLosses ~~March~~In ~~1998.~~The ~~Due~~Future toAnd ~~our~~May ~~limited operating~~Never ~~history, it is difficult to evaluate our current~~Achieve business and prospects and accurately predict our future revenues or results of operations. This uncertainty may result in one or more future quarters where our financial results may fall below the expectation of analysts and investors. As a resultProfitability, ~~the trading~~Which ~~price~~May ofCause ~~our~~Our ~~common~~Stock ~~stock~~Price ~~might~~To ~~decline significantly~~Fall. ~~Operating results may vary depending on a number of factors, many~~ ~~of which are outside our control.~~

32 In 2000 and during the three months ended March 31, 2001, we had a net loss of approximately $279.5 million and $46.1 million, respectively. We expect substantial net losses and negative cash flow for the foreseeable future. We believe it is critical to our long term success that we continue to develop MP3.com brand awareness and loyalty through marketing and promotion, expand our artist and consumer networks, develop our online content and expand the commercial application of our other services. Our operating expenses may continue to increase significantly during the next several years, especially in sales and marketing and product development. We may also incur significant litigation and settlement expenses, as we did in 2000 and in the first quarter of 2001, due to our pending litigation and any other lawsuits that may arise. With increased expenses, we will need to generate significant additional revenues to achieve profitability, especially in light of the dramatic scheduled reduction in revenues from our agreement with MPG, discussed elsewhere. As a result, we may never achieve or sustain profitability and, if we do achieve profitability in any period, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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

~~Rapid~~ Our ~~Growth~~available Incash ~~Our~~and ~~Operations~~equivalents ~~And~~are ~~Infrastructure~~expected Isto ~~Placing~~be Asufficient to ~~Significant~~meet ~~Strain~~our Oncash ~~Our~~requirements ~~Resources~~for at least the next 12 months, ~~And~~even ~~Failure~~taking Tointo ~~Manage~~account ~~This~~certain ~~Growth~~litigation settlement ~~Effectively~~payments ~~Could~~that ~~Disrupt~~may ~~Our~~be ~~Operations~~required ~~And~~in ~~Prevent~~connection Uswith claims ~~From~~related ~~Generating~~to ~~The~~our ~~Revenues~~My.MP3 Weservice ~~Expect~~to the extent we have accrued such amounts as of March 31, 2001. However, we may need to raise additional funds in order to:

We• ~~currently~~satisfy ~~are~~any ~~experiencing~~damage aawards ~~period~~or ofunanticipated ~~rapid~~settlement ~~expansion~~costs inrelated to our ~~web~~ ~~site~~current ~~traffic,~~or ~~personnel,~~potential ~~facilities~~future ~~and~~litigation ~~infrastructure.~~proceedings; ~~For example,~~• ~~the~~finance ~~number~~unanticipated ofworking ~~monthly~~capital ~~page~~requirements; ~~views~~• onobtain ~~our~~additional ~~web~~licenses ~~site increased~~in ~~approximately~~order ~~51.52% from the month of December 1999~~ to ~~the~~provide ~~month~~certain ofmusic ~~September~~services ~~2000.~~and/or ~~Our~~specific ~~number~~content ~~of employees increased from eight on December 31, 1998,~~ to ~~274~~consumers; on• ~~December 31,~~ develop ~~1999,~~or toenhance ~~334~~existing onservices ~~September 30,~~or ~~2000.~~products; We• ~~expect~~fund ~~further significant~~distribution ~~expansion~~relationships; ~~will~~• berespond ~~required~~ to ~~address~~competitive ~~potential growth~~pressures; inor ~~our~~• ~~artist~~acquire ~~and~~complementary ~~consumer bases~~businesses, ~~the breadth of our product and service offerings~~technologies, ~~and~~content ~~other~~or ~~opportunities~~products. This expansion has placed, and we expect it will continue to place, a significant strain on our management, operational and financial resources. Our failure to manage growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

~~Our~~ We ~~Continued~~cannot ~~Reliance~~assure Onyou ~~Revenue~~that ~~From~~additional ~~Advertising~~financing ~~May~~will ~~Not~~be ~~Provide~~available on ~~Sufficient~~terms ~~Financial~~favorable ~~Returns~~to ~~For~~us, ~~Our~~or ~~Business~~at Toall. ~~Grow~~In Orparticular, ~~Survive.~~potential investors Weor ~~Currently~~lenders ~~Depend~~might Onbe Adeterred ~~Small~~from ~~Group~~financing Ofour company ~~Customers~~given ~~For~~its ~~Our~~past, ~~Advertising~~current ~~Revenue.~~and potential litigation and other legal challenges, or might demand terms unfavorable to us as conditions to

31 ~~Although our business model contemplates multiple sources of~~ ~~revenue, we anticipate that in the foreseeable future we will~~ depend substantially on revenue from advertising. During the third quarter of 2000, revenue from advertising accounted for 96.6% of our net revenues, a higher percentage than the same period the previous year. We currently depend on a small group of customers for our revenue from advertising. During the third quarter of 2000, one customer accounted for approximately 56.2% of net revenues, and our top ten customers accounted for approximately 82.3% of net revenues. We expect that most of our revenues will continue to be derived from third party advertising agreements like those we have with MPG, Buy.com and Voquette. If any of these important customers were to leave us, our business could be harmed. Our revenues may also be adversely affected by the future insolvency of major customers within the volatile Internet and software industries. If we do not increase revenue from online advertising, our business may not grow or survive. Increasing our revenue from online advertising depends largely on our ability to:

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

~~Our~~investment ~~failure~~or tofunding. ~~achieve~~If ~~these~~adequate ~~objectives~~funds ~~could~~are ~~reduce~~not available or are not available on acceptable terms, our ~~revenue~~ability to satisfy ~~from~~litigation ~~online~~awards ~~advertising~~or ~~and~~settlement, ~~ultimately~~obtain ~~prevent~~additional usmusic licenses, ~~from~~fund ~~generating~~possible expansion, take advantage of unanticipated ~~the~~opportunities, ~~revenues~~develop weor ~~expect~~enhance services or products or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, and these securities may have rights, preferences or privileges senior to those of our stockholders.

AWe ~~Substantial~~May ~~Portion~~Be OfRequired ~~Our~~To ~~Revenues~~Record ~~And~~A ~~Revenue~~Charge ~~Growth~~ For ~~At Least~~ The ~~Next~~Impairment ~~Two Years Will Come From MPG. If This Relationship Is Prematurely Terminated, Modified Substantially Or Is Not Renewed, Or If Other Significant Sources~~ Of Certain ~~Revenue~~Prepaid ~~Are~~Multimedia ~~Not~~Royalty ~~Developed~~Licenses, WeWhich ~~May~~Could Significantly ~~Not~~Impact ~~Have Sufficient Revenues To Sustain~~ Our ~~Growth~~Financial ~~And Our Stock Price May Fall~~Results.

In ~~July~~connection ~~1999,~~with weour various multimedia content license agreements entered into anwith ~~advertising,~~certain ~~promotion~~major and independent ~~marketing~~record ~~agreement~~labels, ~~with~~we ~~MPG.~~advanced ~~This~~significant ~~agreement was amended~~recoupable, ~~effective~~non-refundable ~~September~~pre-payments ~~2000.~~in Weorder ~~anticipate~~to ~~that~~cover ~~for~~future ~~at least the~~royalty ~~next~~payments ~~two~~owed ~~years~~under asuch ~~substantial~~licenses. ~~portion~~We ofcannot ~~our~~assure ~~revenues~~you ~~will come~~that ~~from~~such ~~sales~~advance ofpayments ~~our~~will ~~advertising,~~be ~~promotion~~fully ~~and~~recouped ~~marketing~~over ~~services under~~the ~~this~~term ~~agreement.~~of the ~~MPG~~relevant islicenses ~~under~~and nowe ~~obligation~~will tonot ~~renew~~receive ~~its relationship~~a ~~with~~refund usfor ~~after~~ the amounts ~~current~~not ~~agreement~~recouped. ~~terminates~~If at in the ~~end~~future, ofthere ~~December~~are ~~2004~~indications orof impaired tovalue, ~~increase~~we ~~its~~may ~~advertising commitments~~be ~~with~~required usto ~~when~~write ~~they~~down ~~significantly~~a ~~decrease under the~~significant ~~agreement~~portion, atif ~~the~~not ~~end~~all, of ~~December~~the ~~2001~~impaired license. ~~Historically,~~These ~~most~~potential charges ofto ~~our revenue~~operations ~~sources~~could ~~have~~significantly ~~not~~affect ~~provided~~one ~~for~~or amore ~~similarly-scheduled~~of ~~growth~~our ~~(or~~future ~~decrease)~~quarterly infinancial ~~revenues.~~results Ifand wecause dous ~~not~~to ~~develop~~miss the ~~significant~~performance ~~additional~~expectations ~~revenue~~of ~~sources~~analysts inand ~~the future~~investors, ~~our~~thus ~~business~~potentially ~~will~~lowering bethe ~~substantially~~trading ~~dependent~~price onof ~~the~~our common stock significantly.

33We Have Made Investments In Other Companies From Which We May Never Be Able To Derive Income And In Relation To Which We Have Had To And May In The Future Have To Record Impairment Expenses, Which Will Impact Our Financial Results.

~~Table~~ We have made investments in and other business arrangements with companies that have experienced financial and operational difficulties, including bankruptcy, which could impair the overall value and potential value of ~~Contents~~these investments and arrangements. This could, in turn, negatively impact our business operations, financial accounting results and stock price. During the year ended December 31, 2000, we recorded expenses related to the impairment of our strategic investments equal to $50.7 million. We may have to record additional impairment expenses in future quarters, and there can be no assurance that we will ever benefit from these investments.

~~MPG~~Our ~~agreement.~~Stock ~~Moreover,~~Price ifAnd ~~MPG~~Trading ~~does~~Volume ~~not~~Has ~~increase~~Been ~~its~~And ~~advertising~~ May ~~commitments with us when they significantly decrease under the~~Continue ~~agreement~~To atBe ~~the~~Extremely end of December 2001 or renew its relationship after termination of the current agreement at the end of December 2004, our revenues or growth rate may decline in periods subsequent to the end of the current agreementVolatile. ~~In addition, if~~ ~~the parties agree to terminate or to substantially modify the~~ agreement prior to its scheduled termination, our revenues, growth rate and stock price may also drop dramatically. We cannot guarantee that we will be able to develop enough additional revenue to offset the loss of revenues that would result in the absence or the significant modification of our agreement with MPG, or that the other revenue sources we may develop will be sufficient to maintain our rate of revenue growth. If any of the aforementioned risks causes our revenues or our revenue growth rate to be substantially reduced, we may not have sufficient revenues to support our business and the market price of our stock may fall.

~~Without~~ The ~~Continued~~trading ~~Development~~price ~~And~~of ~~Maintenance~~our Ofcommon ~~The~~stock ~~Internet~~has ~~And~~been ~~The~~and ~~Availability~~is Oflikely ~~Increased~~to continue ~~Bandwidth~~to Tobe ~~Consumers,~~extremely volatile. Our ~~Business~~stock ~~May~~price ~~Not~~could ~~Succeed.~~be subject to wide fluctuations in response to a variety of factors, including the following:

~~Given~~• ~~the~~developments ~~online~~related ~~nature~~to of our ~~business,~~current ~~without~~or ~~the~~future ~~continued development~~legal ~~and~~proceedings; ~~maintenance~~• ofactual ~~the~~or ~~Internet~~anticipated ~~infrastructure,~~variations ~~we could~~in ~~fail~~quarterly ~~to meet our overall strategic objectives~~ and ~~ultimately~~/or ~~fail~~annual tooperating ~~generate~~results; ~~the~~• ~~web~~announcements ~~site traffic and revenues we expect. This continued development~~ of ~~the~~technological ~~Internet~~innovations; ~~includes maintenance~~• ofnew ~~a reliable network with the necessary speed, data capacity and security, as well as timely development of complementary~~ products ~~including~~or ~~high speed modems, for providing reliable Internet access and~~ services. ~~Because~~offered ~~global~~by ~~commerce on~~us ~~the~~or ~~Internet~~our ~~and~~competitors; ~~the~~• ~~online~~changes ~~exchange~~in offinancial ~~information~~estimates ~~is new~~ and /or ~~evolving,~~ratings weby ~~cannot~~securities ~~predict~~analysts; ~~whether~~• ~~the~~announcements ~~Internet will prove to be a viable commercial marketplace in the long term. The success~~ of ~~our~~significant ~~business will rely on the continued improvement of the Internet as a convenient means of consumer interaction and commerce~~acquisitions, asstrategic well as an efficient medium for the delivery and distribution of music. Our business will depend on the ability of our artists and consumers to continue to upload and download mp3 and other music filespartnerships, asjoint ~~well~~ventures asor tocapital ~~conduct~~commitments ~~commercial transactions~~by ~~with~~ us, ~~without significant delays~~ or ~~aggravation that may be associated with decreased availability of Internet bandwidth and access to~~ our ~~web~~competitors; ~~site.~~• ~~Our~~additions ~~penetration~~or ofdepartures ~~a broader consumer market will depend, in part, on continued proliferation~~ of ~~high~~key ~~speed~~personnel; ~~Internet~~• ~~access.~~sales ~~Even compressed in mp3 format, a typical three minute song file can occupy more than three megabytes~~ of ~~storage~~common ~~space.~~stock; ~~This~~• file could take as much as two minutes to download over an xDSL or cable modem compared to 10 to 20 minutes over a conventional 56Kbps modem. The Internet has experienced, and is likely to continue to experience, significant growth in the ~~numbers~~granting ~~of users~~ and/or ~~amount~~ exercise of ~~traffic.~~warrants ~~As the Internet continues~~ to ~~experience~~purchase ~~increased numbers~~our ofcommon ~~users,~~stock; ~~increased~~• ~~frequency~~perceived ~~of use~~ and ~~increased bandwidth requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, increased users~~ /or ~~bandwidth~~actual ~~requirements~~sales ~~may harm the performance~~ of ~~the Internet.~~our ~~The~~stock ~~Internet~~by ~~has~~company ~~experienced~~insiders; aand ~~variety~~• ~~of outages and~~ other ~~delays~~events asor ~~a result of damage to portions of its infrastructure~~factors, ~~and~~many ~~it could face outages and delays in the future. These outages and delays could reduce the level~~ of ~~Internet~~ ~~usage~~which as well as the level of traffic, and could result in the Internet becoming an inconvenient or uneconomical source of music and music-related products and services. The infrastructure and complementary products or services necessary to make the Internet a viable commercial marketplace for the long term may not be developed successfully or in a timely manner. Even if these products or services are ~~developed,~~beyond ~~the~~our ~~Internet may not become a viable commercial marketplace for the products or services that we offer~~control.

