##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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FORM 10-K



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(Mark One)

|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
	 SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999.

OR



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

For the transition period from  to  .

Commission File Number 000-26697

MP3.com, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|Delaware                                                        |  | 33-0840026                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|4790 Eastgate Mall, San Diego, CA                               |  | 92121-1970                           
|(Address of principal executive offices)                        |  | (Zip Code)                           

(858) 623-7000

(Registrants telephone number, including
area code)


Securities registered under Section 12(b) of the Exchange
 Act:

None


Securities registered under Section 12(g) of the Exchange
 Act:

Common Stock, $0.001 par value


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

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

The aggregate market value of the voting stock held by
non-affiliates computed by reference to the closing price for the
 Common Stock as quoted by the Nasdaq Stock Market as of
March 1, 2000 was approximately $367,579,876.*

As of March 1, 2000 there were 68,426,730 shares of the
Registrants Common Stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Registrants proxy statement filed in connection with the
solicitation of proxies for its 2000 Annual Meeting of
Stockholders is incorporated by reference into Part III of
this Form 10-K. Certain Exhibits filed with the
Registrants Registration Statement Form S-1
(333-78545) and Form 10-Q for the quarter ended
September 30, 1999 are incorporated by reference into
Part IV of this Form 10-K.



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*Excludes
45,979,104 shares of Common Stock held or beneficially held by
directors and executive officers and stockholders whose ownership
 exceeds ten percent of the shares outstanding on March 1,
2000. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power,
directly or indirectly, to direct or cause the direction of the
management or policies of the registrant or that such person is
controlled by or under common control with the registrant.









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TABLE OF CONTENTS



|         |                                                                                              |  |  |  |  |  |  | 
|-------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  
|         | Item 1.Business                                                                             
|         | Item 2.Properties                                                                           
|         | Item 4.Submission of Matter to a Vote of Security Holders                                   
|PART II 
|         | Item 5.Market for Registrants Common Equity and Related Stockholder Matters                
|         | Item 6.Selected Financial Data                                                              
|         | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|         | Item 7A.Quantitative and Qualitative Disclosures about Market Risk                          
|         | Item 8.Financial Statements and Supplementary Data                                          
|         | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III
|         | Item 10.Directors and Executive Officers of the Registrant                                  
|         | Item 11.Executive Compensation                                                              
|         | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|         | Item 13.Certain Relationships and Related Transactions                                      
|PART IV 
|         | Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K                     



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PART I

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

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future events or results, levels of activity, performance or
achievements, all of which may differ materially. We urge you to
carefully review and consider the various disclosures made by us
which attempt to describe some of the factors which affect our
business and may cause such material differences, including
without limitation the disclosures made under the caption
Risk Factors and elsewhere in this annual report on
Form 10-K.

Neither our company nor any other person assumes
responsibility for the accuracy and completeness of the
forward-looking statements made in this document. Also, we are
under no obligation, and we assume no obligation, to update any
of the forward-looking statements for any reason, even if new
information becomes available or other events occur in the
future.




Item 1. Business

Overview

MP3.com is pioneering a revolutionary approach to the promotion
and distribution of music. Our web site has grown into a premier
online music destination for Internet users around the world. We
use the Internet and file formats that make music files smaller
to enable a growing number of artists to distribute and promote
their music worldwide and to enable consumers to conveniently
access this expanding music catalog. As of March 1, 2000,
our web site contained over 346,000 songs from over 56,000
artists, which we believe represents one of the largest
collections of digital music available on the Internet. Consumers
 can search for, listen to and download music free of charge.

In addition to the wide variety of music available on our web
site, consumers have a substantial amount of music already in
their personal music collections that they want to access, manage
 and listen to in a variety of ways. Just as consumers use an
Internet service provider as the central mechanism through which
they interact with the Internet, individuals are increasingly
looking for one central resource, or a Music Service
Provider (or MSP), that allows them to access,
manage and listen to all of their music. In January 2000, we
launched the foundation of our Music Service Provider initiative,
 our upgraded My.MP3.com service. The My.MP3.com
service allows users to place their CDs and favorite MP3.com
artist tracks online, organize their music and receive
personalized music services. In order to maintain our position as
 the premiere Music Service Provider, we intend to work through
strategic partnerships with leading web sites, application
developers, device manufacturers, wireless carriers and
connectivity providers to enable our users to access their music
anytime, anywhere, on any web-enabled device or application.

