CENTERSPAN COMMUNICATIONS CORP
10-Q, 1999-11-15
COMPUTER PERIPHERAL EQUIPMENT, NEC
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 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 30, 1999

                         Commission File Number 0-25520
                                                -------

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

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

         OREGON                                        93-1040330
  (State or jurisdiction of                           (IRS Employer
incorporation or organization)                      Identification No.)

                        7175 N.W. EVERGREEN PARKWAY #400
                          HILLSBORO, OREGON, 97124-5839
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (503) 615-3200
                         (Registrant's telephone number)

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

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

      Common stock, no par value                    5,360,320 shares
              (Class)                       (Outstanding at November 10, 1999)

- ------------------------------------------------------------------------------
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<PAGE>

                       CENTERSPAN COMMUNICATIONS CORPORATION

                               Index to Form 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                              Page No.
                                                                            --------
<S>                                                                         <C>
Item 1.  Financial Statements

         Consolidated Balance Sheets .......................................    2

         Consolidated  Statements of Operations ............................    3

         Consolidated Statements of Cash Flows .............................    4

         Consolidated Statements of Changes in
             Shareholders' Equity ..........................................    5

         Notes to Consolidated Financial Statements ........................    6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations .........................................    8

Item 3.  Quantitative and Qualitative Disclosure About Market Risk .........   14

PART II -- OTHER INFORMATION

Item 2.  Changes in Securities and Use Proceeds.............................   15

Item 4.  Submission of Matters to a Vote of Securityholders.................   16

Item 6.  Exhibits and Reports on Form 8-K...................................   16

SIGNATURES. ................................................................   16
</TABLE>

<PAGE>

                       CENTERSPAN COMMUNICATIONS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                         September 30,       December 31,
                                                             1999               1998
                                                         -------------       ------------
<S>                                                      <C>                 <C>
                                                          (Unaudited)
                            ASSETS

Current assets:
    Cash and cash equivalents                              $  4,786           $    460
    Accounts receivable, net                                    108                  -
    Inventories                                                 295                  -
    Prepaid and other expenses                                  370                134
    Net assets from discontinued operations                  11,300             17,737
    Income taxes receivable                                       -              2,078
    Deferred income taxes                                         -              4,677
                                                           --------           --------
      Total current assets                                   16,859             25,086
Plant and equipment, net                                        513                843
Other                                                            25                 25
                                                           --------           --------
      Total assets                                         $ 17,397           $ 25,954
                                                           --------           --------
                                                           --------           --------

             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Operating line of credit                               $      -           $  5,821
    Accounts payable                                          1,357              7,202
    Accrued liabilities                                         165              1,378
                                                           --------           --------
      Total current liabilities                               1,522             14,401
                                                           --------           --------

Long-term debt                                                6,000                  -

Shareholders' equity:
    Preferred stock                                               -                  -
    Common stock                                             25,644             14,846
    Accumulated deficit                                     (15,711)            (3,262)
    Accumulated comprehensive loss                              (58)               (31)
                                                           --------           --------
      Total shareholders' equity                              9,875             11,553
                                                           --------           --------
      Total liabilities and shareholders' equity           $ 17,397           $ 25,954
                                                           --------           --------
                                                           --------           --------
</TABLE>
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                      2
<PAGE>

                                      CENTERSPAN COMMUNICATIONS CORPORATION
                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Dollars in thousands, except per share amounts)
                                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                 Three Months Ended                    Nine Months Ended
                                                                    September 30,                         September 30,
                                                       -------------------------------------    ----------------------------
                                                              1999                1998               1999             1998
                                                       ---------------     -----------------    -------------      ----------
<S>                                                    <C>                 <C>                  <C>                <C>
Revenues                                                  $     85           $      -           $    806           $      -
Cost of goods sold                                              14                  -                254                  -
                                                          --------           --------           --------           --------
  Gross profit                                                  71                  -                552                  -
                                                          --------           --------           --------           --------

Operating expenses:
   Research and engineering                                    148                  -                278                  -
   Selling, general and administrative                         916                244              1,820                714
                                                          --------           --------           --------           --------
      Total operating expenses                               1,064                244              2,098                714
                                                          --------           --------           --------           --------
Loss from operations                                          (993)              (244)            (1,546)              (714)
Expense related to beneficial conversion feature               757                  -                987                  -
Interest Income                                                (26)                                  (26)               (64)
                                                          --------           --------           --------           --------
Loss before taxes                                           (1,724)              (244)            (2,507)              (650)
Provison for income taxes                                        -                  -              4,532                  -
                                                          --------           --------           --------           --------
Loss from continuing operations                             (1,724)              (244)            (7,039)              (650)
Loss from discontinued operations                                -             (3,038)            (5,207)            (6,702)
                                                          --------           --------           --------           --------
     Net loss                                             $ (1,724)          $ (3,282)          $(12,246)          $ (7,352)
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------

   Loss per share from continuing operations:
     Basic                                                $  (0.34)          $  (0.06)          $  (1.44)          $  (0.15)
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------
     Diluted                                              $  (0.34)          $  (0.06)          $  (1.44)          $  (0.15)
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------

   Loss per share from discontinued operations:
     Basic                                                $      -           $  (0.69)          $  (1.07)          $  (1.54)
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------
     Diluted                                              $      -           $  (0.69)          $  (1.07)          $  (1.54)
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------

   Weighted average shares outstanding:
     Basic                                                   5,004              4,385              4,887              4,353
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------
     Diluted                                                 5,004              4,385              4,887              4,353
                                                          --------           --------           --------           --------
                                                          --------           --------           --------           --------
</TABLE>
      The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>

                                        CENTERSPAN COMMUNICATIONS CORPORATION
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (Dollars in thousands)
                                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                            Nine Months Ended
                                                                                              September 30,
                                                                                      ------------------------------
                                                                                         1999                1998
                                                                                      ----------          ----------
<S>                                                                                   <C>                 <C>
Cash flows from operations:
    Loss from continuing operations                                                    $ (7,039)          $   (650)
    Loss from discontinued operations                                                    (5,207)            (6,702)
                                                                                       --------           --------
    Net loss                                                                           $(12,246)          $ (7,352)
    Adjustments to reconcile net loss to cash provided by (used in) operating
      activities:
        Depreciation                                                                        165              1,122
        Deferred income taxes and taxes receivable                                        6,755             (4,272)
        Beneficial conversion feature on debt                                               987                  -
        Changes in operating assets and liabilities:
           Accounts receivable                                                             (108)                 -
           Inventories                                                                     (295)                 -
           Prepaid expenses and other assets                                               (236)               (65)
           Payables and accrued liabilities                                              (7,085)            (1,254)
           Net assets from discontinued operations                                        6,437             12,433
                                                                                       --------           --------
                   Net cash provided by (used in) operating activities                   (5,626)               612
                                                                                       --------           --------

Cash flows used in investing activities:
    Proceeds from (Purchase of) plant and equipment, net                                    165             (1,443)

Cash flows from financing activities:
    Payments on line of credit                                                           (5,821)               (55)
    Proceeds from issuance of debt                                                        6,000                  -
    Proceeds from issuance of common stock                                                9,608                498
                                                                                       --------           --------
                   Net cash provided by financing activities                              9,787                443
                                                                                       --------           --------
                   Net increase (decrease) in cash
                     and cash equivalents                                                 4,326               (388)

Cash and cash equivalents, beginning of period                                              460                449
                                                                                       --------           --------
Cash and cash equivalents, end of period                                               $  4,786           $     61
                                                                                       --------           --------
                                                                                       --------           --------
</TABLE>

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

                                      4
<PAGE>

                                          CENTERSPAN COMMUNICATIONS CORPORATION
                                                CONSOLIDATED STATEMENTS
                                           OF CHANGES IN SHAREHOLDERS' EQUITY
                                                    (In thousands)
                                                     (Unaudited)
<TABLE>
<CAPTION>
                                                                                              Accumulated
                                                          Common Stock                          Other         Accumulated
                                                        -------------------    Accumulated   Comprehensive    Comprehensive
                                                        Shares      Amount       Deficit         Loss             Loss
                                                        -------    --------    -----------   -------------    -------------
<S>                                                     <C>        <C>         <C>           <C>              <C>
Balance, January 1, 1999                                 4,597     $ 14,846     $ (3,262)     $    (31)

Issuance of common stock                                   524        8,956

Beneficial conversion feature on convertible debt            -          987

Warrants provided to common shareholders                     -          203         (203)

Stock options exercised                                    113          652            -

Translation adjustment                                       -            -            -           (27)       $    (27)

Net loss                                                     -            -      (12,246)                      (12,246)
                                                         -----     --------     --------      --------        --------

Balance, September 30, 1999                              5,234     $ 25,644     $(15,711)     $    (58)
                                                         -----     --------     --------      --------
                                                         -----     --------     --------      --------

   Comprehensive loss, September 30, 1999                                                                     $(12,273)
                                                                                                              --------
                                                                                                              --------
</TABLE>

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

                                      5
<PAGE>

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

NOTE 1  -  BASIS OF PRESENTATION

         The accompanying consolidated financial statements include the
accounts of Centerspan Communications Corporation, (the "Company" formerly
ThrustMaster, Inc.), an Oregon corporation, and its wholly-owned
subsidiaries, Thrustmaster (Europe) Limited and its wholly-owned subsidiary
Thrustmaster (Deutschland) GmbH, and have been prepared by the Company
without audit and in conformity with generally accepted accounting principles
for interim financial information pursuant to rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
unaudited consolidated financial statements include all necessary adjustments
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998. The results of operations for the
periods presented are not necessarily indicative of the results that may be
expected for the entire fiscal year.

         On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances.  The gain
on the sale of the hardware business on October 1, 1999, net of estimated
adjustments and expenditures to close out the discontinued operations, was
approximately $1.750 million.  The continuing operations of the Company
consist of its software business which was started in mid-1998 and generated
minor revenues in 1999.  The following Proforma Consolidated Balance Sheet
reflects the financial effect of the closing of the sale of the hardware
business if the closing had been consummated at September 30, 1999.