~~In Order To Provide Music And Other Content On Our Web Site, We Rely Heavily On The Contributions Of Artists Who, Over Time, May Be Difficult To Attract And Retain.~~32

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

34 In addition, the stock market in general, and the Nasdaq National Market and the stock prices of Internet-related companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. In addition, the market reaction to companies in the Internet sector is often tied to the success of a few established companies such as AOL-Time Warner, Inc., Yahoo! Inc., eBay Inc. and Amazon.com, Inc., regardless of such companies’ relation to a particular company, including ours. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. Class action and derivative lawsuits have been filed against us arising in part from the decline in our stock price throughout 2000, as described elsewhere in these risk factors. This litigation could result in substantial costs and a diversion of management’s attention and resources, which could adversely affect our business, financial condition and the market price of our common stock.

~~Table~~Substantial ofFuture ~~Contents~~Sales Of Our Common Stock In The Public Market Could Cause Our Stock Price To Fall.

~~recognition~~Sales onof ~~our~~a ~~web~~large ~~site~~number ~~and~~of ~~then~~shares ~~are~~of ~~recruited~~our bycommon stock in the public market or the perception that such sales could occur ~~attracted~~could tocause the ~~traditional~~market ~~music~~price ~~industry~~of our common stock to drop. The majority ~~loss~~ of ~~artists~~our shares are freely transferable without ~~and~~restriction or registration under the ~~inability~~Securities toAct ~~attract~~of ~~new~~1933, unless ~~artists~~such ~~would~~shares ~~impair~~are held by our ~~ability~~affiliates, as that term is defined toin ~~generate~~Rule 144 ~~advertising~~under ~~revenue~~the ~~targeted~~Securities Act. Once issued, any shares registered on a Form S-8 registration statement, as all of our shares subject to outstanding options are, may be freely transferable without restriction or registration under the Securities Act of 1933, with the exception of certain shares held by our ~~artist~~affiliates, ~~community~~as that term is defined in Rule 144 under ~~and~~the ~~generate~~Securities CDAct. ~~revenues~~Sales of common stock by existing stockholders in the public market, or the availability of such shares for sale, could adversely affect the market price of the common stock.

~~Our~~ As ~~Brand~~of ~~Name~~March 31, ~~And~~2001, ~~Revenues~~holders ~~Could~~of Beup ~~Damaged~~to 17,088,152 shares of our common stock, as well as holders of warrants to purchase up to 5,400,000 shares of common stock, have certain registration rights. If ~~The~~such ~~Music~~holders, ~~Provided~~by Byexercising ~~Lesser~~either their registration rights or their rights under Rule 144 or Rule 701, cause a large number of securities to be registered and/or sold in the public market, such sales could have an adverse effect on the market price for our common stock. If we were to include in a company-~~Known~~initiated ~~Artists~~registration ~~Fails~~shares Toheld ~~Meet~~by ~~Consumer~~such ~~Expectations~~holders pursuant to the exercise of their registration rights, such sales may have an adverse effect on our ability to raise needed capital.

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

~~Development~~Our OfBrand ~~New~~Name ~~Standards~~And ~~For~~Revenues ~~The~~Could ~~Electronic~~Be ~~Delivery~~Damaged OfIf The Music Provided ~~May~~By ~~Diminish~~Lesser-Known ~~Our~~Artists ~~Brand~~Fails ~~Identity~~To ~~And~~Meet ~~Disrupt The Way We Do Business~~Consumer Expectations.

WeMany ~~currently~~artists, ~~rely~~including onmost ~~mp3~~widely-recognized ~~technology for both brand identity and~~artists, astypically asign ~~delivery~~multi-year ~~method~~exclusive ~~for~~recording ~~the~~contracts ~~digital~~that ~~distribution of music. Mp3~~may isprevent anthem ~~open~~from ~~standard~~posting ~~adopted by the Moving Picture Experts Group that makes~~ music ~~files~~on ~~smaller.~~our Weweb ~~do not own or control mp3 technology~~site. ~~The~~To ~~onset~~post ~~of competing industry standards for the electronic delivery of~~ music ~~could significantly affect the way~~ weon ~~operate~~ our ~~business~~web assite, ~~well~~these asartists ~~the~~must ~~public’s~~typically ~~perception~~get permission offrom ~~MP3.com~~their asrecord a company. ~~For~~As ~~example, some of the major recording studios have devoted resources to develop~~ a ~~universal standard for the electronic delivery of music~~result, ~~called~~our ~~the~~access Secure Digital Music Initiative, or SDMI. This delivery method may be available during 2000. In addition, major corporations including Microsoft Corporation, IBM Corporation, AT&T Corp. and Sony Corporation have launched efforts to ~~establish proprietary audio formats~~ ~~that~~widely-recognized ~~will~~artists ~~compete~~is ~~with the mp3 format~~limited. ~~Some~~If ~~competitive formats offer security and features that track~~ the ~~number of copies made. The mp3 technology we currently use does not offer these features. These features are especially popular among groups associated with the traditional~~ music ~~industry,~~provided ~~and are being promoted~~ by ~~some of our competitors. Widespread industry and~~ ~~consumer acceptance of any of~~ these ~~audio~~lesser-known ~~formats could significantly harm our business if we are unable to adapt~~ and ~~respond~~ tolocal ~~these~~artists ~~changing~~fails ~~standards. Although we are not tied exclusively~~ to ~~the~~meet ~~use of mp3 technology or to any other specific standard for the electronic delivery of music, if a proprietary, or closed, music delivery format receives widespread industry and~~ consumer ~~acceptance, we may be required to license additional~~ technology and information from third parties in order to adopt that format. We cannot assure you that this third-party technology and information will be available to us on commercially reasonable termsexpectations, ~~if at all. Any failure to obtain any of these technology and information licenses or to successfully reconfigure~~ our ~~music~~brand ~~library~~name ~~to support these technologies~~ could ~~prevent~~be usdamaged ~~from~~and ~~making~~ our ~~music available in~~business ~~the~~may ~~most~~not ~~widely~~generate ~~accepted~~sufficient ~~formats,~~revenues ~~which could make our offerings less popular or inaccessible~~ to ~~both consumers and artists and thus harm our business~~survive.

~~Mp3~~Development ~~Technology~~Of IsNew ~~Controversial~~Standards ~~Within~~For The ~~Traditional~~Electronic Delivery Of Music ~~Industry And~~ May ~~Face~~Diminish ~~Continued Opposition, Which May Negatively Affect The Perception Of~~ Our ~~Business,~~Brand ~~Lead~~Identity ~~To Market Confusion, Alienate Advertisers~~ And ~~Consumers~~Disrupt ~~And~~The ~~Reduce~~Way ~~Our~~We ~~Revenue~~Do Business.

~~The~~We ~~traditional~~currently ~~music~~rely ~~industry~~on ~~has~~mp3 ~~not~~technology ~~embraced~~for ~~the~~both ~~development~~brand identity and ofas ~~the~~a ~~mp3~~delivery ~~format~~method tofor ~~deliver~~the digital distribution of music,. inWe do ~~part~~not ~~because~~own ~~users~~or ofcontrol mp3 technology. ~~can~~The ~~download~~onset ~~and~~of ~~distribute~~competing industry ~~unauthorized~~standards ~~or “pirated”~~for ~~copies~~the ofelectronic ~~copyrighted~~delivery ~~recorded~~of music ~~over~~could significantly affect the ~~Internet.~~way ~~Although~~we operate our business ~~model~~as ~~for~~well as the ~~digital distribution~~public’s perception of ~~music~~MP3.com ~~can~~as ~~support~~a ~~more~~company. ~~than one audio compression~~For example, ~~format~~for ~~and~~almost ~~method~~two ~~of delivery~~years, ~~and~~some isof ~~intended~~the tomajor ~~discourage~~recording ~~music~~studios ~~piracy~~devoted ~~and~~significant ~~ensure~~resources ~~that~~into ~~only~~developing ~~legitimate music is posted on~~a ~~our~~universal ~~web~~standard ~~site,~~for ~~our~~the ~~brand~~electronic ~~identity~~delivery isof ~~currently~~music, ~~linked to~~ called the ~~mp3 technology~~Secure ~~and~~Digital ~~possibly~~Music ~~with~~Initiative, ~~other~~or ~~companies~~SDMI. ~~that~~Although ~~may~~at ~~not use mp3~~this time orSDMI ~~other~~does ~~similar~~not ~~technologies~~appear into be a ~~legal~~viable orstandard, ~~scrupulous manner.~~the Asdevelopment aof ~~result,~~which wemay ~~sometimes~~be ~~face~~abandoned ~~and~~entirely, ~~may~~the ~~continue~~recording companies ~~to face~~may

3533

~~opposition~~continue ~~from~~to pursue SDMI or similar efforts in the future. In addition, a number of ~~different~~corporations ~~music~~including ~~industry~~Microsoft Corporation, ~~sources~~IBM Corporation, AT&T Corp., Liquid Audio, ~~including~~Inc., ~~record~~RealNetworks, ~~companies~~Inc. and ~~studios,~~Sony Corporation have launched efforts to establish proprietary audio formats to compete with the ~~Recording~~mp3 ~~Industry~~format. Some competitive formats offer security and ~~Association~~features that track the number of ~~America~~copies (made or designate each copy with an identifiable “~~RIAA~~watermark.”) ~~and~~The ~~established~~mp3 technology ~~artists~~we currently use does not offer these features. These features are especially popular among groups associated with ~~record~~the traditional ~~contracts~~music industry, ~~due~~and toare being promoted by some of our ~~current~~competitors. ~~brand~~Widespread ~~identity~~industry and ~~its~~consumer acceptance of any ~~potentially~~of ~~negative~~these ~~associations~~audio formats could significantly harm our business if we are unable to adapt and respond to these changing standards. In addition, ~~adverse~~it ~~news~~has ~~or events~~been ~~relating~~reported that Microsoft plans to ~~mp3~~severely ~~technology~~limit ~~may~~the ~~lead~~quality toof ~~confusion~~music inthat ~~the~~can be ~~public~~recorded ~~markets~~as ~~regarding~~an ~~our~~mp3 ~~company~~file ~~and~~using ~~its~~software ~~prospects,~~built ~~alienate~~into the next ~~advertisers~~version ~~and~~of ~~consumers,~~its ~~reduce~~personal ~~revenues~~computer ~~and~~operating ~~harm~~system, ~~our~~Windows ~~overall~~XP. ~~financial~~It ~~results.~~has ~~This~~also isbeen reported that music recorded in Microsoft’s ~~part~~Windows ~~evidenced~~Media byAudio ~~our~~format ~~current~~will sound clearer ~~litigation~~than ~~proceedings,~~the ~~but~~mp3 ~~additional~~audio ~~disputes~~format ~~could~~and ~~arise~~may inrequire less storage space on ~~the~~a ~~future~~computer.

We Although ~~May~~we ~~Have~~are ~~Difficulty~~not ~~Competing~~tied ~~For~~exclusively Orto ~~Executing~~the ~~Business~~use ~~Partnerships~~of ~~And~~mp3 technology ~~Making~~or ~~Acquisitions~~to ~~That~~any other specific standard for the digital delivery of music, if a proprietary, or closed, music delivery format receives widespread industry and consumer acceptance, we may be required to license additional technology and information from third parties in order to adopt that format. We ~~May~~cannot assure ~~Need~~you Tothat ~~Expand~~this ~~Our~~third-party ~~Content~~technology ~~And~~and ~~Distribution~~information ~~Channels~~will be available to us on commercially reasonable terms, ~~Which~~if ~~Could~~at ~~Impair~~all. Any ~~Our~~failure ~~Overall~~to ~~Strategic~~obtain ~~Goals~~any of these technology and information licenses or to successfully reconfigure our music library to support these technologies could prevent us from making our music available in the most widely accepted formats, which could make our offerings less popular or inaccessible to both consumers and artists and thus harm our business.

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

~~Financial~~ We ~~Risks~~believe that our historical growth and brand recognition have been largely attributable to frequent and visible national and local media exposure as well as promotion of our web site. The frequency or quality of this media exposure or promotion may not continue. Widespread industry and consumer acceptance of a music delivery platform other than the mp3 format may greatly reduce the frequency and quality of this media exposure and promotion and, as a result, our brand recognition. Further, negative publicity from our litigation proceedings, or from negative perceptions in the public and financial community of “dot-com,” “e-commerce” or “Internet content” companies, could hurt public perception of our brand and cause consumers and artists to use other web sites or other means of accessing and distributing their music. We believe that continuing to strengthen our brand will be critical to achieve widespread acceptance of our products and services. Favorable public perception of our brand will depend largely on our ability to continue providing users with high quality products and services and the success of our marketing efforts. We plan to increase our marketing expenditures to create and maintain brand recognition. However, brand promotion activities may not yield increased revenues and, even if they do, any increased revenues may not offset the expenses we incur in building our brand.