We generate revenues from online advertising, offline advertising
 and electronic commerce. For the year ended December 31,
1999, 93.5% of our revenues was from the sale of advertising. We
sell CDs online, both fully-packaged albums created by artists
sold through our Digital Automatic Music system, which we call
DAM CDs, and albums we compile featuring the work of
multiple artists, which we call compilation CDs. We
also receive revenue from advertisers for their sponsorship of CD
 samplers, which are distributed free of charge to consumers and
contain collections of music. Although our My.MP3.com service is
currently free to our users, we may eventually charge customers a
 subscription or access fee for such service.

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Our unique business model provides the following advantages for
artists and consumers:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | creates an easy and convenient way for consumers to listen to,
	download, manage and purchase music;                                    
|
| |  | lowers dramatically the costs for artists to promote and
	distribute their music;                                                       
|
| |  | enables artists to reach a large number of consumers worldwide;                                                                         
|
| |  | enables consumers to discover local and lesser-known artists in
	ways not available through traditional music retailers and
	labels; and
|
| |  | facilitates direct communication between fans and artists.                                                                              

We believe that large numbers of artists and consumers are drawn
to MP3.com because they have been historically under-served by
the traditional music industry. We expect to continue introducing
 new products and services designed to meet their entertainment,
electronic commerce, communications, business and information
needs.

We have formed several strategic relationships that we believe
will help increase our music content, brand awareness and
electronic commerce opportunities and facilitate our users
ability to access their music anytime, anywhere. In May 1999 we
entered into a three year license and promotion agreement with
Boutit, Inc., also known as No Limit Records, which
represents platinum-selling artists including Master P and
Snoop Dogg. In June 1999, Cox Interactive Media, Inc. invested
$45 million in us and formed a joint venture with us.
Additionally, in July 1999, Groupe Arnault agreed to purchase an
aggregate of $150 million in advertising, promotion and
marketing services from us over a three year period. In a
separate agreement, a subsidiary of Groupe Arnault purchased
approximately five percent of our common stock as part of our
initial public offering.

In November 1999, we outsourced exclusively to Cinram
International, Inc. our just-in-time DAM CD production and
fulfillment process, as well as the production and fulfillment of
 our other promotional CD products. In December 1999, we entered
into an agreement with Visitalk.com, Inc. to enable
MP3.coms artists and consumers to communicate and
collaborate online using real-time voice and video. The strategic
 relationship we formed with PortalPlayer, Inc. in February 2000
is expected to facilitate the integration of our content with
next generation Internet protocol, or IP enabled
consumer electronics devices.

Our Industry

Recorded Music Industry

Music is one of the most popular forms of entertainment in the
world. Music is also big business. According to the International
 Federation of the Phonographic Industry, worldwide sales of
recorded music were $38.7 billion in 1998, 34% of which were
 in the U.S.

The structure and functionality of the music industry has
remained relatively unchanged for many years. Artists are
generally required to sign exclusive contracts with record
labels, which in turn develop, distribute and promote their
music. In addition, the major record labels, as well as a few
independent labels, control to a large extent the
type and quantity of recorded music available to consumers.

This existing system limits artists and consumers in the
following ways:



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Few artists can sell enough music to cover the high distribution
	and promotion costs. These costs include producing CDs and tapes,
	 inventory and retail chain management, as well as television,
	print and radio promotions and public relations efforts.
|
| |  | The majority of artists can only reach limited audiences due to
	finite shelf space at retailers and limited airtime on radio and
	television stations, thus limiting the choices available to
	consumers.                                                   
|
| |  | In order to protect the record companies investment,
	artists must generally commit to multi-year, multi-album
	contracts. These contracts typically give the record company
	rights to and control of the artists music, including all
	digital rights.   

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| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There is very little communication and exchange of information
	between artists and consumers. For example, artists do not
	readily know who is buying their music or how to contact them,
	and consumers often do not have an opportunity to interact
	directly with their favorite artists.