<TABLE>
<CAPTION>
                                                      Proforma
Consolidated Balance Sheet                          September 30,
(Dollars in thousands)                                  1999
- --------------------------                          -------------
<S>                                                 <C>
Cash and cash equivalents                              $17,655
Restricted cash                                          2,250
Accounts receivable, net                                   108
Inventories                                                295
Prepaid and other expenses                                 370
Other assets                                               538
                                                       -------
   Total assets                                         21,216
                                                       -------
                                                       -------

Accounts payable                                       $ 2,926
Accrued liabilities                                        665
Long-term debt                                           6,000
Shareholders' equity                                    11,625
                                                       -------
   Total liabilities and shareholders' equity          $21,216
                                                       -------
                                                       -------
</TABLE>

                                      6
<PAGE>

         The hardware business has been accounted for as discontinued operations
and, accordingly, its operations are segregated in the accompanying statements
of operations. Revenues from these operations were $11,205 for the first nine
months of 1999, and $25,905, $45,494 and $30,821 for the years ended December
31, 1998, 1997 and 1996, respectively. Certain expenses have been allocated to
continued operations, based on the number of employees remaining with the
software business, their related employee costs and overhead for facilities and
other related costs and corporate overhead expenses that were expected to
represent continuing expenses. All income tax provisions and benefits have been
allocated to continued operations. The components of net assets of discontinued
operations included in the Company's Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998, follow:

<TABLE>
<CAPTION>
(Dollars in thousands)                                             September 30,      December 31,
                                                                       1999               1998
                                                                   -------------      ------------
<S>                                                                <C>                <C>
Accounts receivable, net.......................................      $  4,618           $ 10,581
Inventories, net...............................................         6,477              6,786
Prepaid and other expenses.....................................           237                117
Tooling, net...................................................         1,300              1,506
Warranty accrual...............................................          (334)            (1,253)
Loss from July 1 through July 26 on discontinued operations....          (998)                 -
                                                                     --------           --------
     Total assets..............................................      $ 11,300           $ 17,737
                                                                     --------           --------
                                                                     --------           --------
</TABLE>

         On June 9, 1999, the Company issued and sold to two investors $6,000
aggregate principal amount of the Company's zero coupon Convertible
Debentures due June 9, 2002 for $6,000 cash.  The Convertible Debentures have
been recorded as debt. The beneficial conversion feature has been recorded as
additional paid in capital and as a discount against long term debt.  The
beneficial conversion feature of $987 was recognized over 90 days using the
interest method, resulting in a charge of $230 and $757 to continuing
operations in the quarters ended June 30 and September 30, 1999, respectively.

NOTE 2  -  INVENTORIES FOR CONTINUING OPERATIONS

         Inventories for continuing operations are stated at the lower of cost
or market on a first-in, first-out basis. These inventories are as follows:

<TABLE>
<CAPTION>
                                             September 30,              December 31,
                                                  1999                      1998
                                             -------------              -------------
        <S>                                  <C>                        <C>
        Raw materials                             $ 80                       $ -
        Finished goods                             215                         -
                                             ---------                  --------
                                                  $295                       $ -
                                             ---------                  --------
                                             ---------                  --------
</TABLE>

                                      7
<PAGE>

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

FORWARD LOOKING INFORMATION

         The discussion and analysis below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact that the Company makes in this Report on Form 10-Q are
forward-looking. In particular, statements regarding year 2000 compliance and
compliance costs; the adequacy of funds to meet the Company's current or future
cash needs; the development of the Company's software products; the Internet
community, collaboration and communications market; and the Company's future
results of operations or financial position are forward-looking statements.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions identify forward-looking statements. But
the absence of these words does not mean the statement is not forward-looking.
The Company cannot guarantee any of the forward-looking statements, which are
subject to risks, uncertainties and assumptions that are difficult to predict.
Actual results may differ materially from those the Company forecasts in
forward-looking statements due to a variety of factors, including those set
forth in the Company's annual report on Form 10-K under the heading "Additional
Risk Factors that Could Affect Operating Results and Market Price of Stock" and
those set forth in Exhibit 99.1 to this report.  The Company does not intend to
update any forward-looking statements due to new information, future events or
otherwise.

SALE OF THE HARDWARE BUSINESS (DISCONTINUED OPERATIONS)

         On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances. The
hardware business has historically comprised the bulk of the Company's assets,
liabilities, revenues and expenses. From its founding in 1990 through 1997,
the Company was a leader in designing and marketing innovative PC game
controller products. However, commencing in 1997, many larger competitors with
greater economies of scale entered the game controller market creating an
extremely competitive environment characterized by declining prices and
increased marketing costs. The Company's Board of Directors determined that
the Company could not achieve the economies of scale necessary to be
profitable in the game controller market in the foreseeable future, and
concluded that the Company should sell the hardware business and invest the
proceeds in the Company's new Internet communications and collaboration
software business.

INTERNET COMMUNICATIONS SOFTWARE BUSINESS (CONTINUING OPERATIONS)

     On May 31, 1998 the Company entered into a license agreement with Intel
Corporation that licensed to the Company certain software source code technology
related to voice communications over the Internet. The scope of the license was
limited primarily to the PC gaming and entertainment market where the bulk of
the Company's historical business activity was conducted. In December 1998, the
Company re-negotiated the license agreement and secured additional rights
allowing it to use the technology in additional market segments outside of PC
gaming and entertainment.

                                      8
<PAGE>

         In January 1999, the Company shipped its first Internet communications
software product into the distribution and retail channels. The product, called
Talk n' Play, incorporates the Intel technology and allows up to four people in
separate locations to conduct a four-way voice conference over the Internet
while they play on-line games. The product also allows the user to participate
in certain Internet communities provided by PeopleLink Inc., a provider of
outsourced Internet community communications. In June 1999, the Company shipped
its second Internet communications product, iConference, into the distribution
and retail channels, targeting the small-office/home-office market. iConference
provides the same four-way Internet voice conferencing capability as Talk n'
Play and adds the ability for up to four people to transfer files, share files
or share a white board while they are engaged in their voice conference.

         In August 1999, the Company entered into a second license agreement
with Intel Corporation that licensed to the Company additional software source
code that the Company believes will enable it to accelerate the development of
its next generation Internet communications and collaboration products.  The
Company intends to target these new products at the strategic Internet OEM and
PC-OEM channels. Most of the Company's year-to-date revenue from its new
Internet software business has been generated in the computer retail channel.

         The Company believes that Internet communications and collaboration by
the mass market is in an early stage of development and that increasing demand
for these services will drive the convergence of real-time data, voice and video
multimedia interactivity over the Internet. Currently, most of this technology
is "server based." This requires a provider of these services to buy additional
computer equipment in order to constantly "scale-up" to meet the increased
demands of its subscribers or visitors. The audio technology the Company
licensed from Intel Corporation provides a "client-to-client" solution.  This
technology allows a provider to offer a desktop client software solution that
will allow its subscribers or visitors to engage in real-time multimedia
communications without being "tied" to the provider's server. The Company
believes that a significant trend in the future of Internet community,
collaboration and communications will be driven by open, standards-based,
"client-to-client" technology and solutions.

         The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included
elsewhere in this report.

                                      9
<PAGE>

RESULTS OF OPERATIONS

         On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances.

         The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Consolidated Statements of Operations:

<TABLE>
<CAPTION>
                                                              Three Months Ended                   Nine Months Ended
                                                                 September 30,                        September 30,
                                                          --------------------------         ----------------------------
                                                            1999               1998             1999               1998
                                                          --------------------------         ----------------------------
<S>                                                       <C>                  <C>           <C>                  <C>
Revenues                                                     100.0%             -%              100.0%                -%
Cost of goods sold                                            16.0              -                32.0                 -
                                                          --------           ----            --------             -----
  Gross profit                                                84.0              -                68.0                 -

Operating expenses:
    Research and engineering                                 174.0              -                34.0                 -
    Selling, general and administrative                    1,078.0              -               226.0                 -
                                                          --------           ----            --------             -----
      Total operating expenses                             1,252.0              -               260.0                 -
                                                          --------           ----            --------             -----
Loss from operations                                      (1,168.0)             -              (192.0)                -
Expenses related to beneficial conversion feature            891.0              -               122.0
Interest Income                                              (31.0)                              (3.0)
                                                          --------           ----            --------             -----
Loss before taxes                                         (2,028.0)             -              (311.0)                -
Provison  for income taxes                                       -              -               562.0                 -
                                                          --------           ----            --------             -----
Loss from continuing operations                           (2,028.0)             -              (873.0)                -
Loss from discontinued operations                                -              -              (646.0)                -
                                                          --------           ----            --------             -----
Net loss                                                  (2,028.0)%            -%           (1,519.0)%               -%
                                                          --------           ----            --------             -----
                                                          --------           ----            --------             -----
</TABLE>


The continuing operations of the Company consist of its software business which
began in mid-1998 and has generated minor revenues in 1999.  The results of the
Company's continuing operations for the three and nine months ended September
30, 1999 are discussed below.

REVENUES

         Revenues for the three and nine months ended September 30, 1999 were
$85,000 and $806,000, respectively.

GROSS PROFIT

         Gross profit for the three and nine months ended September 30, 1999
was $71,000 and $522,000, respectively. As a percentage of revenues, gross
profit was 84.0% and 68.0% for the three and nine months ended September 30,
1999.

                                      10
<PAGE>

RESEARCH AND ENGINEERING

         Research and engineering expenses were $148,000 and $278,000 for the
three and nine months ended September 30, 1999, respectively, which represents
salaries for software engineers and related costs.

SELLING, GENERAL, AND ADMINISTRATIVE

         Selling, general and administrative expenses were $916,000 and
$1,820,000 for the three and nine months ended September 30,1999,
respectively. Selling, general and administrative expenses increased $423,000
or 86% in the third over the second quarter of 1999 as a result of continued
increases in staffing for the internet software business and additional
marketing cost related to the new products.  The hardware business has been
accounted for as discontinued operations; however certain expenses have been
allocated to continuing operations, based on the number of employees
remaining with the software business, their related employee costs and
overhead for facilities and other related costs and corporate overhead
expenses that are expected to represent continuing expenses.

EXPENSE RELATED TO BENEFICIAL CONVERSION FEATURE

         Expense related to beneficial conversion feature of $757,000 and
$987,000 for the three and nine months ended September 30, 1999,
respectively, relate to the issuance of $6,000,000 of zero coupon convertible
debentures. This expense represents the charge for the beneficial conversion
feature of the convertible debt.

PROVISION FOR INCOME TAXES

         Amounts in the year-to-date September 30, 1999 results represent the
establishment of a full valuation allowance on the Company's deferred tax asset
due to the change in the Company's business as described in Note 1.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its activities to date with a combination of
cash flow from operations, borrowed funds, and proceeds from the sale of equity
securities.

         In late 1998, the Company entered into a demand discretionary
$16,000,000 line of credit. The Company did not utilize the line as expected. On
July 30, 1999, the Company paid off the balance of the line of credit and the
Company and the lender terminated the line of credit.

         On January 28, 1999, the Company issued to three investors for an
aggregate of $4,000,000, an aggregate of 250,000 shares of the Company's
Common Stock (subject to adjustment as described below) and warrants
exercisable for an aggregate of 70,754 shares of Common Stock. The exercise
price applicable to 50% of the shares issuable upon exercise of the warrants
is $20.00 per share; the exercise price for the remaining warrant shares is
$22.40 per share. The Company also agreed to issue to the investors
"adjustment" shares of its Common Stock for no additional consideration
depending upon the market price of the Company's Common Stock during
specified periods following the investment. The adjustment periods lapsed in
July 1999 and the Company was not required to issue any additional shares.
The Company may elect, subject to the satisfaction of certain conditions, to
sell one additional tranche of equity investment to the investors. The amount
of the additional tranche would range from $1,000,000

                                      11

<PAGE>

to $6,000,000, depending on the price of the Common Stock at the time of the
investment. The Company could be required to issue additional shares of its
Common Stock in connection with any additional tranche of investment to
ensure at least a 12.5% return to the investors.

         On June 9, 1999 (the "Closing Date"), the Company issued and sold to
two investors $6,000,000 aggregate principal amount of the Company's zero
coupon Convertible Debentures due June 9, 2002 (the "Debentures"). The
Debentures may be converted into shares of the Company's Common Stock at any
time prior to June 9, 2002. The number of shares into which each Debenture is
convertible is equal to the outstanding principal amount of the Debenture
divided by the conversion price, which may fluctuate from time to time. The
Company has registered under the Securities Act of 1933, as amended, the
shares of Common Stock issuable upon exercise of the Debentures.