~~Our~~If ~~Quarterly~~We ~~Revenues~~Do ~~And~~Not ~~Operating~~Transcend ~~Results~~A ~~Are~~Mere ~~Not~~Association ~~Indicative~~Between OfOur ~~Future Performance~~ Company And ~~Are~~The ~~Difficult~~Mp3 ToFormat ~~Forecast,~~In ~~And~~The ~~Our~~Minds ~~Stock~~Of ~~Price~~Consumers, ~~May Fall If~~ Our ~~Performance~~Brand ~~Does~~Identity And ~~Not~~Financial ~~Meet~~Results ~~Analysts’~~Could ~~Or Investors’ Expectations~~Suffer.

AsThe agrowth ~~result~~ of our ~~limited~~business ~~operating~~will ~~history,~~also wedepend doin ~~not have historical financial data for a~~ significant ~~number of periods~~part ~~upon~~on ~~which~~our ability to ~~forecast~~develop ~~quarterly~~a ~~revenues~~brand ~~and~~identity ~~results of operations. We believe~~ that ~~period-to-period~~transcends ~~comparisons of our~~a ~~operating~~mere ~~results~~association ~~may~~with ~~not~~the bemp3 ~~meaningful~~format. ~~and~~We ~~should~~must ~~not~~pursue bea ~~relied~~brand ~~upon~~development asstrategy ~~indicators~~that ofidentifies ~~future performance. In addition,~~ our ~~revenue~~ ~~and~~company ~~earnings may vary substantially~~ as a ~~result of~~primary ~~holiday-based~~source ~~buying~~for interesting and ~~the~~diverse ~~business~~high ~~cycles~~quality ~~of the~~ music and ~~industry,~~artists ~~online~~above ~~advertisers~~ and ofbeyond ~~Internet~~mp3 ~~commerce~~technology. inAlthough ~~general~~MP3. com ~~However,~~is ~~the~~not tied ~~actual~~exclusively ~~effect~~to ~~of these factors on~~ the ~~price~~use of ~~our stock~~mp3 ~~will~~technology beor ~~difficult~~ to ~~assess~~any ~~due to our limited operating~~other ~~history.~~specific Instandard ~~one~~for orthe ~~more~~digital ~~future~~delivery ~~quarters~~of ~~our~~music, ~~results~~failure ~~of operations~~to achieve ~~may~~brand ~~fall~~recognition ~~below~~apart from the ~~expectations~~mp3 offormat ~~securities analysts and~~could ~~investors,~~significantly ~~and~~affect the ~~trading~~future ~~price~~viability of our ~~common~~brand ~~stock~~name ~~may be~~and ~~affected~~our ability to generate revenues.

~~We Expect Net Losses In The Future And May Never Achieve Profitability, Which May Cause Our Stock Price To Fall.~~34

InTable 1999 and the first nine months of 2000, we had a net loss of approximately $42.5 and $243.9 million, respectively. We expect substantial net losses and negative cash flow for the foreseeable future. We believe it is critical to our long term success that we continue to develop MP3.com brand awareness and loyalty through marketing and promotion, expand our artist and consumer networks, develop our online content and expand our other services. We expect that our operating expenses will increase significantly during the next several years, especially in sales and marketing and product development. With increased expenses, we will need to generate significant additional revenues to achieve profitability. As a result, we may never achieve or sustain profitability and, if we do achieve profitability in any period, we may not be able to sustain or increase profitability on a quarterly or annual basis. Contents

36If We Fail To Collect Accurate And Useful Data About Our Consumers, Potential Advertisers May Not Advertise On Our Web Site, Which May Result In Reduced Advertising Revenues.

~~Table~~ We plan to use consumer data to expand, refine and target our marketing and sales efforts. We collect most of ~~Contents~~our data from users who report information to us as they conduct transactions on our web site. If a large proportion of users impede our ability to collect data or if they falsify data, our marketing and sales efforts would be less effective since advertisers generally require detailed demographic data on their target audiences. In addition, laws relating to privacy and the use of the Internet to collect personal information, including strict laws relating to collecting information from children, could limit our ability to collect data and utilize our database. Failure to collect accurate and useful data could result in a substantial reduction in advertising revenues, which represented approximately 81.4% of our total revenues during 2000 and approximately 92.0% for the three months ended March 31, 2001. Because we use e-mail for direct marketing, any legislative or consumer efforts to regulate unsolicited bulk e-mails, commonly referred to as “spam,” as well as other laws regulating the use of e-mail, could significantly impair our sales and marketing efforts and our associated advertising revenue.

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

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

• We ~~satisfy~~currently ~~any~~operate ~~damage~~a ~~awards~~small orbranch ~~unanticipated~~office ~~settlement~~in ~~costs~~London, ~~related~~England, through which we manage our European operations and attempt to market and sell our ~~current~~services orin ~~potential~~several ~~future~~other ~~litigation~~countries. ~~proceedings;~~Our artists •resided ~~finance~~in ~~unanticipated~~approximately ~~working~~200 ~~capital~~countries ~~requirements;~~as •of March 31, ~~develop~~2001, orand ~~enhance~~customers ~~existing~~visit ~~services~~our orweb ~~products;~~site •from ~~fund~~all over ~~distribution~~the ~~relationships;~~world. •We ~~respond~~have toalso ~~competitive~~entered ~~pressures;~~into orrelationships •with third ~~acquire~~parties ~~complementary~~outside ~~businesses~~of the U.S., ~~technologies~~in particular Japan, ~~content~~to assist orwith ~~products~~our penetration of foreign markets.

WeTo ~~cannot~~date, ~~assure~~we ~~you~~have ~~that~~developed ~~additional~~four ~~financing~~translated ~~will~~versions beof ~~available~~our web onsite ~~terms~~and ~~favorable~~have tolimited ~~us,~~experience orselling atand ~~all~~marketing our products and services internationally. IfWe ~~adequate~~believe ~~funds~~we ~~are~~need ~~not~~to ~~available~~continue orto ~~are~~expand ~~not~~quickly ~~available~~into oninternational ~~acceptable~~markets ~~terms,~~in ~~our ability~~order to ~~fund~~effectively ~~our~~obtain ~~expansion,~~and ~~take~~maintain ~~advantage~~market ofshare. ~~unanticipated~~In most ~~opportunities~~countries, ~~develop~~we orwill ~~enhance~~have ~~services~~to orcompete ~~products~~with orlocal companies who ~~otherwise~~understand ~~respond~~the tolocal ~~competitive~~markets ~~pressures~~better ~~would~~than bewe ~~significantly~~ do ~~limited.~~and Ifwho wemay ~~raise~~have established ~~additional~~local ~~funds~~brand byidentity ~~issuing~~and ~~equity~~customer ~~or convertible~~loyalty. ~~debt~~As ~~securities~~a result, ~~the~~we ~~percentage~~may ~~ownership~~not ofenjoy ~~our stockholders~~some ~~will~~of bethe ~~reduced,~~first-to-market ~~and~~advantages that ~~these~~we ~~securities~~ may have ~~rights,~~ ~~preferences~~enjoyed orin ~~privileges~~the ~~senior~~United ~~to those of our stockholders~~States.

~~Our~~ In ~~Stock~~addition, ~~Price~~international ~~And~~markets ~~Trading~~that ~~Volume~~we ~~Has~~have ~~Been~~selected ~~And~~may not ~~May~~develop ~~Continue~~at Toa Berate ~~Extremely~~that ~~Volatile~~supports our level of investment. In particular, international markets typically have been slower to adopt the Internet as an advertising and commerce medium. Moreover, expansion into international markets will require substantial management attention and financial resources. We cannot be certain that revenues derived from our international expansion will offset the significant investment required to establish and maintain international web sites and an international presence. In addition to uncertainty about our ability to generate revenues from our foreign operations and expand our international presence, there are certain risks inherent in doing business on an international level. We are subject to the normal risks of doing business internationally, as well as risks specific to Internet-based companies in foreign markets. These risks include:

~~The~~• ~~trading~~delays ~~price~~in the development of ~~our~~the ~~common~~Internet ~~stock~~as ~~has~~a ~~been~~music delivery, advertising and iscommerce ~~likely~~medium in international markets; • difficulties in managing operations due to ~~continue~~ distance, language and cultural differences, including issues associated with establishing management systems infrastructures in individual markets; • unexpected changes in regulatory requirements; • the inability to beobtain ~~extremely~~workable ~~volatile~~licenses to operate our My.MP3 ~~Our~~or ~~stock~~other ~~price~~MSP-related ~~could~~services ~~be subject~~internationally; to• ~~wide~~government-imposed ~~fluctuations~~restrictions inon ~~response~~the public’s access to athe ~~variety~~Internet; • legal uncertainty regarding liability for the content posted on our web site and the lack of ~~factors,~~ clear ~~including~~legal precedent or applicable law; • legal systems that are less Internet-friendly than those in the ~~following:~~ United States;

• developments related to our current or future legal proceedings; • actual or anticipated variations in quarterly and/or annual operating results; • announcements of technological innovations; • new products or services offered by us or our competitors; • changes in financial estimates and/or ratings by securities analysts; • announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; • additions or departures of key personnel; • sales of common stock; • perceived and/or actual sales of our stock by company insiders; and • other events or factors, many of which are beyond our control.35

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

37 • different accounting practices; • potential adverse tax consequences, such as those associated with cross-border use of intangible assets, and others; • more stringent consumer protection laws; • higher costs of doing business in foreign countries; • difficulties and costs of staffing and managing foreign operations; • increased risk of piracy and limits on our ability to enforce our intellectual property rights; • the need to comply with different and often conflicting laws and regulations; • political and economic instability; and • other legal and political risks.

~~Table~~ Any of ~~Contents~~these factors could harm our future international operations, and consequently our business, operating results and financial condition. In addition, we do not currently hedge our foreign currency exposures.

~~Substantial~~For ~~Future~~Content, ~~Sales~~We OfRely ~~Our~~Heavily ~~Common~~On ~~Stock In~~ The ~~Public~~Contributions ~~Market~~Of ~~Could~~Artists Who, ~~Cause~~Over ~~Our~~Time, ~~Stock~~May ~~Price~~Be Difficult To ~~Fall~~Attract And Retain.

~~Sales~~Our ofsuccess adepends ~~large~~on ~~number~~having ofa ~~shares~~web ofsite ~~our~~that ~~common~~offers ~~stock in the~~high ~~public~~quality ~~market~~and ordiverse ~~the~~music ~~perception~~choices. ~~that~~Our ~~such~~failure ~~sales~~to ~~could~~attract ~~occur could~~and retain ~~cause~~artists ~~the~~who ~~market~~can ~~price~~provide ofus ~~our~~with ~~common~~music ~~stock~~and toother ~~drop. The majority~~content would oflimit ~~our~~the ~~shares~~overall ~~are~~quality ~~freely~~and ~~transferable~~quantity ~~without~~of ~~restriction~~the orofferings on ~~registration~~our ~~under~~web ~~the~~site ~~Securities~~and ~~Act~~harm ofour ~~1933,~~business. ~~unless~~Because ~~such~~our ~~shares~~contracts with artists are, ~~held~~with byfew ~~our affiliates~~exceptions, asnon-exclusive ~~that~~and ~~term~~can ~~is defined in~~be ~~Rule 144~~terminated ~~under~~by the ~~Securities~~artist ~~Act.~~at Weany ~~are~~time, ~~filing~~our aretention of artists ~~registration~~requires ~~statement~~that onwe ~~Form S-8~~offer ~~with~~sufficient ~~the~~benefits, ~~Securities~~including ~~and~~artist ~~Exchange~~services ~~Commission~~and ~~covering~~artist-oriented ancontent, ~~additional~~to ~~10,600,000~~encourage ~~shares~~them ofto ~~common~~continue ~~stock~~providing ~~reserved~~us ~~for~~with ~~issuance~~content. ~~under~~If ~~our~~we ~~1998~~are ~~and~~not ~~2000~~able ~~equity~~to maintain ~~incentive~~our ~~plans~~ability ~~and~~to ~~for~~serve ~~options~~and ~~issued~~provide ~~outside~~valuable ~~such~~tools ~~plans. Once~~to ~~issued~~artists, ~~any~~artists ~~shares~~may ~~registered~~leave onour ~~such~~web ~~Form S-8~~site ~~registration statement~~and ~~may~~remove betheir ~~freely~~music and ~~transferable~~other ~~without~~content. ~~restriction~~This ~~or registration~~could ~~under~~also ~~the~~prevent ~~Securities~~us ~~Act~~from ofattracting new ~~1933,~~artists. ~~with~~We ~~the~~may ~~exception~~ also oflose ~~certain~~artists ~~shares~~who ~~held~~gain byrecognition on our ~~affiliates,~~web assite ~~that~~and ~~term~~then ~~is defined~~are inrecruited ~~Rule 144~~by ~~under~~or attracted to the traditional ~~Securities~~music ~~Act~~industry. ~~Sales~~The loss of artists and the ~~common~~inability ~~stock~~to byattract ~~existing~~new ~~stockholders~~artists inwould ~~the~~impair ~~public~~our ~~market,~~ability orto ~~the~~generate ~~availability~~advertising ofrevenue, ~~such~~generate ~~shares~~CD ~~for~~revenues ~~sale,~~and ~~could~~offer ~~adversely affect~~a ~~the~~broad ~~market~~selection ~~price~~ of ~~the~~content ~~common~~through ~~stock~~our syndicated radio and business music services.