Because of these limitations, the number of artists served by the
 existing music distribution system is small compared to the
universe of musicians with commercial aspirations. According to a
 recent Gallup poll, approximately 23% of the U.S. population, or
 62 million people, are active music-makers. In addition,
according to the National Association of Music Merchants,
approximately 62% of U.S. households contain an amateur musician.
 These musicians represent a broad spectrum of artists including
hobbyists, amateurs, semi-professional and professional
musicians.

The Internet and Portable Electronic Devices

The Internet has emerged as a global platform that allows
millions of people to share information, communicate, conduct
business and be entertained. The Computer Industry Almanac
estimates that the number of Internet users worldwide will grow
from approximately 181 million users in 1998 to
349 million by the end of 2000. The Internet has become an
attractive medium for advertising and direct marketing because it
 allows for the collection of key demographic data from
consumers. Advertisers can better target individuals based on
their Internet use and buying patterns, causing a sharp increase
in online advertising and direct marketing opportunities. Jupiter
 Communications estimates that the dollar volume of online
advertising will increase from $2.1 billion in 1998 to
$8.8 billion in 2002 and online direct marketing will
increase from $190 million in 1998 to $1.3 billion in
2002.

As users online time increases, more and more are
transitioning to the convenience of faster Internet connections,
upgrading from 28.8 Kbps modems to cable, xDSL and ISDN
modems. According to Jupiter Communications, the number of
subscribers using cable, xDSL or ISDN modems is projected to
increase from one million in 1998 to 10.5 million in 2002.

Several recent technological developments have focused on
providing wireless access to the Internet. Microsoft Corporation,
 Lucent Technologies, Nokia Corporation, Sprint Communications
Company, Palm, Inc., Motorola, Inc. and others have introduced
technologies that integrate computer chips into portable consumer
 handheld devices that enable wireless access to the Internet.
Many of these devices either are or will be enabled with audio
capabilities. According to industry sources, (i) 80% of all
mobile phones expected to be shipped in the U.S. over the next
two years are expected to include a web browser; (ii) the
1.8 million U.S. subscribers to wireless data in 1999 is
expected to grow to nearly four million subscribers by the end of
 2000; and (iii) by 2003 there will be one billion mobile
devices in the world that are enabled with wireless access to the
 Internet. International Data Corporation estimates that as many
as 40 million of these devices will be used for Internet access
in the U.S. alone.

Digital Music

In recent years, consumers have increasingly used their computers
 to play music. Dataquest estimates that in 1998, 30% of U.S.
households had multimedia PCs with a sound card, speakers and
either a CD-ROM or DVD-ROM drive. Consumers can now play CDs on
their computers with the ease and fidelity formerly associated
only with stereo systems. However, music files that exist on
physical CDs are very large and, until fairly recently, inhibited
 users ability to store and transfer music from the CD. For
 example, a three minute song occupies more than thirty megabytes
 of storage. As a result, storing and transferring audio files in
 their original format is expensive and slow. To address this
problem, compression formats have been developed.

One of the most widely accepted standards for the compression of
music is mp3, an open standard adopted by the Moving Picture
Experts Group (MPEG) working under the joint direction of the
International Standards Organization (ISO) and the International
Electro-Technical Commission (IEC). Several other compression
formats are also available, including proprietary audio formats
from companies like Microsoft Corporation, Real Networks and
AT&T Corp. The mp3 standard offers at least 10:1 file
compression and audio integrity at near-CD quality. Mp3 playback
is currently available on most operating environments including
Microsoft Windows 95, Windows 98, Windows NT, Windows 2000, MacOS
 and Linux, most major versions of UNIX

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Traditional music industry companies, including BMG
Entertainment, a unit of Bertelsmann AG; EMI Group plc; Sony
Corporation; Time Warner, Inc. and Universal Music Group, a unit
of The Seagram Company Ltd., have made public statements that
they intend to actively pursue digital distribution and online
promotion of music through in-house development efforts and
strategic alliances. However, music content on the Internet is
still fragmented, and to date neither traditional music companies
 nor other online music providers have developed a single
destination where artists can promote, market and distribute
their music directly to consumers and where consumers can
discover a wide variety of new music and store, access, manage
and listen to their music collections online.