         On August 6, 1999, the Company entered into a binding letter of
intent with an individual investor for the sale of 273,853 shares of the
Company's Common Stock (the "Shares") for $18.258, which represented a
fifteen percent discount from the average closing price of the Company's
Common Stock for the twenty trading days preceding the date of the letter of
intent.  On August 30, 1999, the Company entered into a definitive purchase
agreement with the investor and received $5,000,008 in proceeds for the sale
of the Shares.  In connection with the sale, the Company issued a warrant for
30,000 shares of the Company's Common Stock to the investor's financial
consultant as a finder's fee (the "Warrant"). The exercise price for the
Warrant is $18.258 per share. The Warrant is exercisable at any time before
August 30, 2004.

         The Shares and the Warrant were issued without registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof.  The
Company agreed to register the Shares and the shares of Common Stock issuable
upon the exercise of the Warrant within 180 days of August 30, 1999.

         Net cash used in operating activities was $6,613,000 for the nine
months ended September 30, 1999. The primary uses of cash were a net loss of
$12,246,000, an increase in accounts receivable of $108,000, an increase in
inventories of $295,000, and a decrease in payables and accrued liabilities of
$7,085,000. These uses were offset by decreases in deferred income taxes and
taxes receivable and net assets from discontinued operations of $6,755,000 and
$6,437,000, respectively. This compares to net cash provided by operating
activities of $612,000 for the nine months ended September 30, 1998.

         Proceeds from the sale of capital equipment for the nine months ended
September 30, 1999 were $165,000, compared to capital expenditures of $1,443,000
for the same period in the prior year. These expenditures were primarily for new
computer equipment.

         The Company believes that available funds generated by the sale of
the hardware business on October 1, 1999 in the amount of $15,000,000 and the
receipt of cash in August of 1999 in the amount of $5,000,000 from the
issuance of additional common stock will be adequate to meet the Company's
cash needs during the next twelve months.  The Company may require additional
capital beyond the amounts currently forecasted by the Company.  Any such
required additional capital may not be available on reasonable terms, if at
all, at such time or times as required by the Company.

                                      12
<PAGE>

YEAR 2000 COMPLIANCE

         The Year 2000 issue results from computer programs written using two,
rather than four, digits to define the applicable year. These computer programs
may recognize a date using "00" as the year 1900 instead of 2000 and cause
system failures or miscalculations or material disruptions of business
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business operations.
If the Company or its significant customers, suppliers, service providers and
other related third parties fail to take the necessary steps to correct or
replace these problematic computer programs, the Year 2000 issue could have a
material adverse effect on the Company. The Company cannot, however, quantify
the impact at this time.

         The Company has completed upgrading or replacing the software packages
underlying its financial, production, communication, networking, desktop and
other systems, as appropriate, to address the Year 2000 issue. The Company has
identified that the voice mail system is not Year 2000 complaint and is actively
working to remedy the problem. The Company expects to have the upgrade to the
voice mail system completed by December 15, 1999.  It has also performed an
in-depth analysis of its products and determined that all current products are
Year 2000 compliant. Moreover, the Company has begun to contact all major
external third parties that provide products and services to the Company to
assess their readiness for the Year 2000.

         Management believes it has completed the review, assessment and
correction phase of affected systems within the Company and those which are
external to the Company. This assessment indicated that most of the Company's
significant internal information systems could be affected by the Year 2000
issue, that those systems have been adequately protected against Year 2000
issues, and that the Company may be negatively impacted by non-compliance of
related third parties.

         The Company has completed the remediation phase of the Company's
internal information technology systems and has set December 1999 as the target
for Year 2000 compliance of the Company's voice mail system which has been
identified as not Year 2000 ready. The Company's internal information technology
systems include it's finance systems and those systems used in the research and
development of the Company's products.

         The Company has queried its important suppliers and service providers
and has obtained assurances from those third parties that they are or will be
Year 2000 compliant. The inability of those parties to become Year 2000
compliant could have a material adverse effect on the Company. The effects of
non-compliance by third parties where no system interface exists is not
determinable.

         The Company has made and will continue to make investments in
systems and applications to address Year 2000 issues as required. The Company
has not tracked all internal resources dedicated to the resolution of the
Year 2000 issue and, therefore, is unable to quantify precisely internal
costs incurred to date that are associated with the Year 2000 issue.
Identifiable expenditures for these investments were approximately $76,000
through September 30, 1999. Management estimates that additional expenditures
in 1999 will total approximately $18,000.

                                      13

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         As of September 30, 1999, the Company had cash and cash equivalents of
$4,786,000 compared to $460,000 as of December 31, 1998. The Company invests its
cash in highly liquid marketable securities with maturities of three months or
less at date of purchase. The Company does not invest in derivative securities.


                                      14
<PAGE>

PART II  -  OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

         On August 6, 1999, the Company entered into a binding letter of
intent with an individual investor for the sale of 273,853 shares of the
Company's Common Stock (the "Shares") for $18.258, which represented a
fifteen percent discount from the average closing price of the Company's
Common Stock for the twenty trading days preceding the date of the letter of
intent.  On August 30, 1999, the Company entered into a definitive purchase
agreement with the investor and received $5,000,008 in proceeds for the sale
of the Shares.  In connection with the sale, the Company issued a warrant for
30,000 shares of the Company's Common Stock to the investor's financial
consultant as a finder's fee (the "Warrant"). The exercise price for the
Warrant is $18.258 per share. The Warrant is exercisable at any time before
August 30, 2004.

         The Shares and the Warrant were issued without registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof.  The
Company agreed to register the Shares and the shares of Common Stock issuable
upon the exercise of the Warrant within 180 days of August 30, 1999.

                                     15

<PAGE>

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

         On September 27, 1999, the Company held a special meeting of its
shareholders to approve the sale of the Company's hardware business and the
change of the Company's name from "ThrustMaster, Inc." to "CenterSpan
Communications Corporation."  The Company filed a definitive Proxy Statement
for the special meeting on September 13, 1999.  The number of shares
represented at the meeting was 3,470,516, which represented approximately 70.9%
of the Company's outstanding shares on the record date for the special meeting.
Of the shares represented, 3,466,456 shares voted in favor of the sale and
related name change, and 4,060 shares voted against the sale and related name
change.


Item 6.  Exhibits and Reports on Form 8-K

(a)     Exhibits
<TABLE>
<CAPTION>
      Number                                      Description
      ------                                      -----------
<S>               <C>

          4.8     Common Stock Purchase Agreement, dated as of August 6,
                  1999, between the Company and Peter R. Kellogg.

          4.9     Form of Warrant issued to Lucas Capital Management.

         11.1     Statements Regarding Computation of Per Share Earnings.

           27     Financial Data Schedule as of September 30, 1999.

         99.1     Additional Risk Factors.
</TABLE>

(b)     Reports on Form 8-K:

        No reports on Form 8-K were filed by the Company in the quarter ended
September 30, 1999.


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.

                               CenterSpan Communications Corporation

Date:  November 15, 1999       By  /s/ Mark B. Conan
       Mark B. Conan             ----------------------------------
                               Mark B. Conan
                               Vice President of Finance, Administration and CFO


                                      17

<PAGE>


                       CENTERSPAN COMMUNICATIONS CORPORATION



                         COMMON STOCK PURCHASE AGREEMENT





                                   Dated as of



                                 August 6, 1999



<PAGE>


                                    CONTENTS
<TABLE>
<S>                  <C>
Section 1.           Purchase and Sale of Common Stock ..............................................    1

Section 2.           Closing ........................................................................    1

Section 3.           Representations and Warranties of the Company ..................................    2

       3.1           Organization and Qualification .................................................    2

       3.2           Enforceability .................................................................    2

       3.3           Securities .....................................................................    2

       3.4           No Approvals or Notices Required; No Conflicts With Instruments ................    2

       3.5           Capitalization .................................................................    3

       3.6           SEC Documents ..................................................................    3

       3.7           Full Disclosure ................................................................    3

       3.8           Brokers or Finders .............................................................    4

Section 4.           Representations and Warranties of the Investor .................................    4

       4.1           Authorization ..................................................................    4

       4.2           Purchase Entirely for Own Account ..............................................    4

       4.3           Disclosure of Information; Due Diligence .......................................    5

       4.4           Investment Experience; Accredited Investor Status ..............................    5

       4.5           Restricted Securities ..........................................................    5

       4.6           Legend .........................................................................    6

       4.7           Residency ......................................................................    6

Section 5.           Conditions of Investor's Obligations at the Closings ...........................    6

       5.1           Representations and Warranties .................................................    6

STOCK PURCHASE AGREEMENT                                                                           PAGE i

<PAGE>
<S>                  <C>
       5.2           Performance ....................................................................    7

       5.3           Compliance Certificate .........................................................    7

       5.4           Qualification ..................................................................    7

Section 6.           Conditions of the Company's Obligations at the Closings ........................    7

       6.1           Representations and Warranties .................................................    7

       6.2           Qualification ..................................................................    7

Section 7.           Registration Rights ............................................................    7

Section 8.           Miscellaneous ..................................................................    9

       8.1           Survival of Warranties .........................................................    9

       8.2           Successors and Assigns .........................................................    9

       8.3           Governing Law ..................................................................   10

       8.4           Counterparts ...................................................................   10

       8.5           Headings .......................................................................   10

       8.6           Notices ........................................................................   10

       8.7           Expenses .......................................................................   10

       8.8           Amendments and Waivers .........................................................   10

       8.9           Severability ...................................................................   11

       8.10          Entire Agreement ...............................................................   11


       SCHEDULES:

       Schedule A:                Investors
       Schedule B:                Schedule of Exceptions
</TABLE>

STOCK PURCHASE AGREEMENT                                               PAGE ii

<PAGE>

                         COMMON STOCK PURCHASE AGREEMENT


         This COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made as
of August 6, 1999, by and between CENTERSPAN COMMUNICATIONS CORPORATION, an
Oregon corporation (the "Company"), and PETER R. KELLOGG (the "Investor").

                                     RECITAL

         The Company desires to sell to the Investor, and the Investor desires
to purchase from the Company, shares of the Company's Common Stock, no par value
per share ("Common Stock"), upon the terms and subject to the conditions set
forth herein.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

SECTION 1.            PURCHASE AND SALE OF COMMON STOCK

         Subject to the terms and conditions of this Agreement, the Investor
agrees to purchase, and the Company agrees to sell and issue to the Investor, at
the Closing, the number of shares of Common Stock set forth opposite the
Investor's name on Schedule A hereto, at a price of $18.258 per share of Common
Stock.

SECTION 2.            CLOSING

         (a)      The purchase and sale of the Common Stock shall take place at
the offices of Perkins Coie LLP, 1211 S.W. Fifth Avenue, Portland, Oregon, at
10:00 a.m., on August 30, 1999, or at such other location and time or upon such
other date as the Company and the Investor shall mutually agree (which time and
place are designated as the "Closing").