~~Holders~~Our ofBusiness ~~approximately~~Operations ~~17,088,152~~Could ~~shares~~Be ofSignificantly ~~our~~Disrupted ~~Common Stock have certain registration rights.~~ If ~~such holders, by exercising~~ ~~either~~We ~~their~~Lose ~~registration~~Members ~~rights or their rights under Rule 144 or Rule 701~~Of, ~~cause~~Or aFail ~~large~~To ~~number~~Properly ~~of securities to be registered and/or sold in the public market~~Integrate, ~~such~~ ~~sales could have an adverse effect on the market price for~~Our ~~our~~Management ~~common stock~~Team. ~~If we were to include in a company-initiated~~ ~~registration shares held by such holders pursuant to the exercise~~ ~~of their registration rights, such sales may have an adverse effect on our ability to raise needed capital.~~

~~Risks~~ Our ~~Related~~future Toperformance ~~Sales~~will be substantially dependent on the continued services of our management and our ability to retain and motivate them. The loss of the services of any of our officers or senior managers could harm our business. We do not have long-term employment agreements with any of our key personnel, ~~Marketing~~other ~~And~~than ~~Competition~~our Chief Executive Officer, and we do not maintain any “key person” life insurance policies except on our Chief Executive Officer. Almost all of our management team joined MP3.com in 1999. Since the completion of our initial public offering in July 1999, we have experienced turnover in our management team, and we may continue to experience turnover. Most of these individuals have not previously worked together and are currently being integrated as a management team. If our senior managers are unable to work effectively as a team, our business operations could be significantly disrupted.

~~Unless~~ We ~~Develop~~Rely AOn ~~Strong~~Cinram ~~Brand Identity~~International, ~~Our~~Inc. ~~Business~~To ~~May~~Fulfill ~~Not~~The Production ~~Continue~~And ToDelivery ~~Grow~~Of ~~And~~Substantially All Of Our ~~Financial~~DAM ~~Results~~CDs And Other Merchandise, And We May ~~Suffer~~Be Vulnerable To Unexpected Interruptions Or Discontinuation Of Our Fulfillment Operations.

WeIn ~~believe~~November ~~that~~1999, ~~our~~we ~~historical~~outsourced ~~growth~~exclusively ~~and~~to ~~brand recognition have~~Cinram ~~been~~International, ~~largely~~Inc. ~~attributable~~our tojust-in-time ~~frequent~~DAM ~~and~~CD ~~visible~~production ~~national~~ and ~~local~~fulfillment ~~media~~process, ~~exposure~~ as well as ~~individual,~~the ~~unsolicited~~production ~~promotion~~ and fulfillment of our ~~web~~other ~~site~~promotional CD products. The ~~frequency~~transition ~~or quality~~ of ~~this media exposure~~ fulfillment oroperations ~~promotion~~to ~~may~~Cinram ~~not~~was ~~continue.~~completed ~~Negative~~at ~~publicity~~the ~~from~~end ~~our~~of ~~litigation~~March ~~proceedings~~2000. ~~could~~For ~~hurt~~redundancy, ~~public~~we ~~perception~~also ofcurrently ~~our~~maintain ~~brand~~certain ~~and~~minimal ~~cause~~fulfillment ~~consumers~~capabilities ~~and~~at ~~artists~~our tomain ~~use~~facility ~~other~~in ~~web sites~~San Diego. ~~We believe~~Should ~~that~~Cinram ~~continuing~~cease to ~~strengthen~~provide ~~our~~us ~~brand~~with ~~will~~production ~~be critical~~and tofulfillment ~~achieve~~services ~~widespread~~for ~~acceptance~~any ofreason, ~~our~~we ~~products~~cannot ~~and~~assure ~~services.~~you that ~~Favorable~~we ~~public perception of our brand~~ will ~~depend~~be ~~largely~~able ~~on our ability~~ to ~~continue~~fulfill ~~providing~~any ~~users with high quality products and services and the success~~ of our ~~marketing~~customers’ ~~efforts.~~orders for WeDAM ~~plan~~CDs toand ~~increase~~other ~~our~~merchandise ~~marketing~~without ~~expenditures~~significant todelays ~~create and~~or ~~maintain brand recognition. However~~expense, ~~brand~~or ~~promotion~~at ~~activities may~~all. ~~not~~Any ~~yield~~such ~~increased~~loss ~~revenues~~of ~~and,~~fulfillment ~~even if they do~~operations, ~~any~~for ~~increased~~any ~~revenues~~period ~~may~~of ~~not offset the expenses we incur in~~time ~~building our brand.~~

~~If We Do Not Transcend A Mere Association Between Our Company And The Mp3 Format In The Minds Of Consumers, Our Brand Identity And Financial Results Could Suffer.~~36

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

If no Wematter ~~Fail~~how Tobrief, ~~Collect~~may ~~Accurate~~substantially ~~And~~and ~~Useful~~irreparably ~~Data~~harm ~~About~~our business ~~Our~~reputation ~~Consumers,~~and ~~Potential~~significantly ~~Advertisers~~decrease ~~May~~our ~~Not~~revenues ~~Advertise~~and our Ontotal ~~Our~~number ~~Web~~of ~~Site~~consumers, ~~Which~~artists ~~May~~and ~~Result In Reduced Advertising Revenues~~users.

We ~~plan~~May toNot ~~use~~Be ~~consumer~~Able ~~data~~To toHire ~~expand,~~And ~~refine~~Retain ~~and~~A ~~target~~Sufficient ~~our marketing~~Number ~~and sales efforts. We collect most of our data from~~Of ~~users~~Qualified ~~who~~Employees, ~~report~~And ~~information~~As toA usResult asWe ~~they~~May ~~conduct~~Not ~~transactions on~~Be ~~our~~Able ~~web~~To ~~site. If a large proportion of users impede our~~Grow ~~ability~~As toWe ~~collect data or if they falsify data~~Expect, ~~our~~Or ~~marketing and~~Maintain ~~sales~~The ~~efforts~~Quality ~~would~~Of beOur ~~less effective since advertisers~~Services. ~~generally require detailed demographic data on their target~~

38 Our future success will depend on our ability to attract, train, retain and motivate other highly skilled technical, managerial, marketing and customer support personnel. Despite the recent downturn in the viability and attractiveness of “dot-com” companies to the general workforce, competition for these personnel has historically been intense, especially for engineers, web designers and advertising sales personnel, and we may be unable to successfully attract sufficiently qualified personnel. Moreover, we may experience significant turnover of our current employee workforce. Substantially all of our employees joined us in 1999. If we cannot integrate these employees into our business, we will not be able to effectively manage our growth. Also, our inability to hire, integrate and retain qualified personnel in sufficient numbers may reduce the quality of our programs, products and services.

~~Table~~We ofMust ~~Contents~~Continue To Upgrade Our Technology Infrastructure, Or We Will Be Unable To Effectively Meet Demand On Our Web Site.

~~audiences.~~ In ~~addition,~~the ~~laws~~first ~~relating~~quarter toof ~~privacy~~2001, ~~and~~approximately ~~the use of~~880 gigabytes ~~the~~of ~~Internet~~musical tocontent, ~~collect~~25,000 artists ~~personal~~and ~~information~~167,000 songs and ~~including~~audio ~~strict laws~~files ~~relating~~were added to ~~collecting~~our ~~information~~web ~~from~~site; ~~children~~however, ~~could~~the number ~~limit~~of ~~our~~monthly ~~ability~~page views to ~~collect~~our ~~data~~web ~~and~~site ~~utilize~~decreased ~~our~~approximately ~~database.~~1% ~~Failure~~from toDecember ~~collect~~2000 ~~accurate~~to ~~and~~March ~~useful~~2001. ~~data~~We ~~could~~must ~~result~~continue into aadd ~~substantial~~hardware ~~reduction~~and inenhance ~~advertising~~software ~~revenues,~~to ~~which~~accommodate ~~represented~~the increased ~~96.4%~~content ofand ~~our~~continued ~~total~~use ~~revenues~~of ~~during~~our ~~the~~web ~~first~~site. ~~nine~~If ~~months~~we ofare ~~2000.~~unable to increase ~~Because~~the wedata ~~use~~storage ~~e-mail~~and ~~for~~processing ~~direct~~capacity ~~marketing,~~of ~~any~~our ~~legislative or~~systems ~~consumer~~at ~~efforts~~least toas ~~regulate~~fast ~~unsolicited~~as ~~bulk~~the ~~e-mails~~growth in demand, ~~commonly referred~~our toweb assite ~~“spam,”~~may become asunstable ~~well~~and asmay ~~other~~fail ~~laws~~to ~~regulating~~ operate ~~the~~for ~~use~~unknown periods of time. ~~e-mail,~~Unscheduled downtime could ~~significantly~~harm ~~impair~~ our ~~sales~~business and also ~~marketing~~could ~~efforts~~discourage ~~and~~users of our ~~associated~~web ~~advertising~~site ~~revenue~~and reduce future revenues.

WeOur ~~Expect~~Data ~~Competition~~Warehousing ToAnd ~~Increase~~Web ~~Significantly~~Server InSystems ~~The~~May ~~Future~~Stop ~~Which~~Working Or ~~Could~~Work ~~Reduce~~Improperly ~~Our~~Due ~~Revenues~~To Natural Disasters, ~~Potential~~Failure ~~Profits~~Of Third-Party ~~And~~Services, ~~Overall~~Rolling ~~Market~~Blackouts ~~Share~~And Other Unexpected Problems.

~~The~~Since ~~market~~our ~~for~~data ~~the~~warehousing, ~~online~~web ~~promotion~~server and ~~distribution~~network ~~of music and~~facilities are ~~music-related~~all ~~products~~located isin ~~competitive.~~California, ~~Barriers~~an toearthquake ~~entry~~or onother ~~the~~natural ~~Internet~~disaster ~~are~~could ~~relatively~~affect ~~low,~~all ~~and~~of weour ~~expect~~facilities ~~competition~~simultaneously. toAn ~~increase~~unexpected ~~significantly~~event inlike ~~the~~a ~~future.~~power Weor ~~face~~telecommunications ~~competitive~~failure, ~~pressures~~fire, ~~from~~flood ~~numerous~~or ~~actual~~earthquake ~~and~~at ~~potential~~our ~~competitors,~~on-site ~~many~~data ofwarehousing facility ~~which~~or ~~have~~at ~~longer~~either ~~operating~~of ~~histories,~~our ~~greater~~three ~~brand~~Internet ~~name~~service ~~recognition,~~providers’ ~~larger~~facilities ~~consumer~~could ~~bases~~cause ~~and~~the ~~significantly~~loss ~~greater financial,~~of ~~technical~~critical data and ~~marketing~~prevent ~~resources~~us ~~than~~from weoffering ~~do.~~our ~~We cannot~~services ~~assure~~to ~~you~~artists ~~that~~and consumers. ~~web~~In ~~sites~~addition, ~~maintained~~California byutility ~~our~~companies ~~existing and~~are ~~potential~~currently ~~competitors~~experiencing ~~will~~a ~~not~~financial becrisis ~~perceived~~which byhave ~~consumers,~~led to ~~artists~~“brownouts,” ~~talent~~“rolling ~~management~~blackouts” ~~companies~~ and other ~~music-related~~ ~~vendors~~disruptions orof ~~advertisers~~power asservices ~~being superior~~ to ~~ours~~consumers. WeThese ~~also~~losses ~~cannot~~of ~~assure~~power ~~you~~could ~~that~~continue weor ~~will~~worsen bedue ~~able~~ to ~~maintain~~circumstances out of our control and adversely affect our business or ~~increase~~shut down our web site ~~traffic~~and ~~levels,~~other ~~purchase~~operations ~~inquiries~~entirely. ~~and~~Our ~~number~~business ofinterruption ~~click-throughs~~insurance onmay ~~our~~not ~~online~~adequately ~~advertisements~~compensate orus ~~that~~for ~~competitors~~any losses that ~~will~~may ~~not~~occur, ~~experience~~and ~~greater~~our ~~growth~~web site may suffer irreparable harm in ~~these~~the eyes ~~areas~~of ~~than~~consumers weand doartists. In addition, we rely on third ~~Increased~~parties ~~competition~~to ~~could~~securely ~~result~~store inour ~~advertising~~archived ~~price~~data, house our web ~~reduction~~server and network systems, ~~reduced~~and ~~margins~~connect orus ~~loss~~to ofthe ~~market~~Internet. ~~share,~~A failure by any of ~~which could~~these ~~damage~~third ~~the~~parties ~~long-term~~to orprovide ~~short-term~~these ~~prospects~~services satisfactorily ofwould impair our ability to access archives and ~~business~~operate our web site.

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

~~Our~~ If ~~Business~~the ~~Operations~~security ~~Could~~measures Bethat ~~Significantly~~we ~~Disrupted~~use Ifto protect personal information are ineffective, we may lose visitors to our web site that could reduce our revenues. We ~~Lose~~rely ~~Members~~on Ofsecurity and authentication technology licensed from third parties. With this technology, Orwe ~~Fail~~perform Toreal-time ~~Properly~~credit ~~Integrate~~card authorization and verification. We cannot predict whether new technological developments could allow these security measures to be circumvented. In addition, ~~Our~~our ~~Management~~software, ~~Team~~databases and servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot assure that we can prevent all security breaches.

37 ~~Our future performance will be substantially dependent on the~~ ~~continued services of our management and our ability to retain~~ and motivate them. The loss of the services of any of our officers or senior managers could harm our business. We do not have long-term employment agreements with any of our key personnel, other than our Chief Executive Officer, and we do not maintain any “key person” life insurance policies except on our Chief Executive Officer. Almost all of our management team joined MP3.com in 1999. Since the completion of our initial public offering in July 1999, we have experienced turnover in our management team, and we may continue to experience turnover. Most of these individuals have not previously worked together and are currently being integrated as a management team. If our senior managers are unable to work effectively as a team, our business operations could be significantly disrupted.