Music Service Provider

At MP3.com, we provide a centralized solution to both artists and
 consumers in the form of a Music Service Provider. As an MSP, we
 facilitate consumers ability to store, access, manage and
listen to their music collections online, and artists
ability to promote, market and distribute their music directly to
 consumers. Our solution provides a number of advantages to both
artists and consumers:

Value to Artists

Distribution and Promotional Power.We offer our artists a
 distribution model that allows them to upload and promote their
music through their own MP3.com web page for no charge. Artists
can have a fully-packaged CD available for sale to consumers
within as little as 48 hours of registration by using mp3
technology to digitize their music. To use our services, artists
provide at least one full length promotional song for consumers
to download or stream free of charge. In addition, we empower
artists by allowing them to post additional songs on our web site
 at their discretion and to control the promotion of their music
by specifying music genres and geographical classifications,
adding or deleting music selections at any time and selecting
price points for the sale of their CDs. We also provide artists
with several tools that enable them to interact with and present
music, messages and other content directly to their fans.

Global and Local Exposure.Artists can use our web site to
 reach a global and growing base of consumers immediately upon
uploading their music. Lesser-known and local artists can
immediately promote their music to a targeted local audience
while simultaneously reaching a broader worldwide audience. In
addition, internationally-recognized artists can promote their
music to a global audience in a new way through concert
promotions, new song releases and direct contact with their fans.
 We facilitate artist discovery by allowing users to browse the
site alphabetically, geographically from countries to local
towns, or by music genre and style. We also offer our own song
ranking system to provide artists and fans daily and weekly lists
 of the top songs, complete with links to the featured
artists web pages. Our editorial content and special
features, such as featured songs, new
songs and payola songs, offer additional
promotional exposure for artists.

Access to Consumer Feedback and Statistics.Artists
receive daily, detailed information about how many people visited
 their web page, how many people listened to their songs, how
many people downloaded their songs, and how many CDs they sold
during the day and over the past month. Artists can also learn
geographical information about their fan base. Our aggregated
data and demographic analyses allow us to offer artists sales,
marketing and other information that enables them to define,
evaluate and connect with their fan base. Artists can use this
information, including geographic and listener data, to determine
 which of their songs receive the best reception, which genres
are best suited for their songs and how their music compares to
other songs in the same genre or region. This allows them to
change their music selections or target promotional events and
marketing to their fans through our site.

Revenue Opportunities.Our artists control the pricing of
their music and achieve superior economics through revenue
sharing on sales of their DAM CDs. Under our revenue sharing
arrangement, artists typically

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Value to Consumers

Extensive New Music Selection.We offer consumers one of
the largest databases of independent musical content available on
 the Internet through our expanding collection of artists from
all 50 states and approximately 150 foreign countries.
Consumers can search for, listen to or download thousands of
songs posted on our web site by artists for no charge, and
purchase our DAM CDs at prices ranging from $5.99 to $14.99. Our
music collection spans approximately 250 categorized genres,
 including pop & rock, classical, country, alternative,
childrens, easy listening, electronic, hip hop/rap, blues,
jazz and world/folk.

Personalized Music Experience.Consumers who visit our web
 site are able to find the music that interests them by searching
 our music collection by genre, artist, song, similar artists or
location. As a result of our search capabilities, fans can browse
 an increasing number of songs and choose to listen to or
purchase only those selections in which they are primarily
interested. In addition, our customers can register profiles by
providing their zip code, e-mail address and their music
preferences that allow us to suggest new songs to them based upon
 their preferences and prior purchases. We believe that our
personalized approach not only enhances the experience of
visiting our web site, but also increases the time a consumer
spends on MP3.com and encourages repeat visits.

Communications with Artists and Other Fans.We allow fans
to contact artists directly via e-mail and to communicate with
one another through message boards. In addition, artists can use
their web page to communicate directly with their fans, advising
them of concerts and new releases. Message boards allow fans with
 common interests and preferences to be connected. Newcomers to
our web site can receive general guidance from more experienced
visitors in our General mp3 Questions forum. Some of
our other forums focus on music-related software and hardware
technology and industry news.