         (b)      At the Closing, the Company shall deliver to the Investor a
certificate representing the shares of Common Stock which the Investor is
purchasing, against delivery to the Company by the Investor of a cashier's check
or wire transfer of funds in the amount of the purchase price for such shares
payable to the Company's order.

STOCK PURCHASE AGREEMENT                                              PAGE 1

<PAGE>

SECTION  3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company hereby represents and warrants to the Investor that, except
as set forth on a Schedule of Exceptions attached hereto as Schedule B:

         3.1      ORGANIZATION AND QUALIFICATION

         The Company is a corporation duly organized and validly existing under
the laws of the State of Oregon. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure to so
qualify would have a material adverse effect on the assets, condition (financial
or other), prospects or business of the Company (a "Company Material Adverse
Effect").

         3.2      ENFORCEABILITY

         The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each of the
certificates, instruments and documents executed or delivered by it pursuant to
the terms of this Agreement. All corporate action on the part of the Company
necessary for the authorization, execution and delivery of this Agreement and
the performance of all of its obligations under this Agreement has been taken.
This Agreement has been duly executed and delivered by the Company, and this
Agreement is a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as to the effect, if
any, of (a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally, (b) rules of law governing specific performance, injunctive
relief and other equitable remedies, and (c) the enforceability of provisions
requiring indemnification in connection with the offering, sale or issuance of
securities.

         3.3      SECURITIES

         The Common Stock to be issued pursuant to this Agreement, when issued
and delivered to the Investor pursuant to this Agreement, shall be validly
issued, fully paid and nonassessable and, assuming the accuracy of the
representations and warranties contained in Section 4, issued in compliance with
applicable federal and state securities laws.

         3.4      NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
                  INSTRUMENTS

         The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not (a) constitute a
violation (with or without the giving of notice or lapse of time, or both) of
any

STOCK PURCHASE AGREEMENT                                              PAGE 2

<PAGE>

provision of law or any judgment, decree, order, regulation or rule of any
court or other governmental authority applicable to the Company; (b) require any
consent, approval or authorization of, or declaration, filing or registration
with, any person or entity, except (i) compliance with applicable securities
laws and (ii) such consents, approvals, authorizations, declarations, filings
and registrations (A) which have been or as of the Closing Date will have been
obtained or effected or (B) the failure of which to obtain or effect would not,
both individually and in the aggregate, have a Company Material Adverse Effect;
(c) result in a default (with or without the giving of notice or lapse of time,
or both) under, or acceleration or termination of, or the creation in any party
of the right to accelerate, terminate, modify or cancel any agreement or
document filed as an exhibit the Company's SEC Documents (as defined below),
except for such defaults, accelerations, terminations or creations of such
rights which would not, both individually and in the aggregate, have a Company
Material Adverse Effect; or (d) conflict with or result in a breach of or
constitute a default under any provision of the Articles of Incorporation or
Bylaws of the Company.

         3.5      CAPITALIZATION

         The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, of which 4,893,426 shares were issued and outstanding as
of July 31, 1999, and 5,000,000 shares of preferred stock, par value $0.01 per
share, none of which is issued or outstanding. Such issued and outstanding
shares of Common Stock are validly issued, fully paid and nonassessable.

         3.6      SEC DOCUMENTS

         The Company has furnished the Investor with true and complete copies of
(i) its Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
(ii) all Forms 8-K filed after the date of such Form 10-K, if any, (iii) its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June
30, 1999, and (iv) a draft (dated August 26, 1999) of its Proxy Statement for
the special meeting of the Company's shareholders to be held in September 1999
(collectively, the "SEC DOCUMENTS"). As of their respective filing dates, each
of the SEC Documents complied in all material respects with the requirements of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.

         3.7      FULL DISCLOSURE

         The information furnished by the Company to the Investor or its
representatives in connection with this Agreement (including, without
limitation, the information contained in the SEC Documents, as the same may have
been updated by

STOCK PURCHASE AGREEMENT                                              PAGE 3

<PAGE>


filings by the Company with the Securities and Exchange Commission after the
date hereof but prior to the Closing Date), when taken together, does not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements so made or information so
delivered, in light of the circumstances under which they were made, not
misleading.

         3.8      BROKERS OR FINDERS

         The Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by or on behalf of the Company, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby, except for the Company's warrants to be issued to First Montauk
Securities on behalf of Lucas Capital Management, Inc.

SECTION  4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

         The Investor hereby represents and warrants for itself, and not for any
other Investor that:

         4.1      AUTHORIZATION

         All corporate or other similar action, if any, required on the part of
the Investor for the authorization, execution and delivery of this Agreement and
the other agreements and transactions contemplated herein, and the performance
of all of the Investor's obligations hereunder and thereunder have been taken,
and this Agreement constitutes, and when executed and delivered by the Investor
the other agreements contemplated herein to which the Investor is a party will
constitute, valid and legally binding obligations of the Investor, enforceable
in accordance with their respective terms, except as to the effect, if any, of
(a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally, (b) rules of law governing specific performance, injunctive
relief and other equitable remedies, and (c) the enforceability of provisions
requiring indemnification in connection with the offering, sale or issuance of
securities. The Investor has full power and authority to execute, deliver and
perform its obligations under this Agreement and such other agreements and to
own the Common Stock to be received by the Investor hereunder (collectively, the
"Securities").

         4.2      PURCHASE ENTIRELY FOR OWN ACCOUNT

         This Agreement is made with the Investor in reliance upon the
Investor's representation to the Company, which by the Investor's execution of
this Agreement

STOCK PURCHASE AGREEMENT                                              PAGE 4

<PAGE>

the Investor hereby confirms, that the Securities will be acquired for
investment for the Investor's own account, and not with a view to the
distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same in a manner contrary to the Securities Act of 1933, as
amended (the "Act"), or applicable state securities laws.

         4.3      DISCLOSURE OF INFORMATION; DUE DILIGENCE

         The Investor has received and reviewed a copy of each SEC Document. The
Investor represents and acknowledges that it has been solely responsible for its
own "due diligence" investigation of the Company and of the management and
business of the Company, for its own analysis of the merits and risks of this
investment, and for its own analysis of the fairness and desirability of the
terms of the investment; that in taking any action or performing any role
relative to the arranging of the proposed investment, the Investor has acted
solely in its own interests.

         4.4      INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS

         The Investor is an investor in securities of the type of the Common
Stock and acknowledges that the Securities are a speculative risk. The Investor
is able to fend for itself in the transactions contemplated by this Agreement,
can bear the economic risk of its investment (including possible complete loss
of such investment) for an indefinite period of time and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Securities. The Investor represents it
has not been organized for the purpose of acquiring the Securities. The Investor
understands that the Securities have not been registered under the Act, or under
the securities laws of any jurisdiction, by reason of reliance upon certain
exemptions, and that the reliance of the Company on such exemptions is
predicated upon the accuracy of the Investor's representations and warranties in
this Section 4. The Investor is familiar with Regulation D promulgated under the
Act and is an "accredited investor" as defined in Rule 501(a) of such Regulation
D.

         4.5      RESTRICTED SECURITIES

         The Investor understands that the Securities are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such securities may be
resold without registration under the Act only in certain limited circumstances
and in accordance with the terms and conditions set forth in the legend
described in Section 4.6 below. In this connection, the Investor represents that
it is familiar with Rule 144 promulgated under the Act, as

STOCK PURCHASE AGREEMENT                                              PAGE 5

<PAGE>

currently in effect, and understands the resale limitations imposed thereby
and by the Act.

         4.6      LEGEND

         It is understood that the certificates evidencing the Securities may
bear the following or a similar legend:

         THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE
         STATE LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
         OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (i) THERE IS AN
         EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
         SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID
         SECURITIES, (ii) THIS CORPORATION RECEIVES AN OPINION OF LEGAL COUNSEL
         FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THIS CORPORATION
         STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (iii)
         THIS CORPORATION OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS
         EXEMPT FROM REGISTRATION.

         4.7      RESIDENCY

         For purposes of the application of state securities laws, the Investor
represents that it is a resident of the state set forth opposite the Investor's
name on Schedule A hereto.

SECTION 5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THE CLOSINGS

         The obligations of the Investor under Section 1 of this Agreement are
subject to the fulfillment at or before the Closing of each of the following
conditions:

         5.1      REPRESENTATIONS AND WARRANTIES

         The representations and warranties of the Company contained in Section
3 hereof shall be true in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
as of the Closing Date, other than such representations and warranties as are
made as of another date.

STOCK PURCHASE AGREEMENT                                              PAGE 6

<PAGE>

         5.2      PERFORMANCE

         The Company shall have performed and complied in all material respects
with all agreements, obligations and covenants contained in this Agreement that
are required to be performed or complied with by it on or before the Closing
Date.

         5.3      COMPLIANCE CERTIFICATE

         The Chief Executive Officer of the Company shall deliver to the
Investor at the Closing a certificate certifying that the conditions specified
in Sections 5.1 and 5.2 have been fulfilled.

         5.4      QUALIFICATION

         The offer and sale of the Securities to the Investor pursuant to this
Agreement shall be qualified or exempt from qualification under all applicable
federal and state securities laws, which qualification or exemption the Company
shall have exercised its reasonable best efforts to obtain.

SECTION 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSINGS

         The obligations of the Company to the Investor under this Agreement are
subject to the fulfillment at or before the Closing of each of the following
conditions:

         6.1      REPRESENTATIONS AND WARRANTIES

         The representations and warranties of the Investor contained in Section
4 shall be true in all material respects on and as of the Closing Date with the
same effect as though such representations and warranties had been made as of
the Closing Date.

         6.2      QUALIFICATION

         The offer and sale to the Investor of the Securities shall be qualified
or exempt from qualification under all applicable federal and state securities
laws, which qualification or exemption the Company shall have exercised its
reasonable best efforts to obtain.

SECTION 7. REGISTRATION RIGHTS

         (a)      Subject to Section 7(b) below, the Company shall file, with
respect to the shares of Common Stock purchased under this Agreement, a
registration statement on Form S-3 (or any successor form) on or before the
180th day after the Closing Date to register the Securities held by the Investor
under the Act. The Company shall use commercially reasonable efforts to have the
registration statement declared effective

STOCK PURCHASE AGREEMENT                                              PAGE 7

<PAGE>

and to maintain the effectiveness of such registration statement (and
maintain the current status of the prospectus or prospectuses contained
therein) for at least 120 days.

         (b)      The Company shall not be obligated to effect any such
registration pursuant to Section 7(a):

                  (1)      if Form S-3 is not available for such offering by the
         Investor;

                  (2)      if the Company shall furnish to the Investor a
         certificate signed by the President or Chief Executive Officer of the
         Company stating that in the good faith judgment of the Board of
         Directors of the Company, it would be materially detrimental to the
         Company and its shareholders for such Form S-3 registration to be
         effected at such time, in which event the Company shall have the right
         to defer the filing of the Form S-3 registration statement for a period
         of not more than ninety (90) days after the expiration of the 180-day
         period set forth above; or

                  (3)      in any particular jurisdiction in which the Company
         would be required to qualify to do business or to execute a general
         consent to service of process in effecting such registration.