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

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

39 The laws and regulations that govern our business change rapidly. Although our operations are currently based in California, the United States government and the governments of other states and foreign countries have attempted to regulate activities on the Internet. We do not know for certain how existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, illegal or obscene content, retransmission of media, and personal privacy and data protection may apply to the Internet. The vast majority of such laws were adopted before the advent of the Internet and related technologies and do not address the unique issues associated with the Internet and related technologies. In addition, most of the laws that relate to the Internet have not yet been fully interpreted by the various courts and other authorities.

~~Table~~ Furthermore, we have entered into agreements with international entities, and anticipate entering into additional agreements, to conduct business activities in foreign jurisdictions. Because our services are accessible worldwide, and because we facilitate sales of ~~Contents~~goods and provide services to users worldwide, foreign jurisdictions may claim that we are required to comply with their laws. For example, a French court has recently ruled that a U.S. web site must comply with French laws regarding content and, in December 2000, the highest court in Germany ruled similarly with regard to German law.

We On ~~May~~October 28, ~~Not~~1998, Bethe ~~Able~~Digital ToMillennium ~~Hire~~Copyright ~~And~~Act (or ~~Retain~~“DMCA”) Awas ~~Sufficient~~enacted. ~~Number~~The OfDMCA ~~Qualified~~includes ~~Employees,~~statutory licenses ~~And~~for Asthe Aperformance ~~Result~~of Wesound ~~May~~recordings ~~Not~~and Befor ~~Able~~the making Toof ~~Grow~~recordings Asto Wefacilitate ~~Expect~~transmissions. Under these statutory licenses, Ordepending ~~Maintain~~on our future business activities, we and our business partners may be required to pay licensing fees for digital sound recordings we deliver on our web site and through retransmissions of radio broadcasts and/or other audio content. The ~~Quality~~DMCA Ofdoes ~~Our~~not ~~Services~~specify the rate and terms of such licenses, which will be determined either through voluntary inter-industry negotiations or arbitration. Moreover, with respect to digital publishing, sound recording and other music licenses not directly covered by the DMCA, we plan to engage in a proceeding before a tribunal of the United States Copyright Office along with the Recording Industry Association of America during 2001 to determine what, if any, licensee fees should be paid to various rights holders. Depending on the rates and terms adopted for the statutory licenses, our business could be harmed both by increasing our own cost of doing business, and by increasing the cost of doing business for our customers.

~~Our~~The ~~future~~Child ~~success~~Online ~~will~~Protection ~~depend~~Act onand ~~our~~the ~~ability~~Child toOnline ~~attract, train,~~Privacy ~~retain~~Protection ~~and~~Act ~~motivate~~(or ~~other~~“COPPA”) ~~highly~~were ~~skilled~~enacted ~~technical,~~in ~~managerial,~~October ~~marketing~~1998. ~~and~~COPPA ~~customer~~imposes ~~support~~civil ~~personnel.~~and ~~Competition~~criminal ~~for~~penalties ~~these~~on persons ~~personnel~~distributing ismaterial ~~intense,~~harmful ~~especially~~to ~~for~~minors ~~engineers,~~over ~~web~~the ~~designers~~Internet ~~and~~to persons ~~advertising~~under ~~sales~~the ~~personnel,~~age ~~and~~of we17, ~~may~~or becollecting ~~unable~~personal toinformation ~~successfully~~from ~~attract~~children ~~sufficiently~~under ~~qualified~~the ~~personnel~~age of 13. ~~Substantially~~ ~~all~~We ofdo ~~our~~not ~~employees~~knowingly ~~have~~collect and ~~joined~~disclose uspersonal ~~since~~information ~~1999~~from such minors. IfThe manner wein ~~cannot~~which ~~integrate~~COPPA ~~these~~may ~~employees~~be ~~into~~interpreted ~~our~~and ~~business,~~enforced wecannot ~~will~~be fully ~~not~~determined, beand ~~able~~future legislation similar to ~~effectively~~COPPA ~~manage~~could subject ~~our~~us ~~growth.~~to ~~Also~~potential liability, ~~our~~which ~~inability~~in turn could harm our business. toSuch ~~hire,~~laws ~~integrate~~could ~~and~~also ~~retain~~damage ~~qualified~~the ~~personnel~~growth inof ~~sufficient~~the Internet ~~numbers~~generally ~~may~~and ~~reduce~~decrease the ~~quality~~demand offor our ~~programs,~~ products and services.

We Finally, ~~Must~~there ~~Continue~~are Toa ~~Upgrade~~large ~~Our~~number ~~Technology~~of ~~Infrastructure~~legislative proposals before the United States Congress and various state legislatures regarding online and other issues related to our business. It is not possible to predict whether or when such legislation may be adopted, Orand Wecertain ~~Will~~proposals, Beif ~~Unable~~adopted, Tocould ~~Effectively~~materially ~~Meet~~and adversely ~~Demand~~affect Onour ~~Our~~business ~~Web~~through ~~Site~~a decrease in user registration and revenue, and influence how and whether we can communicate with our customers.

InBecause ~~the third quarter~~ of ~~2000,~~this anrapidly ~~average~~evolving ofand ~~approximately~~uncertain regulatory ~~42.8 gigabytes~~environment, ofboth ~~musical~~domestically ~~content~~and ~~was~~internationally, ~~added~~we tocannot predict ~~our~~how ~~web~~these ~~site each~~laws ~~week~~ and ~~the~~regulations ~~number~~might ofaffect ~~monthly page views to~~ our ~~web site~~ ~~increased approximately 51~~business.5% ~~from~~In ~~the~~addition, ~~month~~these ofuncertainties ~~December~~make ~~1999~~it ~~to the~~difficult ~~month of September 2000. We must continue~~ to ~~add hardware and~~ ensure ~~enhance~~compliance ~~software~~with ~~to accommodate~~ the ~~increased~~laws ~~content~~ and ~~use~~regulations of governing ~~our web site~~the Internet. IfThese welaws ~~are unable to increase the data storage~~ and ~~processing~~ ~~capacity~~regulations ofcould ~~our~~harm ~~systems~~us atby ~~least as fast as the growth~~subjecting us into ~~demand,~~liability ~~our~~or ~~web~~forcing ~~site~~us ~~may become unstable and may fail~~ to ~~operate~~ ~~for~~change ~~unknown~~how ~~periods~~we ofdo ~~time. Unscheduled downtime could harm our~~ business ~~and also could discourage users of our web site and reduce future revenues~~.

~~Our New Financial Accounting System And Other Internal Systems May Not Work Effectively And As A Result~~ We May ~~Not~~Be ~~Have~~Liable ~~The Information We Need~~ To ~~Record~~Third ~~Transactions~~Parties ~~And~~For ~~Meet~~Music, ~~Our~~Software ~~Accounting~~ And Other ~~Reporting~~Content ~~Obligations,~~That ~~Which~~Is InAvailable ~~Turn~~On ~~Could Affect~~ Our ~~Ability~~Web ToSite ~~Run~~And ~~Our~~On ~~Business~~The ~~Efficiently~~CDs We ~~Or Profitably~~Distribute.

InWe ~~1999, we installed a new financial accounting system. If our accounting system does not work effectively, we~~ may ~~experience delays~~be orliable ~~failures~~to inthird ~~our~~parties ~~accounting~~for ~~processes. This could adversely impact~~ the ~~promptness~~content ~~and~~on ~~accuracy of~~ our ~~transaction~~web ~~processes,~~site and ~~our~~on ~~financial accounting and reporting. To manage~~ the ~~expected~~CDs ~~growth of our operations and personnel,~~ we ~~will need~~distribute: to improve our operational and financial systems, transaction processing, procedures and controls. Our current and planned systems, transaction processing, procedures and controls may not be adequate to support future operations.

~~Our~~• ~~Data~~if ~~Warehousing~~the ~~And~~music, ~~Web~~text, ~~Server~~graphics, ~~Systems~~software ~~May~~or ~~Stop~~other ~~Working~~content Oron ~~Work~~our ~~Improperly~~web ~~Due~~site Toor ~~Natural~~CDs ~~Disasters,~~violates ~~Failure~~their Ofcopyright, ~~Third-Party~~trademark, ~~Services~~or ~~And~~other ~~Other~~intellectual ~~Unexpected~~property ~~Problems.~~rights;

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

WeTable Mayof Lose Visitors To Our Web Site And Lose Revenues If Our Online Security Measures Fail.Contents

If• ~~the~~if ~~security~~our ~~measures~~artists ~~that~~violate wetheir ~~use~~contractual obligations to ~~protect~~others ~~personal information~~by ~~are~~providing ~~ineffective,~~content weon ~~may lose visitors to~~ our web site ~~that~~or ~~could~~CDs; ~~reduce~~or ~~our~~• ~~revenues.~~if Weanything ~~rely~~ on ~~security~~our ~~and authentication~~web ~~technology~~site ~~licensed~~or ~~from~~CDs ~~third~~is ~~parties.~~deemed ~~With this technology~~obscene, ~~we perform real-time credit card authorization and verification. We cannot predict whether new technological developments could allow these security measures to be circumvented. In addition~~indecent, ~~our~~harmful ~~software, databases and servers may be vulnerable~~ to ~~computer~~minors ~~viruses, physical~~ or ~~electronic break-ins and similar disruptions~~defamatory. ~~We may need to spend significant resources to protect against~~

40Risks Related To Government Regulation, Content and Intellectual Property.

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

~~security~~We ~~breaches~~May orNot toBe ~~alleviate~~Able ~~problems~~To ~~caused~~Prevent byOthers ~~any~~From Using Our ~~breaches~~Trademarks, Copyrights, Software And Other Intellectual Property Assets. WeIf ~~cannot~~Others ~~assure~~Do ~~that~~Use weThese ~~can~~Assets, ~~prevent~~Their ~~all~~Value ~~security~~To Us, And ~~breaches~~Our Ability To Use Them To Generate Revenue, May Decrease.

~~Risks~~ Our ~~Related~~intellectual Toproperty ~~Government~~includes ~~Regulation~~our trademarks and copyrights, ~~Content~~proprietary software, and other proprietary rights. ~~Intellectual~~We ~~Property~~believe that our intellectual property is important to our success and our competitive position, and we try to protect it. However, our efforts may be inadequate. Although we have applied for a trademark registration for the “MP3.com” name in numerous jurisdictions worldwide, we do not currently have a registered trademark in nearly all of these jurisdictions, including the most important jurisdictions such as the United States, and we may not be able to prevent others from using “mp3” or “MP3.com.” Use of the “MP3.com” name by others could dilute our brand identity and confuse the market. Moreover, much of our technology, including our Beam-it and Instant Listening services, subscription channels, the business music services and web site technology and software, are currently not protected by patents or other protection which would prevent third parties, including record companies and other rights holders, from duplicating the technology and providing services identical to ours. Although we have applied for patents with regard to a number of these and other core technologies of our business, none of these patents have yet been issued, nor is there any guarantee that they will ever be issued (or prosecutable) in the future. In addition, our ability to conduct our business may be harmed if others claim we violate their intellectual property rights. For example, certain entities have asserted that many online music providers, including MP3.com, violate patent rights that they allegedly own covering forms of distribution of music over the Internet (including the sale of digital downloads and certain music streaming technologies). If successful, these claims, or similar claims by others, could seriously harm our business by forcing us to cease using important intellectual property or requiring us to pay monetary damages. Even if unsuccessful, these claims could harm our business by damaging our reputation, requiring us to incur legal costs and diverting management’s attention away from our business.

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

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

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The primary objective of our investment activities is to ~~preserve~~ preserve principal while at the same time maximizing yields ~~without~~ without significantly increasing risk. To achieve this objective, we maintain a portfolio of cash equivalents ~~and~~in ~~marketable~~a variety of securities, including U.S. government agencies, ~~corporate debt~~ ~~securities,~~ commercial paper, and money market funds. As of ~~September~~ March 3031, ~~2000~~ 2001, ~~approximately 98.4~~100% of our total portfolio matures in one year or less~~, with the remainder maturing in less than two years~~.

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

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

		Maturing Less			Maturing Greater
		Than 1 Year			Than 1 Year
Cash equivalents		$	179,803		$	—
	Average interest rates		6.60	%		—
Short term investments, excluding equity investments		$	48,788		$	4,002
	Average interest rates		6.63	%		7.05	%

As of September 30, 2000, we held one derivative financial instrument, a warrant to purchase 1.5 million shares of Cinram International, Inc., and one marketable equity investment. The deemed fair value of the warrant and equity investment were $5,647,000. In addition, we had no outstanding bank debt as of September 30, 2000.

Foreign Currency Risk

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

Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of interest sensitive financial instruments at March 31, 2001. The following table presents the fair value balances of our cash equivalents that are subject to interest rate risk by year of expected maturity and average interest rates as of March 31, 2001 (dollars in thousands):


	2001

Cash equivalents	$	91,211




Average interest rates		5.02	%

Strategic Portfolio Liquidity Risk

We have made strategic investments in certain privately-held companies. As of March 31, 2001, these investments had a net book value of approximately $11.4 million. Since these companies are not publicly traded, the ability for us to liquidate or sell all or part of our ownership interest in one or all of these companies may be very difficult. In the event we are able to sell all or a portion of our ownership interest, we may need to do so at a substantial discount from our cost or recorded basis. Additionally, the ability of these companies to obtain additional capital, if necessary, to continue to operate may be very difficult. If one or all of these companies are unable to obtain necessary capital to continue their operations, they may file for bankruptcy or be forced into bankruptcy by their creditors. This could further impair our ability to sell or liquidate our ownership interest, which could result in a significant charge to income for impairment of these strategic investments.