Convenient Access to Music Collections.Our upgraded
My.MP3.com service, which was upgraded in January
2000, allows users to place their CDs and favorite MP3.com artist
 tracks online, organize their music and receive personalized
music services. Currently in beta phase, the My.MP3.com service
features two new technologies  Beam-itTM
and Instant Listening.TM Our Instant Listening service
 allows consumers to purchase CDs from partner e-tailers and
listen to these CDs instantly using their My.MP3.com account. The
 Instant Listening service eliminates the hurry-up-and-wait
reality that has been associated with online purchasing. Our
Beam-it technology allows users to place most of their existing
CD collection online. The user simply places a CD into a computer
 CD-ROM drive. Once the Beam-it proprietary software completes
its verification process, the music is automatically added to the
 users My.MP3.com account. Owners can create a virtual
jukebox, make customized playlists and use MP3.com to listen to
their entire CD library seamlessly from anywhere around the globe
 on any web-enabled device.

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Products and Services

The following lists our current and future products and services:

|                                                |  |                          
|----------------------------------------------- |  | -------------------------
|                                               
|                                               
|Advertising                                     |  | Electronic Commerce      
|                                                |  |                          
|                                               
|                                               
|ONLINE                                          |  |                          
|Web Site Advertising: banners, portals, buttons |  | DAM CDs                  
|Web Site Sponsorships                           |  | Compilation CDs          
|E-Mail Marketing                                |  | MSP Service*             
|Greeting Cards                                  |  | Music-Related Merchandise
|OFFLINE AND OTHER                               |  |                          
|Sponsorship of CD samplers                      |  |                          
|Contests and Sweepstakes                        |  |                          
|MP3 Summit                                      |  |                          
|Syndicated Radio*                               |  |                          
|                                               




|  |                  
|- | -----------------
|* | under development

Online Advertising

For the twelve months ended December 31, 1999, 53.0% of our
revenues were derived from a portfolio of online advertising
services. These services allow our advertisers to maximize
visibility for their products by placing them in specifically
targeted MP3.com categories, like Hardware, Software, Artist
Sign-Up, and specific music genres. We can place advertisements
in targeted areas or in general rotation throughout the web site.
 Our online advertising products currently consist of banners,
portals, buttons, web site sponsorships, e-mail marketing and
greeting cards.

Banners, Portals and Buttons.Banners, portals and buttons
 are graphic elements on a web page. Hypertext links are embedded
 in each of these advertisements to provide the user with instant
 access to the advertisers web site, additional information
 and/or products or services. A banner is the largest size of
advertising product available, with portals being next largest
and buttons being the smallest. Banners are displayed on the top
and bottom of each MP3.com web page. The location of portals and
buttons is dependent on the layout of the specific page where
they appear. Pricing of banners, portals and buttons are
generally based on a Cost Per Thousand Impressions, or CPM,
basis. Impressions are the number of times an
advertisement appears in pages viewed by users of our web site,
and revenue is earned as impressions are delivered. Prices of
each of these advertisements are based on target audience,
desirability of location and volume of impressions.

Web Site Sponsorships.A web site sponsorship is an
advertising plan that enables sponsors products to be
associated with a specific MP3.com category, music genre, web
page or event, such as our software and hardware categories. The
sponsorships begin on the first page of the selected area and
appear on all related pages. We also offer listing sponsorships
that allow advertisers to purchase preferred placement in product
 listings. Prices of sponsorships are based on target audience
and desirability of location.

E-Mail Marketing. Our e-mail marketing products consist
primarily of text or html-based advertisements inserted into
messages delivered to our artists and customers. Our e-mail
marketing programs focus on customer retention and new program
acquisition, and allow advertisers to use our technology-based
tools to

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Greeting Cards.Greeting card marketing products are text
or html-based advertisements inserted into electronic greeting
cards delivered through our site. Greeting card advertisements
offer advertisers the chance to send marketing messages to
targeted audiences using various criteria including preferred
artist or music genre, geographic location, or any of the
customized preferences users have entered into their user
profile. The greeting card program leverages MP3.com music as its
 point of differentiation from other greeting card programs.
Users can select from a wide variety of occasions
(Valentines Day, birthdays), attach any full-length song
from MP3.coms deep catalog, personalize the message, and
send to anyone with an e-mail address. Prices for each of these
advertisements are based on target audience and volume of
impressions.

Offline and Other Advertising

For the twelve months ended December 31, 1999, 40.5% of our
revenues were derived from a portfolio of offline and other
advertising services. These services allow our advertisers to
maximize visibility for their products by providing them with
advertising opportunities other than our traditional online
products. Our offline and other advertising products currently
consist of CD sampler sponsorships, contests and sweepstakes and
MP3 Summit sponsorships. Also, in 1999 we offered a concert tour
sponsorship package as one of our offline and other advertising
products.