         (c)      The Company shall notify the Investor in writing at least
thirty (30) days prior to filing any registration statement under the Act for
purposes of effecting a public offering of securities of the Company (including,
but not limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding registration statements relating to any
registration under Section 7(a) of this Agreement or to any employee benefit
plan or a corporate reorganization) and will afford the Investor an opportunity
to include in such registration statement all or any part of the Securities then
held by the Investor, subject to the provisions of Sections 7(d) and 7(e) below.
If the Investor wants to include in any such registration statement all or any
part of the Securities held by the Investor, the Investor shall within twenty
(20) days after receipt of the above-described notice from the Company, so
notify the Company in writing, and in such notice shall inform the Company of
the number of Securities the Investor wishes to include in such registration
statement.

         (d)      If a registration statement under which the Company gives
notice under Section 7(c) is for an underwritten offering, then the Company
shall so advise the Investor. In such event, the right of the Investor to
include any of the Investor's Securities in a registration pursuant to Section
7(c) shall be conditioned upon the Investor's participation in such underwriting
and the inclusion of the Investor's Securities in the underwriting on the same
terms and conditions as the other

STOCK PURCHASE AGREEMENT                                              PAGE 8

<PAGE>

participants in such offering, including, without limitation, entering into
an underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting (including a market stand-off
agreement of up to 180 days if required by such underwriters).
Notwithstanding any other provision of this Agreement, if the managing
underwriter(s) determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares from the registration and the underwriting,
and the number of shares that may be included in the registration and the
underwriting shall be allocated, FIRST, to the Company, SECOND, to each
holder of registration rights granted by the Company before the date of this
Agreement that contractually require the Company to include such holder's
shares on a priority basis, and THIRD, to the Investor and any other holder
of registration rights granted by the Company (excluding those covered
above), on a pro rata basis based on the total number of shares of Common
Stock then sought to be included by each in such offering. If the Investor
disapproves of the terms of any such underwriting, the Investor may elect to
withdraw therefrom by written notice to the Company and the underwriter(s),
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration.

         (e)      The Investor may not have any Securities registered pursuant
to any registration statement initiated pursuant to the Registration Rights
Agreement, dated as of June 9, 1999, among the Company, Strong River Investment
Inc., and Bay Harbor Investments, Inc.

SECTION 8. MISCELLANEOUS

         8.1      SURVIVAL OF WARRANTIES

         The warranties, representations and covenants contained in or made
pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing.

         8.2      SUCCESSORS AND ASSIGNS

         The terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors, assigns, heirs and legal
representatives of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto and their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

STOCK PURCHASE AGREEMENT                                              PAGE 9

<PAGE>

         8.3      GOVERNING LAW

         This Agreement shall be governed by and construed under the laws of the
State of Oregon as applied to agreements among persons domiciled in Oregon
entered into and to be performed entirely within the State of Oregon.

         8.4      COUNTERPARTS

         This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

         8.5      HEADINGS

         The headings used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement.

         8.6      NOTICES

         Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given upon
personal delivery to the party to be notified or three days after deposit in the
United States Mail, postage prepaid, registered or certified with return receipt
requested and addressed to the party to be notified, if to the Company, at 7175
NW Evergreen Parkway, Hillsboro, Oregon 97124, Attention: Frank Hausmann, or, if
to an Investor, at the address indicated for the Investor on Schedule A hereto,
or at such other address as any such party may designate by ten days' advance
written notice to the other parties given in the foregoing manner.

         8.7      EXPENSES

         The Company shall pay all costs and expenses incurred by it with
respect to the preparation and performance of this Agreement. The Investor shall
pay all costs and expenses incurred thereby with respect to the preparation and
performance of this Agreement.

         8.8      AMENDMENTS AND WAIVERS

         This Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
the Investor.

STOCK PURCHASE AGREEMENT                                              PAGE 10

<PAGE>

         8.9      SEVERABILITY

         If one or more provisions of this Agreement is held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement, and
the balance of this Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.

         8.10     ENTIRE AGREEMENT

         This Agreement constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter hereof, and
supersedes all prior agreements with respect to the subject matter hereof, other
than any confidentiality agreements entered into in connection with the
transactions contemplated hereby.

                     [This space intentionally left blank.]

STOCK PURCHASE AGREEMENT                                              PAGE 11

<PAGE>


         IN WITNESS WHEREOF, the parties have duly executed this Common Stock
Purchase Agreement as of the date first above written.

                                          CENTERSPAN COMMUNICATIONS CORPORATION



                                          By:
                                             -----------------------------
                                          Name: Frank G. Hausmann
                                          Title:  Chief Executive Officer
                                                  and President


                                          INVESTOR:



                                          By:
                                             -----------------------------
                                          Name:
                                          Title:

STOCK PURCHASE AGREEMENT                                              PAGE S-1

<PAGE>


                                   SCHEDULE A

                                    INVESTOR

<TABLE>
<CAPTION>
                                                                 SHARES OF               PURCHASE
                                             STATE                COMMON                 PRICE FOR
                                               OF                  STOCK                  COMMON
INVESTOR AND ADDRESS                       RESIDENCE             PURCHASED                 STOCK
- --------------------                       ---------             ---------               ---------
<S>                                        <C>                   <C>                  <C>
Peter R. Kellogg                                                   273,853             $5,000,008.10
</TABLE>

<PAGE>

                                   SCHEDULE B

                             SCHEDULE OF EXCEPTIONS



<PAGE>

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE LAW. NO INTEREST HEREIN MAY BE SOLD, DISTRIBUTED,
ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT THE PRIOR WRITTEN
CONSENT OF THIS CORPORATION.



No. W-L-                             Warrant to purchase
Issued:                              30,000 shares of Common
                                     Stock (subject to adjustment)



                      CENTERSPAN COMMUNICATIONS CORPORATION

                                  COMMON STOCK
                                PURCHASE WARRANT



         THIS CERTIFIES THAT, for value received, Lucas Capital Management (the
"Holder") is entitled to exercise this Warrant to purchase from the Company
Thirty Thousand (30,000) fully paid and nonassessable shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"), on the terms and
subject to the conditions set forth herein. The shares of Common Stock issuable
upon the exercise of this Warrant are referred to herein as the "Warrant
Shares." The number of Warrant Shares issuable upon exercise of this Warrant and
the Exercise Price (as defined below) are subject to adjustment as provided
herein. The term "Warrant" as used herein shall include this Warrant and any
warrants delivered in substitution hereof as provided herein.

         1.1      TERM OF WARRANT

         This Warrant may be exercised by the Holder, in whole but not in part,
at any time prior to the earlier of (a) August 30, 2004, or (b) the closing of a
Corporate Transaction (as defined below) (the "Exercise Period"). As used
herein, the term "Corporate Transaction" means the sale of all or substantially
all the assets of the Company or the acquisition of the Company by another
entity by means of a merger, consolidation, reorganization or any other
transaction or series of related transactions resulting in the exchange of the
outstanding shares of the Company for securities or

<PAGE>

consideration issued or caused to be issued by the acquiring entity or any of
its affiliates and as a result of which the shareholders of the Company
immediately prior to such transaction hold or receive, by virtue of their
ownership of securities of the Company, less than fifty percent (50%) of the
capital stock of the resulting entity; provided, however, that the sale of
the Company's hardware business assets to Guillemot Corporation, S.A. will
not constitute a "Corporate Transaction," and such sale will not be subject
to the notice provisions of Section 4.5.

         1.2      EXERCISE PRICE

         The Exercise Price at which this Warrant may be exercised shall be
$18.258 per share of Common Stock, as adjusted from time to time pursuant to
Section 4 hereof.

         1.3      METHOD OF EXERCISE

                           1.3.1    PROCEDURE FOR EXERCISE

         This Warrant may be exercised by the Holder, in whole but not in part,
by delivering to the Company (i) this Warrant, (ii) cash, a wire transfer of
funds or a check payable to the Company in the amount of the Exercise Price
multiplied by the number of shares for which this Warrant is being exercised
(the "Purchase Price"), and (iii) the form of Election to Purchase attached
hereto as Annex A, duly completed and executed by the Holder. This Warrant shall
be deemed to have been exercised immediately prior to the close of business on
the date of its surrender for exercise as provided above.

                           1.3.2    NET EXERCISE RIGHTS

         Notwithstanding the payment provisions set forth above, the Holder may
elect to receive Warrant Shares in an amount equal to the value (as determined
below) of this Warrant by surrender of this Warrant at the principal office of
the Company, together with notice of such election, in which case the Company
shall issue to the Holder the number of Warrant Shares determined as follows:

                                     X =  Y (A-B)
                                          -------
                                             A

WHERE:   X = THE NUMBER OF WARRANT SHARES TO BE ISSUED TO THE HOLDER
         Y = THE NUMBER OF WARRANT SHARES SUBJECT TO THE PORTION
             OF THIS WARRANT BEING EXERCISED
         A = THE FAIR MARKET VALUE (AS DEFINED BELOW) OF ONE WARRANT SHARE
         B = THE EXERCISE PRICE

                                      -2-

<PAGE>

         For purposes of the above calculation, the fair market value of a
Warrant Share shall be the average of the closing bid and asked prices of the
Company's Common Stock as quoted on the Nasdaq National Market System or on any
exchange on which such Common Stock is then listed, whichever is applicable, for
the five trading days prior to the date of exercise of this Warrant.

2.       DELIVERY OF STOCK CERTIFICATES

         Within 10 days after the payment of the Purchase Price following the
exercise of this Warrant, the Company, at its expense, shall issue in the name
of the Holder a certificate for the number of fully paid and nonassessable
Warrant Shares to which the Holder shall be entitled upon such exercise and
payment.

3.       COVENANTS AS TO WARRANT SHARES

         3.1      RESERVATION OF WARRANT SHARES

         The Company shall at all times have authorized and reserve and keep
available, free from preemptive rights, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon the exercise of this
Warrant, the number of Warrant Shares deliverable upon full exercise of this
Warrant.

         3.2      ISSUANCE OF WARRANT SHARES

         The Company covenants that all Warrant Shares shall, upon issuance
thereof in accordance with the terms of this Warrant, be (a) duly authorized,
validly issued, fully paid and nonassessable and (b) free from all liens,
pledges, charges and security interests created by the Company.

4.       ADJUSTMENTS

         4.1      ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES

         The Exercise Price and the number of Warrant Shares issuable upon the
exercise of this Warrant shall be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of such Exercise Price pursuant to
this Section 4, this Warrant shall thereafter entitle the Holder to purchase, at
the Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares issuable upon exercise of this
Warrant immediately prior to such adjustment, and dividing the product thereof
by the Exercise Price resulting from such adjustment.

                                      -3-

<PAGE>

         4.2      ADJUSTMENT OF EXERCISE PRICE UPON EXTRAORDINARY COMMON STOCK
                  EVENT

         Upon the happening of an Extraordinary Common Stock Event (as defined
below) after the issuance date of this Warrant, the Exercise Price shall,
simultaneously with the happening of such Extraordinary Common Stock Event, be
adjusted by multiplying the then effective Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and the denominator
of which shall be the number of shares of Common Stock outstanding immediately
after such Extraordinary Common Stock Event, and the product so obtained shall
thereafter be the Exercise Price. The Exercise Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.