Foreign Currency Risk

Currently, nearly all of our revenues and expenses are denominated in U.S. dollars and as a result, we have not experienced any significant foreign exchange gains or losses.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Record Label Lawsuits. On January 21, 2000, ten major recording companies filed a copyright infringement lawsuit against MP3.com, Inc. (“MP3.com”, the “Company”, “we”, or “us”) in the United States District Court for the Southern District of New York. The complaint alleged that MP3.com, in connection with certain content available in its My.MP3.com service, made unauthorized copies of tens of thousands of audio CDs in violation of the Copyright ~~Act. On April 28, 2000, the court~~Litigation ~~granted plaintiffs’ motion for summary judgment and held~~ that MP3.com was liable for infringing plaintiffs’ copyrights, and the litigation proceeded with discovery on the issues of willfulness and damages. On May 10, 2000, MP3.com voluntarily disabled the plaintiffs’ content within the My.MP3.com service.

~~Between~~Major ~~June~~Label ~~and August 2000, MP3~~Lawsuits.~~com~~ ~~entered~~On ~~into settlement and license agreements with Warner Music Group~~January 21, ~~BMG Entertainment~~2000, ~~Sony~~ ~~Music and Capitol Records, Inc.(EMI), which together represented eight of the~~ ten major recording companies ~~that~~ filed ~~the~~a copyright infringement lawsuit ~~on January 21, 2000. The~~ against ~~settlement agreements provide for a settlement amount to be paid in cash by~~ MP3.com, Inc. in ~~exchange~~the ~~for~~United aStates ~~release~~District ~~from~~Court for the ~~settling plaintiffs~~Southern ~~and~~District ~~their~~of ~~affiliated~~New ~~entities~~York (asthe ~~defined~~“Major ~~in the~~Label ~~settlement agreements~~Lawsuit”). ofThe ~~all~~complaint ~~claims~~alleged ~~related~~that ~~to the January 21, 2000 lawsuit and the My.~~MP3.com, ~~service. Most-favored-nations provisions~~ in ~~these settlement agreements~~ ~~require~~connection ~~additional~~with ~~settlement~~certain ~~amounts~~content toavailable bein ~~paid~~its ~~under certain circumstances~~My. MP3~~.com~~ service, made nounauthorized ~~admission~~copies of ~~wrongdoing~~tens ~~in connection~~of ~~with~~thousands ~~these settlements. Subject to certain affirmative obligations~~ of ~~MP3.com~~audio ~~and~~CDs ~~other terms and conditions regarding~~in ~~the~~violation ~~implementation~~ of the ~~My.MP3.com~~Copyright ~~service, the license agreements permit MP3~~Act.~~com~~ toOn ~~utilize recordings owned by Warner Music Group~~April 28, ~~BMG Entertainment~~2000, ~~Sony~~the court ~~Music~~granted ~~and~~plaintiffs’ ~~EMI~~motion asfor ~~part~~summary ofjudgment ~~the~~and held ~~My.~~that MP3.com ~~service.~~was ~~The~~liable ~~license~~for ~~agreements~~infringing ~~have terms of~~plaintiffs’ ~~approximately three to ten years~~copyrights, and ~~provide~~the ~~for~~litigation ~~on-going royalty~~proceeded ~~payments~~with ~~based~~discovery on the ~~greater of (i) a specified~~ ~~percentage~~issues of ~~net~~willfulness ~~revenues~~and ~~generated~~damages. ~~from~~On ~~the~~May 10, ~~My.~~2000, MP3.com ~~service~~ ordisabled ~~(ii) a~~all ~~specified~~content ~~amount~~within ~~accrued~~the ~~each time a licensor recording is streamed from~~ My.MP3~~.com.~~ Inservice ~~addition,~~except ~~the licenses~~as ~~provide~~expressly ~~for~~authorized ~~on-going~~by ~~royalty payments based on~~ the ~~number~~copyright ~~of times a licensor recording is added to My~~holders.~~MP3.com accounts.~~

AsBetween aJune ~~result~~and ofAugust ~~the~~2000, ~~settlements~~MP3.com ~~described~~entered ~~above,~~into ~~the~~settlement ~~January 21,~~and ~~2000~~license ~~copyright~~agreements ~~infringement~~with ~~lawsuit~~Warner ~~was~~Music ~~limited~~Group, BMG toEntertainment, aSony ~~dispute~~Music, ~~with~~and ~~UMG~~Capitol ~~Recordings~~Records, Inc., (EMI), which ~~represents~~together ~~two~~represented eight of ~~the~~ ~~original plaintiffs. A trial in~~ the ~~case~~ten ~~was~~major ~~held from~~recording ~~August 28~~companies ~~through~~that ~~September 6,~~filed ~~2000 on~~ the ~~issues~~Major ~~of willfulness~~Label ~~and damages~~Lawsuit. ~~After~~The ~~hearing evidence, the court ruled~~settlement onagreements ~~September 6,~~provide ~~2000~~for ~~that~~a ~~MP3.com~~settlement ~~had~~amount ~~willfully infringed UMG’s copyrights and awarded damages~~ to ~~UMG~~be paid in ancash ~~amount of~~by ~~$25,000 per CD~~MP3.com Ain ~~trial~~exchange isfor ~~scheduled~~a torelease ~~commence~~from ~~on November 13, 2000 to determine~~ the ~~number~~settling ~~of valid copyright~~plaintiffs and ~~registrations~~their ~~held~~affiliated byentities ~~UMG,~~(as ~~and~~defined ~~hence~~in the ~~number~~settlement agreements) of ~~CDs~~all ~~for~~claims ~~which~~ related ~~UMG will be entitled~~ to ~~recover~~ the ~~per~~lawsuit CDand ~~damage~~the ~~award~~My. ~~Based~~MP3 onservice. ~~information~~“Most-favored-nation” ~~presently~~provisions ~~available,~~in ~~the~~these settlement ~~maximum~~agreements ~~number~~require ofadditional ~~such registrations~~settlement isamounts ~~estimated~~ to be ~~between~~paid ~~3,000~~under ~~and~~certain ~~7,000~~circumstances. ~~Numerous factors could affect the ultimate size of the~~ ~~determination.~~

~~Over~~As ~~the~~a ~~course~~result of ~~2000~~these settlements, ~~some~~the ~~other~~Major ~~independent~~Label ~~labels~~Lawsuit ~~have~~was limited ~~filed~~to a dispute with UMG Recordings, Inc., which represented ~~lawsuits~~two ~~against~~of usthe ~~based~~original onplaintiffs. A trial in the ~~same~~case was ~~set~~held from August 28 through September 6, 2000 on the issues of ~~allegations~~willfulness asand damages. After hearing evidence, the court ruled on September 6, 2000 that MP3.com had willfully infringed UMG’s ~~case~~copyrights and awarded damages to UMG in an amount of $25,000 per CD. ~~These~~The ~~labels~~Court ~~include~~then ~~Zomba~~scheduled ~~Recording~~a period ~~Corp~~to allow MP3.,com ~~Tee~~to ~~Vee~~conduct discovery concerning the ~~Toons,~~certificates ~~Inc~~of registration for which plaintiffs sought damages. On November 16, ~~and~~2000, ~~Koch~~UMG ~~Entertainment~~made ~~and~~a ~~Velvel~~motion ~~Records~~for ~~LLC.~~entry ~~Additionally~~of judgment in the amount of $53,400,000 ~~several~~in ~~independent~~statutory ~~labels~~damages, costs, ~~have~~and ~~sent~~attorneys’ usfees, ~~demand~~which MP3.com did not oppose. ~~letters~~As ~~alleging~~a ~~similar~~result, ~~claims~~a judgment in that amount was entered.

~~Publisher Lawsuits~~MP3.com Onhas ~~March 14,~~also ~~2000,~~entered ~~two~~into ~~large~~a license agreement with UMG. ~~music-publishing~~Subject ~~companies,~~to ~~MPL~~certain ~~Communications,~~affirmative ~~Inc~~obligations of MP3.com and ~~Peer~~other ~~International~~terms ~~Corporation,~~and ~~filed~~conditions aregarding ~~copyright~~the ~~infringement~~implementation ~~lawsuit~~ of ~~against~~the My.MP3 service, MP3.com inis ~~the~~permitted ~~United~~to ~~States~~utilize ~~District~~the ~~Court~~recordings ~~for~~owned ~~the~~by ~~Southern~~Warner ~~District~~Music ofGroup, ~~New~~BMG ~~York.~~Entertainment, ~~The~~Sony ~~complaint~~Music, ~~alleged that MP3.com~~EMI, inand ~~connection~~UMG as ~~with~~part ~~its~~of the My.MP3~~.com~~ service,. ~~made unauthorized~~The ~~copies~~license agreements have terms of approximately 45three to ten years,~~000~~ ~~audio~~and ~~CDs~~provide ~~in violation~~for payment of a ~~the~~one-time ~~Copyright~~fee ~~Act,~~each ~~and~~time ~~that~~a ~~MP3.com,~~licensor’s inrecording ~~connection~~is added to ~~with~~a ~~the~~separate ~~streaming~~My.MP3 ofaccount. ~~audio~~These ~~content~~licenses toalso ~~users~~provide offor on-going royalty payments based on the ~~My.MP3.com~~greater of (i) a ~~service,~~specified ~~continued~~percentage toof ~~make~~net ~~unauthorized~~revenues ~~digital~~generated ~~phonorecords~~from or in ~~violation~~connection ofwith the ~~Copyright Act~~My.MP3 ~~The~~service ~~complaint~~or ~~further~~(ii) a ~~alleges~~specified ~~that~~amount ~~MP3.com’s~~accrued ~~actions~~each ~~constituted~~time ~~unauthorized~~a ~~copying~~licensor’s ~~and willful~~recording ~~infringement~~is ofstreamed from ~~plaintiffs’~~My.MP3. ~~copyrights~~Although MP3.com ~~Plaintiffs seek~~has ~~damages~~obtained ~~(including~~license ~~statutory~~agreements permitting ~~damages~~the use of uprecordings tofrom ~~$150~~BMG Entertainment,~~000~~ ~~per~~Warner ~~violation)~~Music ~~and~~Group, ~~injunctive~~Sony ~~relief~~Music, ~~prohibiting~~UMG, ~~MP3.com~~EMI, ~~from~~and certain other independent ~~operating~~labels, ~~its~~we ~~My.~~cannot guarantee that MP3.com ~~service~~will orbe ~~any~~able ~~other~~to ~~service~~secure similar ~~that~~license ~~uses unauthorized~~agreements ~~reproductions~~from ofany ~~plaintiffs’~~other ~~copyrighted~~recording ~~works~~company. ~~Additionally, Zomba~~

43 Other Record Label Lawsuits. Over the course of 2000, some other entities filed lawsuits against us based on the same set of allegations as the Major Label Lawsuit. These include: Tee Vee Toons, Inc.; Zomba Recording Corp. (the “Zomba case”); Koch Entertainment and Velvel Records LLC (the “Koch case”); EMusic.com, Inc., Fuel 2000 Records, Spinart, Inc., Gig Records, Fearless Records, and Invisible Records (the “EMusic case”); and Unity Entertainment Corporation (the “Unity” case). Additionally, several independent labels have sent us demand letters alleging similar claims.

A jury trial in the Tee Vee Toons case commenced on March 26, 2001. Prior to trial, in reliance on the Court’s rulings in the Major Label Lawsuit, the issues of infringement, fair use, and willfulness were adjudicated against us. As a result, the jury trial was limited to the issue of damages. The trial concluded on April 6, 2001. The jury considered 145 copyright certificates and returned a verdict which the Court tabulated as totaling $292,968. Subsequently, two jurors contacted the Court to inform it that the verdict decided upon by the

~~Enterprises,~~jurors ~~Inc~~contained discrepancies. ~~has~~The ~~filed~~Court ~~its~~has ~~own~~interviewed ~~music publishing case against~~all ~~us. In view of~~ the ~~court’s~~jurors ~~rulings~~and inhas ~~the~~set ~~UMG case, there is~~ a ~~substantial~~briefing ~~risk~~schedule ~~that~~on the ~~issues~~issue of ~~infringement, fair use,~~the ~~and~~jury’s ~~willfulness may be adjudicated against us in these cases with publishers~~verdict. ~~This~~The Court could ~~mean~~reform ~~that we would only be able to litigate~~ the ~~issue~~verdict ~~of damages. A motion has been filed by MPL and Peer~~ to ~~amend their complaint to add many additional copyrighted~~an amount ~~works~~consistent towith ~~those at issue in~~ the ~~action.~~jury’s Onpurported ~~October 17~~intention, ~~2000,~~it could ~~MP3.com,~~leave the ~~National~~verdict ~~Music~~undisturbed ~~Publishers’ Association, Inc.~~ and ~~its~~enter ~~licensing~~judgment ~~subsidiary,~~in ~~The Harry Fox Agency, Inc. entered~~the ~~into~~amount aoriginally ~~preliminary~~set ~~agreement that — if approved~~ by ~~individual~~ ~~HFA music publisher-principals — would permit~~ the ~~use~~jury, ofor upit tocould ~~one~~declare ~~million musical compositions on the~~a Mymistrial.~~MP3.com~~ ~~service.~~An Inimmediate ~~addition,~~appeal ~~MP3.com,~~is ~~MPL~~likely ~~and Peer agreed~~ to ~~settle~~ ~~the~~be ~~March 14,~~taken ~~2000 litigation upon finalization of the preliminary agreement, which requires ratification~~ by ~~individual~~ ~~HFA~~one ~~music publisher-principals. MP3.com, MPL and Peer~~party ~~agreed~~or ~~to stay~~ the ~~March 14,~~other ~~2000~~depending ~~litigation~~upon ~~until~~ the ~~ratification~~ ~~process~~Court’s ~~is completed~~ruling. ~~Accordingly, the court stayed~~ ~~all proceedings in this litigation until January 2, 2001.~~

~~The~~Discovery ~~proposed,~~in ~~3-year~~the ~~licensing~~Zomba ~~arrangement~~case ~~provides~~is ~~that~~currently ~~MP3.com will~~being ~~pay~~conducted upand is scheduled to ~~thirty~~close ~~million~~on ~~dollars ($30~~May 21,~~000,000)~~ to2001. ~~HFA~~The ~~for~~final pre-trial ~~the~~conference ~~benefit~~is ofscheduled upfor toJune 29, 252001,~~000~~ ~~music publishers~~ and ~~their~~the ~~songwriter~~case is set ~~partners~~for astrial ~~part~~on ofJuly 9, ~~two equal funds~~2001. ~~One~~Like ~~fund~~the ~~will~~Tee beVee ~~used~~Toons tocase, ~~pay~~the ~~HFA~~trial ~~publisher-principals~~in ~~for~~the ~~past~~Zomba ~~uses~~case ofwill ~~music~~be onlimited to only the issue of Mydamages.~~MP3.com~~ ~~service,~~The inKoch ~~exchange~~case ~~for~~has abeen ~~release~~settled ~~from HFA publisher-principals~~ and ~~their~~the ~~affiliated~~case ~~entities~~is ofnow closed. ~~all~~The ~~claims related~~complaint toin the ~~March~~EMusic case was filed on December 14, 2000. ~~lawsuit~~MP3.com’s ~~and~~response to the ~~use of their~~complaint ~~compositions~~was filed on ~~the~~February 8, My2001.~~MP3.com~~ ~~service.~~Pursuant ~~The~~to ~~other~~the ~~fund will~~case ~~provide~~management ~~advance~~plan, ~~payments~~the ~~toward~~case ~~royalties~~is ~~earned~~to ~~under~~be ~~the~~ready for trial on ~~prospective~~August 20, ~~license~~2001. The ~~terms~~Unity ofcase, ~~the~~which ~~prospective~~purports ~~license~~to ~~call~~be ~~for~~brought aon ~~payment~~behalf of ~~one~~Unity, ~~quarter~~an ~~cent~~independent ~~each~~record ~~time~~company awhose works ~~song~~were isallegedly ~~streamed~~used on in ~~demand~~the toMy.MP3 aservice, ~~customer~~and ~~from~~all ~~his~~other similarly situated entities or ~~her~~individuals, Mywas filed on November 7, 2000. MP3.com, ~~locker~~Inc. answered the Complaint on January 16, ~~along~~2001. On April 16, 2001, the Court entered ~~with~~an aorder ~~one-time~~denying ~~fee~~plaintiffs’ ~~per~~motion ~~track~~for ~~added~~class certification without prejudice to a renewal of the ~~My.MP3.com~~motion ~~service~~within 45 days.

~~Artists’~~Publisher ~~Class Action~~Lawsuits. On ~~April~~March 1214, 2000, ~~several~~ ~~artists~~two ~~filed~~large music apublishing ~~class~~companies, ~~action~~MPL ~~lawsuit~~Communications, inInc. ~~the~~and ~~United States~~Peer International ~~District~~Corporation, ~~Court~~with ~~for~~ the ~~Southern~~assistance ~~District~~ of ~~New~~The ~~York~~Harry ~~against~~Fox ~~MP3~~Agency, Inc.~~com~~ ~~and~~(“HFA”), ~~several~~filed ~~major~~a ~~recording~~copyright ~~companies that claimed to own~~infringement lawsuit ~~copyrights~~against MP3.com in ~~sound~~the ~~recordings~~United ~~featuring~~States ~~the~~District ~~artists.~~Court ~~The~~for ~~complaint~~the ~~alleges~~Southern ~~that~~District ~~the~~of ~~recording~~New ~~company~~York ~~defendants,~~(the in“MPL/ ~~their~~Peer case”). ~~separate~~The ~~lawsuit~~complaint ~~against~~alleged that MP3.com ~~(filed on January 21~~, ~~2000 —~~ ~~see above), are claiming rights~~ in connection ~~plaintiffs’~~with ~~recordings~~its ~~that they do not possess~~My.MP3 ~~In particular~~service, ~~the~~made ~~complaint~~unauthorized ~~alleges~~copies ~~that~~of ~~the~~audio ~~recording company~~CDs ~~defendants~~containing doplaintiffs’ ~~not~~copyrighted ~~possess~~works ~~any~~in ~~copyright~~violation ~~protections with respect~~of tothe ~~plaintiffs’~~Copyright ~~pre-1972~~Act, ~~published~~ and ~~pre-1978~~that ~~unpublished recordings~~MP3.com, doin ~~not~~connection ~~possess~~with the streaming ~~right~~of toaudio ~~digitally~~content ~~transmit plaintiffs’~~to ~~pre-1996~~users ~~recordings~~of ~~over~~ the ~~Internet,~~My.MP3 ~~and do~~service, ~~not~~continued ~~possess~~to ~~the~~make ~~right~~unauthorized todigital ~~control~~phonorecords ~~the~~in ~~conversion of~~violation ~~plaintiffs’~~of ~~recordings~~the ~~into~~Copyright ~~mp3 files~~Act. The complaint further ~~alleges~~alleged that MP3.com’s ~~has~~actions ~~used~~constituted ~~the~~unauthorized ~~names~~copying and ~~likenesses of~~ ~~plaintiffs~~willful ~~without~~infringement ~~their consent or authorization and in a deceptive manner, in violation~~ of ~~the~~plaintiffs’ ~~federal Lanham Act, the New York Civil Rights Law, and unspecified unfair competition and misappropriation laws~~copyrights. ~~In their prayer for relief, plaintiffs ask~~Plaintiffs sought todamages ~~have~~(including ~~their~~statutory ~~class action certified, to be awarded unspecified~~ damages ~~and~~of ~~attorneys’~~up ~~fees,~~ to ~~have the defendants enjoined~~$150,000 per ~~from~~violation) ~~using plaintiffs’ names~~ and ~~likenesses~~injunctive ~~to promote downloading music over the Internet, and to receive declaratory~~ relief ~~regarding~~prohibiting ~~plaintiffs’~~MP3.com ~~rights in their pre- and~~from ~~post-1972~~operating ~~recordings. This case has been dismissed in~~ its ~~entirety~~ ~~with~~My.MP3 ~~prejudice~~service ator ~~the~~any ~~pleadings~~other ~~stage,~~service ~~and~~that ~~we have been~~uses ~~informed~~unauthorized ~~that~~reproductions ~~the~~of plaintiffs’ ~~intend~~copyrighted ~~to appeal~~works.

~~Settlement~~On ~~Discussions;~~October 17, ~~Charge~~2000, ~~to Earnings.~~ MP3.com, ~~has pursued~~the ~~and~~National ~~continues to actively pursue settlement discussions~~Music ~~with~~Publishers’ ~~the~~Association, ~~various~~Inc., ~~plaintiffs~~ and ~~claimants~~its ~~in the cases and~~licensing ~~disputes~~subsidiary, ~~discussed~~HFA, ~~above.~~entered ~~The decision whether to enter~~ into ~~settlement~~ ~~and/or license agreements with each party will be based upon~~ a ~~number~~preliminary ofagreement ~~factors related~~ to ~~both the lawsuits and~~be ~~MP3.com’s~~approved ~~business~~by inindividual ~~general.~~HFA Wemusic ~~cannot~~publisher-principals ~~guarantee that we~~for ~~will~~settlement beand ~~able~~use toof ~~enter~~musical ~~into~~compositions ~~any additional settlement agreements~~ on ~~terms~~the ~~favorable to MP3~~My.~~com,~~MP3 ~~if at all, or that any settlement~~service orfor ~~license~~a ~~agreement~~three ~~will~~year ~~prove beneficial to our business or stockholders~~term. ~~During~~As ~~the~~a ~~quarter ended June 30~~result, ~~2000,~~MPL ~~we recorded a charge for litigation~~ and ~~copyright~~Peer ~~matters~~settled ~~of $150.0 million. The charge for litigation and copyright matters represented MP3.com’s estimate of~~ the ~~total costs to~~ MPL/ bePeer ~~incurred~~case ~~in connection~~ with ~~the resolution of the various litigation and copyright matters associated with the My.~~MP3.com ~~service~~, ~~including the lawsuits filed by major recording companies~~ and ~~other~~a ~~parties.~~stipulation ~~Copyright~~of ~~issues~~dismissal ~~associated~~ with ~~the~~ prejudice ~~My.MP3.com~~was ~~Service~~subsequently ~~also~~signed ~~include~~by ~~but~~the ~~are~~parties ~~not limited to~~on ~~publishing rights~~December 28, ~~non-major~~2000 ~~label content,~~ and ~~legal~~entered ~~and advisory~~by ~~fees.~~the ~~This~~Court ~~charge did not reflect or include any amounts~~on ~~paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3.com service~~January 2, ~~or any additional amounts that might be~~2001. ~~payable under the most-favored-~~

44 The three-year licensing arrangement provided that MP3.com would pay up to $30 million to HFA for the benefit of up to 25,000 music publishers and their songwriter partners, to be allocated to two equal funds. One fund was used to pay HFA publisher-principals for past uses of music on the My.MP3 service, in exchange for a release from HFA publisher-principals and their affiliated entities of all claims related to those asserted in the MPL/ Peer case and the use of their compositions on the My.MP3 service. The other fund provides advance payments toward royalties earned under the prospective license. The terms of the prospective license call for a payment of one-quarter cent each time a song is streamed on demand to a customer from his or her My.MP3 locker, along with a one-time fee per track added to the My.MP3 service. The preliminary agreement with HFA was finalized on February 28, 2001. Approximately 78% of the publisher-principals HFA represents accepted and are bound by the settlement agreement and approximately 90% accepted and are bound by the licensing agreement. In April 2001, HFA refunded to MP3.com approximately $4.6 million pursuant to the agreement, representing approximately $3.2 million and $1.4 million for the proportion of HFA publisher-principals that did not settle or license content to MP3.com, respectively.

Zomba Enterprises, Inc. has filed its own music publishing case against us making allegations similar to those set forth in the MPL/ Peer case. Additionally, several other publishers, not affiliated with HFA, have sent us demand letters alleging similar claims. In view of the Court’s rulings in the Tee Vee Toons and Zomba cases, there is a substantial risk that the issues of infringement, fair use, and willfulness may be adjudicated against us in any and all publisher cases. This would mean that we would only be able to litigate the issue of damages.

~~nations~~Artists’ ~~provisions~~Class Action. ~~described~~On ~~above~~April 12, 2000, several artists filed a class action lawsuit in the United States District Court for the Southern District of New York against MP3.com ~~This~~and ~~charge~~several ~~reflected~~major recording companies that ~~management~~claimed to own copyrights in sound recordings featuring the artists. The complaint alleged that the recording company defendants in the Major Label Lawsuit claimed rights in plaintiffs’s ~~expectations~~recordings asthat they did not possess. In particular, the complaint alleged that the recording company defendants did not possess any copyright protections with respect to plaintiffs’ pre-1972 published and pre-1978 unpublished recordings, did not possess the right to digitally transmit plaintiffs’ pre-1996 recordings over the Internet, and did not possess the right to control the conversion of plaintiffs’ ~~July 26~~recordings into mp3 files. The complaint further alleged that MP3.com has used the names and likenesses of plaintiffs without their consent or authorization and in a deceptive manner, ~~2000~~in violation of the federal Lanham Act, the New York Civil Rights Law, and ~~was~~unspecified unfair competition ~~based~~and onmisappropriation ~~currently~~laws. ~~available~~In ~~information~~their asprayer ~~well~~for asrelief, plaintiffs ~~significant~~asked to have their class action certified, to be ~~assumptions~~awarded ~~made~~unspecified bydamages ~~management~~and attorneys’ fees, to have the defendants enjoined from using plaintiffs’ names and likenesses to promote downloading music over the Internet, and to receive declaratory relief regarding plaintiffs’ rights in their pre- and post-1972 recordings. On August 28, 2000, the ~~litigation~~Court issued an oral ruling dismissing all claims against MP3.com. On December 7, 2000, judgment was entered dismissing, with prejudice, the federal claims against the defendants. All state claims were dismissed for lack of an independently sufficient jurisdictional basis. Plaintiffs filed a Notice of Appeal on January 5, 2001. Briefing begins on April 24, 2001.

~~During~~Copyright Settlement Discussions; Charge to Operations. MP3.com has pursued and continues to actively pursue settlement discussions with the ~~quarter~~various plaintiffs and claimants in the cases and disputes discussed above. The decision whether to enter into settlement and/or license agreements with each party will be based upon a number of factors related to both the lawsuits and MP3.com’s business in general. We cannot guarantee that we will be able to enter into any additional settlement agreements on terms favorable to MP3.com, if at all, or that any settlement or license agreement will prove beneficial to our business or stockholders. During the year ended ~~September~~December 3031, 2000, we recorded ~~an additional~~a charge for litigation and copyright matters of $20170.0 million. ~~This~~The charge ~~additional~~for ~~charge~~litigation ~~reflects~~and ~~incremental~~copyright matters represented our ~~costs~~estimate ~~that~~of ~~management~~the ~~estimates~~total ~~will~~costs to be incurred only in connection with the resolution of the various litigation and copyright matters associated with the My.MP3~~.com~~ service, including the lawsuits filed by major recording companies and other parties. Copyright ~~The~~issues ~~additional~~associated with the My.MP3 service also include ~~charge~~but are not limited to publishing rights, non-major label content, and ~~accrual~~legal and advisory fees. This charge did not reflect or include any amounts paid or payable in connection with forward-looking licenses to use music recordings or compositions in connection with the My.MP3 service. This charge reflects management’s expectations as of the date of this ~~quarterly~~ report, and is based on currently available information as well as significant assumptions made by management regarding the various litigation and copyright matters. ~~Although~~Cash wepayments ~~believe~~for ~~that~~ the settlements ~~expectations~~and judgments discussed above and other payments ~~assumptions~~have ~~reflected~~reduced inthe ~~this~~cumulative ~~additional~~amount reserved as a result of this charge ~~are~~to ~~reasonable~~$43.4 million as of March 31, we 2001. We cannot guarantee that future events or results will conform to our ~~such~~ expectations or assumptions regarding the various litigation and copyright matters. If these expectations and ~~significant~~ significant assumptions prove to be erroneous in light of future events, the actual amounts incurred by MP3.com to resolve all copyright matters related to the My.MP3 service could be materially different than those recorded as of ~~September~~ March 3031, ~~2000~~2001, and could far exceed the resources and market capitalization of our company.