         "Extraordinary Common Stock Event" shall mean (x) the issuance of
additional shares of Common Stock (or other securities or rights convertible
into or entitling the holder thereof to receive additional shares of Common
Stock ) as a dividend or other distribution on outstanding Common Stock of the
Company, (y) a split or subdivision of outstanding shares of Common Stock into a
greater number of shares of Common Stock, or (z) a combination of outstanding
shares of Common Stock into a smaller number of shares of Common Stock.

         4.3      CAPITAL REORGANIZATION OR RECLASSIFICATION

         If the Common Stock issuable upon the exercise of this Warrant shall be
changed into the same or a different number of shares of any class or classes of
stock of the Company, whether by capital reorganization, reclassification or
otherwise (other than an Extraordinary Common Stock Event), then and in each
such event the Holder shall have the right thereafter to exercise this Warrant
for the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by holders
of the number of shares of Common Stock into which this Warrant might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to adjustment as provided herein. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the Holder after the reorganization,
recapitalization or change to the end that the provisions of this Section 4
(including adjustment of the Exercise Price then in effect and the number of
shares issuable upon exercise of this Warrant) shall be applicable after that
event as nearly equivalent as may be practicable.

                                      -4-

<PAGE>

         4.4      NOTICE OF ADJUSTMENT

         Whenever the number of shares of Common Stock or other stock or
property issuable upon the exercise of this Warrant or the Exercise Price is
adjusted, then and in each such case the Company shall promptly deliver a notice
to the Holder, which notice shall state the Exercise Price resulting from such
adjustment and/or the increase or decrease, if any, in the number of shares of
Common Stock or other stock or property issuable upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.

         4.5      OTHER NOTICES

         In the event that the Company shall propose at any time:

                  (a) to declare any dividend or distribution upon its Common
         Stock, whether in cash, property, stock or other securities, whether or
         not a regular cash dividend and whether or not out of earnings or
         earned surplus;

                  (b) to offer for subscription to the holders of its Common
         Stock any additional shares of stock of any class or series or other
         rights;

                  (c) to effect any reclassification or recapitalization of the
         shares of its Common Stock outstanding involving a change in the Common
         Stock; or

                  (d) to merge or consolidate with or into any other
         corporation, to sell, lease or convey all or substantially all of its
         property or business, or to liquidate, dissolve or wind up;

then, in connection with each such event, the Company shall send to the Holder:

                  (i) at least 20 days' prior written notice of the date on
         which a record shall be taken for such dividend, distribution or
         subscription rights (and specifying the date on which the holders of
         Common Stock shall be entitled thereto) or for determining rights to
         vote in respect of the matters referred to in (c) and (d) above; and

                  (ii) in the case of the matters referred to in (c) and (d)
         above, at least 20 days' prior written notice of the date when the same
         shall take place (and, if applicable, specifying the date on which the
         holders of the Common Stock shall be entitled to exchange their shares
         of Common Stock for securities or other property deliverable upon the
         occurrence of such events).

                                      -5-

<PAGE>

5.       FRACTIONAL SHARES

         No fractional shares shall be issued upon the exercise of this Warrant,
and the number of shares of Common Stock to be issued shall be rounded to the
nearest whole share, determined on the basis of the total number of shares of
Common Stock issuable upon such aggregate conversion.

6.       TRANSFERS

         6.1 RESTRICTIONS ON TRANSFER

         No Warrant Shares or any interest therein may be transferred unless (a)
such transfer is registered under the Securities Act of 1933, as amended (the
"Securities Act"), (b) the Company has received an opinion of legal counsel for
the Holder reasonably satisfactory to the Company stating that the transfer is
exempt from the registration requirements of the Securities Act, or (c) the
Company otherwise satisfies itself that such transfer is exempt from
registration.

         6.2 TRANSFERS

         The Company shall register on the books of the Company maintained at
its principal office the permitted transfer of this Warrant upon surrender to
the Company of this Warrant, with the form of Assignment attached hereto as
Annex B duly completed and executed by the Holder. Upon any such registration of
transfer, a new Warrant, in substantially the form of this Warrant, evidencing
this Warrant so transferred shall be issued, at the Company's expense, to the
transferee.

7.       LEGEND

         Legends setting forth or referring to the applicable restrictions set
forth in Section 6.1 may be placed on this Warrant, any replacement hereof or
any certificate representing the Warrant Shares, and a stop transfer restriction
or order shall be placed on the books of the Company and with any transfer agent
until such securities may be sold or otherwise transferred in accordance with
Section 6.1.

8.       HOLDER AS OWNER

         The Company may deem and treat the holder of record of this Warrant as
the absolute owner hereof for all purposes regardless of any notice to the
contrary.

                                      -6-

<PAGE>

9.       NO SHAREHOLDER RIGHTS

         This Warrant shall not entitle the Holder to any voting rights or any
other rights as a shareholder of the Company or to any other rights whatsoever
except the rights stated herein; and no dividend or interest shall be payable or
shall accrue in respect of this Warrant or the Warrant Shares, until and to the
extent that this Warrant shall be exercised.

10.      REGISTRATION RIGHTS

         (a) Subject to Section 10(b) below, the Company shall file, with
respect to the shares of Common Stock issuable under this Warrant, a
registration statement on Form S-3 (or any successor form) on or before the
180th day after the issuance date of this Warrant to register the shares
issuable upon the exercise of this Warrant under the Securities Act. The Company
shall use commercially reasonable efforts to have the registration statement
declared effective and to maintain the effectiveness of such registration
statement (and maintain the current status of the prospectus or prospectuses
contained therein) for at least 120 days.

         (b) The Company shall not be obligated to effect any such registration
pursuant to Section 10(a):

                  (1) if Form S-3 is not available for such offering by the
         Holder;

                  (2) if the Company shall furnish to the Holder a certificate
         signed by the President or Chief Executive Officer of the Company
         stating that in the good faith judgment of the Board of Directors of
         the Company, it would be materially detrimental to the Company and its
         shareholders for such Form S-3 registration to be effected at such
         time, in which event the Company shall have the right to defer the
         filing of the Form S-3 registration statement for a period of not more
         than ninety (90) days after the expiration of the 180-day period set
         forth above; or

                  (3) in any particular jurisdiction in which the Company would
         be required to qualify to do business or to execute a general consent
         to service of process in effecting such registration.

         (c) The Company shall notify the Holder in writing at least thirty (30)
days prior to filing any registration statement under the Securities Act for
purposes of effecting a public offering of securities of the Company (including,
but not limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding registration statements relating to any
registration under Section 10(a)

                                      -7-

<PAGE>

of this Warrant or to any employee benefit plan or a corporate
reorganization) and will afford the Holder an opportunity to include in such
registration statement all or any part of the shares issuable upon the
exercise of this Warrant, subject to the provisions of Sections 10(d) and
10(e) below. If the Holder wants to include in any such registration
statement all or any part of the shares issuable upon the exercise of this
Warrant, the Investor shall within twenty (20) days after receipt of the
above-described notice from the Company, so notify the Company in writing,
and in such notice shall inform the Company of the number of shares of Common
Stock the Investor wishes to include in such registration statement.

         (d) If a registration statement under which the Company gives notice
under Section 10(c) is for an underwritten offering, then the Company shall so
advise the Holder. In such event, the right of the Holder to include any of the
shares issuable upon the exercise of this Warrant in a registration pursuant to
Section 10(c) shall be conditioned upon the Holder's participation in such
underwriting and the inclusion of the Holder's shares of Common Stock in the
underwriting on the same terms and conditions as the other participants in such
offering, including, without limitation, entering into an underwriting agreement
in customary form with the managing underwriter or underwriters selected for
such underwriting (including a market stand-off agreement of up to 180 days if
required by such underwriters). Notwithstanding any other provision of this
Warrant, if the managing underwriter(s) determine(s) in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, then the managing underwriter(s) may exclude shares from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, FIRST, to the
Company, SECOND, to each holder of registration rights granted by the Company
before the issuance date of this Warrant that contractually require the Company
to include such holder's shares on a priority basis, and THIRD, to the Holder
and any other holder of registration rights granted by the Company (excluding
those covered above), on a pro rata basis based on the total number of shares of
Common Stock then sought to be included by each in such offering. If the Holder
disapproves of the terms of any such underwriting, the Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter(s),
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any shares of Common Stock excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration.

         (e) The Holder may not have any shares of Common Stock registered
pursuant to any registration statement initiated pursuant to the Registration
Rights Agreement, dated as of June 9, 1999, among the Company, Strong River
Investment Inc., and Bay Harbor Investments, Inc.

                                      -8-

<PAGE>

11.      GOVERNING LAW; CONSTRUCTION

         The validity and interpretation of the terms and provisions of this
Warrant shall be governed by the laws of the State of Oregon. The descriptive
headings of the several sections of this Warrant are inserted for convenience
only and shall not control or affect the meaning or construction of any of the
provisions thereof.

12.      LOST WARRANT CERTIFICATE

         Upon receipt by the Company of satisfactory evidence of the loss,
theft, destruction or mutilation of this Warrant and either (in the case of
loss, theft or destruction) indemnification reasonably satisfactory to the
Company or (in the case of mutilation) the surrender of this Warrant for
cancellation, the Company will execute and deliver to the Holder, without
charge, a new Warrant of like denomination.

13.      WAIVERS AND AMENDMENTS

         This Warrant or any provision hereof may be amended or waived only by a
statement in writing signed by the Company and the Holder.

14.      NOTICES

         Any notice required by the provisions of this Warrant to be given to
the Holder shall be deemed given two days after being deposited in the United
States mail, postage prepaid and addressed to such Holder's address appearing on
the books of the Company.

         Any notice required by the provisions of this Warrant to be given to
the Company shall be deemed given two days after being deposited in the United
States mail, postage prepaid and addressed to CenterSpan Communications
Corporation, 7175 NW Evergreen Parkway, Hillsboro, OR 97124, Attention: Frank G.
Hausmann, or at such other address as specified in a notice delivered to the
Holder as set forth above.

15.      BINDING EFFECT

         This Warrant shall be binding upon the Company and its successors and
assigns, and shall inure to the benefit of and be enforceable by the Holder and
its successors and permitted assigns.

                                      -9-

<PAGE>

16.      INVESTMENT INTENT, ETC.

         By accepting this Warrant, the Holder represents that (a) the Holder is
acquiring this Warrant and the Warrant Shares issuable upon exercise hereof for
investment and not with a view to, or for sale in connection with, any
distribution thereof; (b) the Holder can bear the economic risk of an investment
in the Warrant Shares (including possible complete loss of such investment) for
an indefinite period of time and has such knowledge and experience in financial
and business matters that the Holder is capable of evaluating the merits and
risks of an investment in the Warrant Shares; (c) the Holder understands that
this Warrant and the Warrant Shares have not been registered under the
Securities Act, or under the securities laws of any jurisdiction, by reason of
reliance upon certain exemptions, and that the reliance of the Company on such
exemptions is predicated upon the accuracy of the Holder's representations in
this Section; (d) the Holder is familiar with Regulation D promulgated under the
Securities Act and is an "accredited investor" as defined in Rule 501(a) of
Regulation D; and (e) the Holder is familiar with Rule 144 under the Securities
Act, as currently in effect, and understands the resale limitations that are or
would be imposed thereby and by the Securities Act on this Warrant and the
Warrant Shares to the extent such securities are characterized as "restricted
securities" under the United States federal securities laws inasmuch as they are
acquired from the Company in a transaction not involving a public offering.

         IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.

                          CENTERSPAN COMMUNICATIONS CORPORATION


                          By
                            ------------------------------------
                          Name:     Frank G. Hausmann
                          Title:    Chief Executive Officer and
                                    President

                                      -10-

<PAGE>

                                     ANNEX A

                          FORM OF ELECTION TO PURCHASE

To CenterSpan Communications Corporation:

         The undersigned hereby elects to purchase ___________ shares of Common
Stock of CenterSpan Communications Corporation issuable upon the exercise of the
within Warrant, and requests that a certificate for such shares shall be issued
in the name of the undersigned holder and delivered to the address indicated
below.

         [Payment enclosed in the amount of $                          ]
                                             ---------------------------

         [THE UNDERSIGNED ELECTS THAT THE WARRANT BE EXERCISED IN ACCORDANCE
WITH SECTION 1.3.2 thereof.]

         Dated:
               -------------

         Name of holder of Warrant:
                                   --------------------------------------------
                                                   (please print)

                  Address:
                             --------------------------------------------------

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

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

                  Signature:
                             --------------------------------------------------

<PAGE>

                                     ANNEX B

                               FORM OF ASSIGNMENT


         FOR VALUE RECEIVED, ______________________________________ hereby
sells, assigns and transfers to the assignee set forth below all of the rights
of the undersigned in and to the number of Warrant Shares (as defined in and
evidenced by the foregoing Warrant) set opposite the name of such assignee below
and in and to the foregoing Warrant with respect to said Warrant Shares:


NAME OF ASSIGNEE                   ADDRESS                     NUMBER OF SHARES
- ----------------                   -------                     ----------------




         Dated:
               --------------

         Name of holder of Warrant:
                                   --------------------------------------------
                                                   (please print)

                  Address:
                             --------------------------------------------------

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

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

                  Signature:
                             --------------------------------------------------


<PAGE>

                                           EXHIBIT 11.1

                               CENTERSPAN COMMUNICATIONS CORPORATION
                                 STATEMENTS REGARDING COMPUTATION
                                       OF PER SHARE EARNINGS
                         (Dollars in thousands, except net loss per share)
                                            (Unaudited)

<TABLE>
<CAPTION>
                                                      Three Months Ended          Nine Months Ended
                                                         September 30,              September 30,
                                                  -------------------------  -------------------------
                                                      1999          1998          1999        1998
                                                   ---------     ---------     ----------   ---------
<S>                                                <C>           <C>           <C>          <C>
Weighted average number of
  common shares outstanding - basic                   5,004         4,385         4,887        4,353

Common stock equivalents
  arising from stock options                              -             -             -            -
                                                   --------      --------      --------     --------
Weighted average number of
  common shares outstanding - diluted                 5,004         4,385         4,887        4,353
                                                   ========      ========      ========     ========
Net loss from continuing operations                $ (1,724)     $   (244)     $ (7,039)    $   (650)
                                                   ========      ========      ========     ========
Net loss from discontinued operations              $      -      $ (3,038)     $ (5,207)    $ (6,702)
                                                   ========      ========      ========     ========
Net loss per share from continuing operations:
  Basic                                            $  (0.34)     $  (0.06)     $  (1.44)    $  (0.15)
                                                   ========      ========      ========     ========
  Diluted                                          $  (0.34)     $  (0.06)     $  (1.44)    $  (0.15)
                                                   ========      ========      ========     ========
Net loss per share from discontinued operations:
  Basic                                            $      -      $  (0.69)     $  (1.07)    $  (1.54)
                                                   ========      ========      ========     ========
  Diluted                                          $      -      $  (0.69)     $  (1.07)    $  (1.54)
                                                   ========      ========      ========     ========
</TABLE>


<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED STATEMENT OF
INCOME FOR THE PERIOD THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                           4,786
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</TABLE>

<PAGE>

                                  EXHIBIT 99.1

                     CENTERSPAN COMMUNICATIONS CORPORATION

                                  RISK FACTORS

    Before investing in our common stock, you should consider carefully the
following factors, as well as the information contained in the rest of this
prospectus and in the documents we incorporate by reference.

AS A RESULT OF THE SALE OF OUR HARDWARE BUSINESS ASSETS, OUR REVENUES WILL
  DECLINE SUBSTANTIALLY AND INITIALLY DEPEND PRIMARILY UPON THE SALE OF TWO
  PRODUCTS

    We have historically derived nearly all of our revenues from the sale of
game controller hardware products. In October 1999, we sold our hardware
business assets to Guillemot Corporation, and our product offerings are
currently limited to our Talk n' Play and iConference software products.
Revenues from sales of our Talk n' Play and iConference products, first shipped
in January and June 1999, respectively, have been minor to date. As a result,
our revenues will decrease substantially as a result of the sale of the hardware
business assets and will depend primarily upon the sale of our two software
products and any additional products we may develop in the future. Sales of
these products may not be substantial.

WE ARE COMPETING IN A NEW MARKET, WHICH MAY NOT DEVELOP OR WHERE WE MAY FAIL TO
  GAIN MARKET ACCEPTANCE OF OUR PRODUCTS

    The market for Internet community, collaboration and communications products
is new and rapidly evolving. As is common in rapidly evolving markets, demand
and market acceptance for recently introduced products are subject to high
levels of uncertainty and risk. If this new market fails to develop, develops
more slowly than expected or becomes saturated with competitors, or our products
do not achieve or sustain market acceptance, it could have a material adverse
effect on our business, results of operations, and financial condition.

WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS OR ENHANCEMENTS TO OUR
  EXISTING PRODUCTS AT THE RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET, WHICH
  COULD ADVERSELY AFFECT US

    Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high quality products,
product enhancements, and services on a timely basis and by keeping pace with
technological developments and emerging industry standards. The markets for our
products are rapidly evolving. Failure to develop and release enhanced or new
products, or delays or

                                       2
<PAGE>
quality problems in doing so, could have a material adverse effect on our
business, results of operations, and financial condition.

OUR SUCCESS DEPENDS ON INCREASING MARKET AWARENESS OF OUR BRAND NAMES, WHICH MAY
  NOT OCCUR

    We changed our name to CenterSpan Communications Corporation in connection
with the sale of our hardware business assets in October 1999. We market our
products under the brand name WeCanTalk.com. Developing and maintaining
awareness of the CenterSpan Communications and WeCanTalk.com brand names is a
significant factor in achieving widespread acceptance of our Internet
communications solutions. The failure to successfully promote our brand names
could have a material adverse effect on our business, results of operations, and
financial condition. Due in part to the emerging nature of the Internet
communications market [and the substantial resources available to many of our
competitors], there may be a time-limited opportunity to achieve and maintain a
significant market presence. Successfully promoting and positioning the
CenterSpan Communications and WeCanTalk.com brands will depend largely on the
effectiveness of our marketing efforts and our ability to develop reliable and
useful products at competitive prices. We will need to invest substantially in
such efforts. We may not be successful in creating and maintaining brand
awareness among potential customers.

BECAUSE OUR PRODUCTS DEPEND UPON TECHNOLOGY LICENSED FROM THIRD PARTIES, THE
  LOSS OF ACCESS TO SUCH TECHNOLOGY COULD ADVERSELY AFFECT US

    Our products currently depend upon technologies developed by third parties,
primarily Intel Corporation, which are outside our control. Any lack of
commercial acceptance of the third parties' technologies or of our continued
access to these technologies could have a material adverse effect on the
commercial acceptance of our products and on our business, results of
operations, and financial condition.

THE PURCHASE PRICE FOR THE SALE OF OUR HARDWARE BUSINESS ASSETS IS SUBJECT TO
  DOWNWARD ADJUSTMENTS, WHICH, IF TRIGGERED, COULD RESULT IN REDUCED PROCEEDS TO
  US

    The purchase price for the sale of our hardware business assets to Guillemot
Corporation is subject to several adjustments. These adjustments could result in
reduced proceeds to us from the sale of the assets. Any significant decrease in
sale proceeds could adversely affect our ability to implement our further
expansion into software products markets. The purchase price for the assets will
be adjusted downward if Guillemot experiences high levels of inventory return
costs, price protection costs, or uncollectible accounts receivable. The
purchase price is also subject to adjustment if our inventory and accounts
receivable levels at the end of July 1999 differ in the aggregate by more than
$160,000 from May 31, 1999 levels. An additional downward adjustment to the
purchase price of up to $500,000 will occur if the National Association for
Stock Car Auto Racing, Inc. does not modify and extend or renew our existing
license agreement to allow Guillemot to sell our NASCAR-branded products.

BECAUSE PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUE ARE DIFFICULT TO PREDICT,
  YOU SHOULD NOT RELY ON REVENUE FOR A GIVEN PERIOD AS AN INDICATOR OF REVENUE
  FOR FUTURE PERIODS

    Because of the emerging nature of our Internet communications solutions
business, we may be unable to accurately forecast our revenues. Traditionally,
our revenue, which was derived primarily from our hardware business, has
fluctuated, and it will likely continue to fluctuate, significantly from period
to period. Because these fluctuations are difficult to predict, you should not
rely on our revenue for a given period as an indicator of revenue for future
periods. The factors listed below determine our revenue for a given period and
make forecasting future revenue difficult.

    - The amount and timing of operating costs and capital expenditures relating
      to development and expansion of our business;

                                       3
<PAGE>
    - The volume and timing of orders received during a period, with customers
      generally ordering on an as-needed basis;

    - The timing of new or enhanced product introductions by us and our
      competitors;

    - The impact of price competition on our average selling prices; and

    - Changes in product or distribution channel mix.

    As a result of these factors and other factors generally beyond our control,
fluctuations in revenue may not be identifiable until at or near the end of a
period.

ALTHOUGH WE DO NOT HAVE FIRM SALES FORECASTS, WE MUST PLAN OUR EXPENDITURES FAR
  IN ADVANCE, WHICH MAY MAGNIFY THE EFFECT OF REVENUE SHORTFALLS IN ANY GIVEN
  PERIOD

    Notwithstanding the difficulty in forecasting future sales, we generally
must undertake our development, sales and marketing activities and other
commitments months in advance. Accordingly, the effect of shortfalls in revenue
may be magnified due to our inability to adjust expenses during a quarter to
match the level of revenue for the quarter, which could have a material adverse
effect on our business, results of operations, and financial condition.

[SEASONAL FLUCTUATIONS IN OUR OPERATING RESULTS MAY RESULT IN VOLATILITY IN THE
  MARKET PRICE OF OUR STOCK.

    We have generally experienced seasonality in our operating results. Our
revenues have typically been substantially higher in the fourth quarter of the
year, reflecting traditional retail seasonality patterns. We expect the seasonal
pattern of our revenue to continue as we expand our Internet communications
solutions business. This seasonality may result in quarter to quarter volatility
in the market price of our stock.]

SHORTER THAN EXPECTED PRODUCT LIFE CYCLES MAY RESULT IN DEPRESSED REVENUES AND
  GROSS MARGINS IN AFFECTED PERIODS

    From time to time we or our competitors may introduce products, features, or
technologies that could render our existing products less competitive or
obsolete. This could cause potential customers to defer their decision to buy or
determine not to buy our products. If a product's life is shorter than expected,
unexpected sales decreases and distribution channel inventory returns and
end-of-life and obsolete inventory would depress our revenue and gross margin in
the affected periods.