~~Cash~~Class Action ~~payments for the settlements discussed above~~ and ~~other payments~~Derivative ~~have reduced the cumulative amount reserved as a result~~Lawsuits ~~of these charges to $116.9 million as of September 30,~~ ~~2000. Amounts payable for past issues in connection with the HFA/Peer/MPL agreement described above are included in the remaining amount reserved as of September 30, 2000.~~

~~Although~~ MP3.com ~~has~~and ~~obtained~~certain ~~license~~of ~~agreements~~its ~~permitting~~employees, ~~the~~officers, and directors ~~use~~have ofbeen ~~recordings~~named ~~from~~as ~~BMG~~defendants ~~Entertainment,~~in ~~Warner~~several ~~Music~~lawsuits ~~Group,~~alleging ~~Sony~~violations ~~Music~~of ~~and~~the ~~EMI,~~federal wesecurities ~~cannot guarantee that MP3~~laws.~~com~~ ~~will~~The becomplaints, ~~able~~which were tofiled ~~secure~~between ~~similar~~September 19, ~~license~~2000 ~~agreements~~and ~~from~~November 15, 2000 ~~any~~in ~~other~~the ~~recording company.~~United ~~Similarly,~~States ~~MP3.com~~District ~~has~~Court ~~not~~for ~~yet~~the ~~secured~~Southern District ~~any~~of ~~final publishing~~California, ~~license~~each orpurport ~~other~~to ~~affirmative~~be ~~clearance~~brought ~~(whether~~on bybehalf of ~~litigation~~a orclass ~~otherwise)~~of tostockholders. ~~utilize~~The ~~within~~complaints ~~the~~allege ~~My.~~that MP3.com ~~service~~and the ~~compositions~~other ~~embodied~~defendants inviolated the ~~recordings~~federal ~~owned~~securities bylaws ~~any~~by ~~recording~~issuing ~~company~~materially ~~(including~~false ~~BMG~~and ~~Entertainment,~~misleading ~~Warner~~statements ~~Music Group, Sony Music~~ and ~~EMI),~~failing to ~~nor~~disclose ~~can~~material weinformation ~~guarantee~~regarding ~~that~~its ~~any~~My.MP3 ~~such~~service ~~license~~and orthe ~~clearance~~litigation ~~will~~surrounding ~~ever~~the ~~be obtained~~service. IfBetween September 14, a2000 ~~final~~and ~~publishing~~ October 26, ~~license~~2000, orcertain stockholders ~~other~~of ~~affirmative~~MP3.com ~~clearance~~filed toshareholder ~~utilize~~derivative ~~such~~suits ~~compositions~~against isMP3.com ~~not~~and ~~obtained,~~certain ~~our~~of ~~ability~~its toemployees, ~~utilize~~officers, and directors in the ~~My.MP3.com~~ ~~service~~Superior ~~recordings~~Court ~~from~~of ~~any~~the ~~recording~~State ~~company~~of ~~could be~~California, County ~~materially~~of ~~and~~San ~~adversely affected~~Diego. These complaints allege

43 ~~Class Action Lawsuits. We and certain of our~~ ~~employees, officers and directors have been named as defendants~~ in several lawsuits alleging violations of the federal securities laws. The complaints, which were filed between September 19, 2000 and September 29, 2000 in the United States District Court for the Southern District of California, each purport to be brought on behalf of a class of stockholders. The complaints allege that we and the other the defendants violated the federal securities laws by issuing materially false and misleading statements and failing to disclose material information regarding our My.MP3.com service and the litigation surrounding the service. The complaint does not specify the dollar amount of damages alleged.

We cannot assure you that we will be successful in ultimately defending any of these lawsuits, and we may be required to pay license fees or substantial damages, including statutory, punitive or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. At the rate of $25,000 per week, our aggregate potential liability resulting from all of our copyright litigation proceedings could exceed billions of dollars. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

~~Item~~ various 2statutory and common law claims relating to the My.MP3 service, ~~Changes~~including inbreach ~~Securities~~of ~~and~~fiduciary ~~Use~~duty, abuse of ~~Proceeds~~control, constructive fraud, gross mismanagement, unjust enrichment, and waste of corporate assets.

~~Changes~~ MP3.com and the representatives of the various plaintiffs for both the class action lawsuits and derivative lawsuit executed Stipulations of Settlement dated as of March 20, 2001 (“Stipulations”). Under the terms of the Stipulations, the defendants, while continuing to deny all liability, have paid into an escrow account $35,000,000 and agreed to issue 2.5 million shares of MP3.com common stock which MP3.com valued at $5,391,000, in ~~Securities~~exchange for complete dismissals and releases of all claims with prejudice. The escrow amount and the 2.5 million shares of common stock will be governed by the Stipulations; however, except in certain circumstances, the distribution will not occur prior to March 31, 2002. In addition, under the Stipulations, MP3.com agreed to institute certain corporate governance enhancements. In order to complete the settlement, it will be necessary to secure appropriate approvals from both the State Superior Court and Federal District Court, and to provide notice to members of the class and current stockholders.

~~None~~Charge Related to Class Action and Derivative Lawsuits. In light of the settlements of the class action and derivative lawsuits, the Company has recorded a charge of $41,428,000 during the three months ended March 31, 2001. The charge includes the cash paid into the escrow account, the value of the 2.5 million shares of common stock to be issued, and other legal costs. While the charge of $41,428,000 excludes any potential recovery from its insurance carriers, the Company is seeking to recover from its carriers the full amount of the settlement together with its legal expenses. If the Company receives insurance proceeds, the Company will record the recovery as a gain in the statement of operations caption “Charge related to class action and derivative lawsuits.”

~~Use~~Other ~~of Proceeds~~Litigation

MP3.com’s ~~registration~~is ~~statement~~also ~~(No. 333-78545)~~involved ~~under the~~in ~~Securities~~other ~~Act~~legal ~~for~~matters ~~its~~and ~~initial~~claims ~~public offering (the “Registration Statement”) was declared effective by the SEC on July 20, 1999. Offering proceeds, net~~ of ~~aggregate~~ ~~expenses~~various ~~of approximately $20.6 million~~types, ~~were~~and ~~approximately $360.4 million.~~from Astime ~~of September 30, 2000, MP3.com has used the net proceeds of $360.4 million as follows: approximately $55.8 million of the net offering proceeds for working capital paid directly or indirectly~~ to ~~third~~time ~~parties; approximately~~we ~~$5.0 million~~may ~~for~~also ~~the~~be ~~purchase~~involved ~~or installation~~in ~~of machinery and equipment; approximately $12.0 million for the purchase of various strategic investments and issuance of a note receivable; approximately $24.6 million for the settlement of certain~~ litigation ~~and~~relating ~~copyright~~to ~~matters; approximately~~claims ~~$23.0 million~~arising ~~for~~out ~~prepaid multimedia content royalties; approximately $4.0 million for the acquisition~~ of ~~the~~our ~~remaining~~operations ~~53.5% of MP3Radio.com; and approximately $236.0 million for the purchase of temporary investments~~ in ~~corporate commercial paper and notes, U.S. government and agency notes, and money market funds. No payments were made to directors, officers, or affiliates of~~ the ~~Company~~normal orcourse ~~owners~~ of ~~10%~~ ~~or more of the outstanding Shares of Common Stock of the Company, other than compensation payments to officers of the Company~~business.

In particular, the music industry in the United States is generally regarded as extremely litigious in nature compared to other industries. As a result, in the future we may be engaged in litigation with others in the music industry, including those entities with whom we have ongoing license arrangements. For example, some of the major recording companies that settled their portion of the Major Label Lawsuit with us have asserted in writing that they believe the amount paid by MP3.com to UMG in satisfaction of the Court’s judgment, together with the concurrent issuance of warrants to UMG, triggered additional payments to them under the “most favored nations” clause in their settlement agreement with MP3.com. Although we do not believe they are entitled to any such additional payments, we cannot assure you that we will be successful in ultimately concluding this particular matter in an amicable fashion, or defending any resulting lawsuit. As a result, we may be forced to defend one or more lawsuits on this and other issues in the future, and in fact may be involved in a number of litigation proceedings with the same group of related plaintiffs. We have not recorded any charge related to any claims for additional “most favored nations” payments as of March 31, 2001.

We cannot assure you that we will be successful in ultimately defending any of these lawsuits, and we may be required to pay license fees or substantial damages, including statutory, punitive, or other damages that far exceed the resources and overall market capitalization of MP3.com, in which event we might have to significantly limit or terminate our business operations, particularly because our business is not yet profitable. At the rate of $25,000 per work (which is the per CD amount of statutory damages awarded by the court in the Major Label Lawsuit), our aggregate potential liability resulting from all of our copyright litigation proceedings could exceed one billion dollars. If successful, any one of these lawsuits could seriously harm our business by forcing us to cease providing services to our consumers or requiring us to pay monetary damages. Even if unsuccessful, these lawsuits still can harm our business severely by damaging our reputation, requiring us to incur legal costs, lowering our stock price and public demand for our stock, and diverting management’s attention away from our primary business activities in general.

Item 2. Changes in Securities and Uses of Proceeds

Changes in Securities

None.

Use of Proceeds

MP3.com’s registration statement (No. 333-78545) under the Securities Act for its initial public offering (the “Registration Statement”) was declared effective by the SEC on July 20, 1999. Offering proceeds, net of aggregate expenses of approximately $20.6 million, were approximately $360.4 million. As of March 31, 2001, MP3.com has used the net proceeds of $360.4 million as follows: approximately $79.7 million of the net offering proceeds for working capital paid directly or indirectly to third parties; approximately $8.5 million for the purchase or installation of machinery and equipment; approximately $12.0 million for the purchase of various strategic investments and issuance of a note receivable; approximately $92.8 million for the settlement of certain litigation and copyright matters; approximately $35.0 million for the settlement of derivative and shareholder lawsuits; approximately $40.1 million for prepaid multimedia content royalties; approximately $4.0 million for the acquisition of the remaining 53.5% of MP3Radio.com; and approximately $88.3 million for the purchase of temporary investments in corporate commercial paper, U.S. government and agency notes, and money market funds. As of March 31, 2001, no payments had been made to directors, officers, or affiliates of MP3.com or owners of 10% or more of the outstanding Shares of Common Stock of MP3.com, other than compensation payments to officers of MP3.com.

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

There were no matters submitted to a vote of the security holders.

Item 5. Other Information

under the agreement. The financial incentives could result in the reduction of the marketing and promotions commitment beginning with the latest period.

Quarterly Payment Schedule			Purchase Amount
			(in thousands)
1999
	Q4		$	5,000
2000
	Q1		$	6,500
	Q2		$	8,500
	Q3		$	11,500
	Q4		$	13,500
2001
	Q1		$	15,000
	Q2		$	12,250
	Q3		$	12,250
	Q4		$	12,250
2002
	Q1		$	6,000
	Q2		$	5,000
	Q3		$	5,000
	Q4		$	5,000
2003
	Q1		$	300
	Q2		$	300
	Q3		$	275
	Q4		$	275
2004
	Q1		$	275
	Q2		$	275
	Q3		$	275
	Q4		$	275
		Total	$	120,000

On October 18, 2000, Theodore W. Waitt resigned from our Board of Directors.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit 10.17†		—	Amended and Restated Advertising, Promotion and Marketing Agreement dated September 29, 2000 between the Company and Montaigne Participations Et Gestion (formerly Groupe Arnault)
Exhibit
Exhibit 10.28†		—	Settlement Agreement dated July 26, 2000 between the Company and Capitol Records, Inc. (“EMI”)
Number			Description of Document
Exhibit 10.29†		—	License Agreement dated July 26, 2000 between the Company and Virgin Holdings, Inc. (“EMI”)
	10.31‡		Letter Agreement regarding employment between MP3.com and Gregory P. Kostello dated May 26, 1999.
Exhibit 10.30†		—	Settlement Agreement dated August 17, 2000 between the Company and Sony Music Entertainment Inc.
	10.32		Second Amendment to Settlement Agreement between MP3.com and The Harry Fox Agency, Inc., MPL Communications, Inc. and Peer International Corporation dated February 28, 2001.
Exhibit 27.1		—	Financial Data Schedule.
	10.33‡		Amendment to Consulting Agreement between MP3.com and Howard B. Wiener dated March 1, 2001.
	10.34		Stipulation of Settlement in the Class Action Litigation, dated as of March 20, 2001.
	10.35		Stipulation of Settlement in the Derivative Litigation, dated as of March 20, 2001.

†‡ ~~Confidential~~Management ~~treatment~~contract ~~has~~or ~~been~~compensatory ~~requested~~plan ~~with~~or ~~respect to certain portions of the exhibit~~arrangement. ~~Omitted portions have been filed separately with the Securities and Exchange Commission.~~

(b) Reports on Form 8-K:

None

4845

SIGNATURES

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


	MP3.COM, INC.
	(Registrant)

Date: April 27, 2001


	By:	/s/ PAUL L.H. OUYANG



	Paul L.H. Ouyang
	Executive Vice President and Chief Financial
	Officer (Authorized Officer)
	(Principal Financial and Accounting Officer)

~~Date: October 19, 2000~~46

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