THE INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS
  AND REDUCED PROFITS

    The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition may result in pricing
pressures, reduced sales, reduced margins, or the failure of products to achieve
or maintain market acceptance. Any of these factors could have a material
adverse effect on our business, results of operations, and financial condition.
Many of our competitors have greater name recognition, access to larger customer
bases, and substantially greater financial, technical, marketing, distribution,
service, support, and other resources than we have. Consequently, these
competitors may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards, or customer requirements.

                                       4
<PAGE>
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS AND DECREASE THE
  VALUE OF YOUR INVESTMENT

    Our success depends largely upon the continued services of our executive
officers and other key management and development personnel. The loss of the
services of one or more of our executive officers, engineering personnel, or
other key employees could have a material adverse effect on our business,
results of operations, and financial condition. Our employees are employed on an
"at will" basis and could terminate their employment with us at any time. We do
not maintain key person life insurance policies on any of our employees.

OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT
  OUR BUSINESS AND DECREASE THE VALUE OF YOUR INVESTMENT

    Our future success also depends on our ability to attract and retain highly
qualified personnel. We may not be successful in attracting or retaining
qualified personnel, which could have a material adverse effect on our business,
results of operations, and financial condition. The competition for qualified
personnel in the computer software markets is intense, and we may be unable to
attract, assimilate, or retain additional highly qualified personnel in the
future. We attempt to hire engineers with high levels of experience in designing
and developing software products in time-pressured environments. There is a
limited number of qualified software engineers in our geographic location,
resulting in intense competition for their services.

WE MAY NEED TO ACCESS ADDITIONAL FUNDS TO FINANCE ONGOING OPERATIONS, WHICH MAY
  REQUIRE US TO COMMIT SIGNIFICANT AMOUNTS OF CAPITAL TO DEBT SERVICE AND COULD
  RESULT IN DILUTION TO OUR SHAREHOLDERS

    As of September 30, 1999, we believe that available funds will be adequate
to meet our anticipated cash needs during the next 12 months. However,
additional capital beyond the amounts currently forecast by us may be required
and may not be available on reasonable terms, if at all. Additional financing
may involve public or private offerings of debt or equity securities, and may
include bank debt. Debt financing may increase our leveraged position, require
us to devote significant cash to service debt and limit funds available for
working capital, capital expenditures, and general corporate purposes. Any of
these results could increase our vulnerability to adverse economic and industry
conditions and competitive pressures. Equity financing may cause additional
dilution to purchasers of our common stock.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD RESULT IN
  COMPETITORS OBTAINING ACCESS TO PROPRIETARY INFORMATION

    We regard substantial elements of our products as proprietary and attempt to
protect them by relying on [patent,] trademark, service mark, copyright, and
trade secret laws and restrictions, as well as confidentiality procedures and
contractual provisions. Any steps we take to protect our intellectual property
may be inadequate, time consuming, and expensive. In addition, despite our
efforts, we may be unable to prevent third-parties from infringing upon or
misappropriating our intellectual property. Any infringement or misappropriation
could have a material adverse effect on our business, results of operations, and
financial condition. [Currently issued patents or any new patent applications
may not provide us with any competitive advantages, or may be challenged by
third parties.] Effective trademark, copyright, and trade secret protection may
not be available in every country in which our products are distributed. In
addition, our competitors may independently develop similar technology that
substantially limits the value of our intellectual property.

                                       5
<PAGE>
OTHERS MAY BRING INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, WHICH
  COULD REQUIRE SIGNIFICANT RESOURCES TO DEFEND AND COULD LEAD TO RESTRICTIONS
  ON OUR CURRENT OPERATIONS

    In addition to the technology we have developed internally, we also have
acquired or licensed technologies from other companies. Our internally developed
technology or the technology we acquired or licensed may infringe on a third
party's intellectual property rights and third parties may bring claims against
us alleging infringement of their intellectual property rights. Any infringement
or claim of infringement could have a material adverse affect on our business,
result of operations, and financial condition.

    In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We are not currently
involved in any intellectual property litigation. We may, however, be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. These potential claims
and any resulting litigation could subject us to significant liability for
damages and invalidation of our proprietary rights. Any litigation involving
intellectual property, regardless of its success, likely would be time-consuming
and expensive to defend and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following:

    - Cease selling, incorporating, or using products or services that
      incorporate the challenged intellectual property;

    - Obtain from the holder of the infringed intellectual property right a
      license to sell or use the relevant technology, which license may not be
      available on reasonable terms, or at all; and

    - Redesign those products or services that incorporate the technology at
      issue.

    Any of these results could have a material adverse effect on our business,
results of operations, and financial condition.

PRODUCT DEFECTS COULD LEAD TO LOSS OF CUSTOMERS

    The occurrence of errors or failures in our products could result in adverse
publicity, loss of or delay in market acceptance, or claims by customers against
us, any of which could have a material adverse effect on our business, results
of operations, and financial condition.

    Our products and product enhancements are very complex and may from time to
time contain errors or result in failures that we did not detect or anticipate
when introducing our products or enhancements to the market. The Internet
communications solutions environment is characterized by a wide variety of non-
standard configurations that make pre-release testing for compatibility errors
very difficult and time consuming. Despite our testing, errors may still be
discovered in some new products or enhancements after the products or
enhancements are delivered to customers.

FAILURE TO EXPAND OUR SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD LIMIT
  OUR GROWTH

    In order to increase our future market share and revenue, we will need to
expand our direct and indirect sales operations and channels of distribution.
Failure to do so could have a material adverse effect on our business, results
of operations, and financial condition. [We need to expand our relationships
with domestic and international channel partners, distributors, systems
integrators, on-line and other resellers, and other partners to build our
indirect sales channel. We must also continue to expand and maintain strategic
relationships with key hardware and software vendors, distributions partners,
and customers.] We may not be able to establish partnerships or maintain them
after they are established. Failure to maintain our current distribution
channels, to adjust to changes in distribution patterns or to establish or
maintain channel partnerships may have a material adverse effect on our
business, results from operations or financial condition.

                                       6
<PAGE>
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET

    Continued expansion in the sales of our Internet communications solutions
will depend upon the adoption of the Internet as a widely used medium for
commerce and communication. If the Internet does not continue to become a
widespread communications medium and commercial marketplace, the demand for our
Internet communications solutions could be significantly reduced, which could
have a material adverse effect on our business, results of operations, and
financial condition. The Internet may not prove to be a viable medium for
communications because of inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
complementary products, such as high speed modems. The Internet infrastructure
may not be able to support the demands placed on it by continued growth. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased levels of
Internet activity, security, reliability, cost, ease of use, accessibility, and
quality of service.

OUR SALES MAY DECLINE IF WE ARE UNABLE TO ADOPT OUR PRODUCTS TO CHANGES IN
  INTERNET TECHNOLOGY

    Even if the infrastructure, standards, or protocols of the Internet, or
complementary services, products, or facilities, are developed, we may be
required to make significant expenditures to adapt new or existing products to
changing or emerging technologies. For example, if Internet-based formats were
to change, our communications solutions may not function as designed, and we may
incur significant expense in developing new products that would be compatible
with the new formats. We may not be successful in either developing these
products or timely introducing them to the market. Any such changes in
technology could have a material adverse effect on our business, results of
operations, and financial condition.

THE CONVERSION PRICE OF OUR CONVERTIBLE DEBENTURES MAY FLUCTUATE, WHICH COULD
  REQUIRE US TO ISSUE A GREATER NUMBER OF SHARES UPON CONVERSION AND RESULT IN
  DILUTION TO OUR SHAREHOLDERS.

    On June 9, 1999, we sold to two investors $6 million aggregate principal
amount of our zero coupon convertible debentures due June 9, 2002. The
conversion price of the debentures depends upon the relevant average closing bid
price of our common stock for a given period. In essence, the conversion price
of the debentures ensures that the investors will receive at least a 12.5%
return on their investment. Fluctuations in the conversion price of the
debentures could require us to issue a significantly greater number of shares of
our common stock upon conversion of the debentures. The issuance of these shares
could have a substantial dilutive effect on our common stock.

    The following table sets forth the maximum number of shares that we would be
required to issue to the investors upon full exercise of the convertible
debentures if the relevant average closing bid price was at different levels for
the applicable period, including if the relevant average closing bid price was
$      per share, the closing sale price of our common stock on October   ,
1999.

<TABLE>
<CAPTION>
                            AVERAGE CLOSING BID PRICE
AVERAGE CLOSING BID PRICE      AS A PERCENTAGE OF         TOTAL SHARES ISSUED UPON
        PER SHARE             10/ /99 CLOSING PRICE     CONVERSION OF THE DEBENTURES
- -------------------------   -------------------------   ----------------------------
<S>                         <C>                         <C>
         $                             100%
         $                              75%
         $                              50%
         $                              25%
</TABLE>

SALES OF OUR COMMON STOCK MAY REDUCE THE MARKET PRICE OF OUR STOCK

    Sales of substantial amounts of our common stock in the public market by
existing shareholders or further issuances of capital stock by us could
adversely affect the price of our common stock. Any decline in the market price
of our common stock could encourage short sales of our common stock, material

                                       7
<PAGE>
amounts of which could place further downward pressure on the price of our
stock. As of September 30, 1999, substantially all of the outstanding shares of
our common stock were freely tradable under federal securities laws to the
extent that they are not held by our affiliates.

THE MARKET PRICE FOR OUR COMMON STOCK, LIKE OTHER TECHNOLOGY STOCKS, MAY BE
  VOLATILE

    The value of your investment in CenterSpan Communications could decline due
to the impact of any of the following factors upon the market price of our
common stock:

    - Variations in our actual and anticipated operating results;

    - Changes in our earnings estimates by analysts;

    - Our failure to meet analysts' performance expectations; and

    - Lack of liquidity.

    The stock markets have recently experienced stock price and volume
volatility that has affected companies' stock prices. The stock markets may
continue to experience volatility that may adversely affect the market price of
our common stock. Stock prices for many companies in the technology sector have
experienced wide fluctuations that have often been unrelated to their operating
performance. Fluctuations such as these may affect the market price of our
common stock.

SOME OF OUR PRODUCTS MAY NOT BE YEAR 2000 COMPLIANT, WHICH COULD RESULT IN
  CUSTOMER DISSATISFACTION, CLAIMS AGAINST US OR BUSINESS INTERRUPTIONS

    We are currently reviewing our products, internal systems and infrastructure
in order to identify and modify those products and systems that are not year
2000 compliant. We expect any required modification to be made on a timely basis
and do not believe that the cost of any modification will have a material
adverse effect on our operating results. However, increased costs associated
with implementation of any modifications and the inability to implement these
modifications could have a material adverse effect on our business, results of
operations, and financial condition. In addition, if our suppliers, vendors,
major distributors, or partners fail to correct their year 2000 problems, their
failure could result in an interruption in, or a failure of, our normal business
activities or operations. These failures could have a material adverse effect on
our business, results of operations, and financial condition.



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