Sponsorship of CD Samplers.CD samplers are CD ROM
products containing collections of music and paid advertising
that are distributed free of charge to consumers. Each CD sampler
 contains a large selection of the most popular songs of each
major genre from our expanding roster of over 56,000 artists. CD
samplers may also include video entertainment, multimedia video
game samples and interactive contests. Our CD sampler product
allows advertisers to target specific consumers by selectively
placing advertisements, game samples and video clips within the
genres of the CD sampler. Different versions of a CD sampler can
be created to appeal to specific target audiences. In 1999, we
distributed over 2.5 million individual CD samplers. Prices
of these sponsorships are based on the placement and position
within the CD sampler and its packaging as well as the nature of
the advertisements to be displayed.

Contests and Sweepstakes.We have developed a number of
contests and sweepstakes products that are designed to create
awareness of our advertisers products and services. Each
contest or sweepstakes is uniquely tailored to the product being
promoted and designed to most effectively attract customers from
a pre-determined target demographic. Prices of these contests and
 sweepstakes are based on a variety of factors, including the
complexity and duration of the event.

MP3 Summit.Each year we hold an MP3 Summit for industry
and technology participants to showcase new trends for the online
 and offline delivery of music and related technologies. Summit
sponsorships are priced based on placement and position within
the summit and our summit advertising materials.

Concert Tour Sponsorships.Expanding on the traditional
tour concept, in the fourth quarter of 1999 we organized a
28-college campus concert tour that included a headliner band and
 featured an MP3.com Village at each tour location.
Spectators were able to listen to music from top local MP3.com
bands and preview the latest mp3 technology and enjoy
demonstrations and giveaways from paid sponsors during these
one-day events. Concert footage was then made available online
for users to experience in a virtual medium. Although we intend
to continue our efforts with sponsorships of third party concerts
 (see Sales and Marketing  Other Sales and
Marketing Efforts), we do not intend to offer other concert
 tour sponsorship products in the near future.

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Electronic Commerce

For the twelve months ended December 31, 1999, 6.5% of our
revenues were derived from the sale of CDs and other
music-related merchandise.

Digital Automatic Music (DAM) CDs.The majority of
our electronic commerce revenues are generated from the sale of
DAM CDs. DAM CDs are fully packaged albums created by artists who
 post their music on our web site. The artists choose the selling
 price of their CDs (the current range they can choose is $5.99
to $14.99). A typical DAM CD contains multiple songs that are
recorded, performed and uploaded to our web site by an artist or
group of artists. The music contained on DAM CDs is in both mp3
and standard audio CD format, which means it may be played on a
computer using mp3 player software (an mp3 software player is
imbedded on each DAM CD), a portable mp3 player or a standard CD
player. In addition, DAM CDs, at the artists discretion,
can contain multimedia features including artist-provided
graphics, song lyrics and biographical information. We produce
and package the CDs, generally on the same day the order is
received, and mail them to our customers one or two days after
that. During 1999, the production and packaging of DAM CDs was
fulfilled at our headquarters in San Diego, California. Beginning
 in March 2000, these responsibilities were outsourced
exclusively to Cinram International, a global third party
production and fulfillment company.

Compilation CDs.From time to time, we sell compilation
CDs featuring various artists who have posted their music on our
web site. These CDs are usually genre-specific, such as
electronic music or Christmas music. Compilation CDs are produced
 and sold in a similar manner to our DAM CDs.

Music-Related Merchandise.We occasionally sell
music-related promotional merchandise from our web site including
 items like The Official MP3.com Guide to MP3, written by
our chairman and chief executive officer, and t-shirts, hats and
other apparel. We also occasionally auction items from our web
site such as portable mp3 players, celebrity guitars and other
music-related memorabilia.

Future Products in Development

Syndicated Radio.We are working to develop a series of
syndicated radio shows featuring MP3.com artists. These
syndicated programs will be targeted to specific segments of
society like the Christian, college and ethnic markets. We expect
 revenues to be generated through the sale of minutes of
advertising time within the weekly shows and product placement
slotting fees.

MSP Subscription Service.Our My.MP3.com
service, which was upgraded in January 2000, allows users to
organize their music online, receive personalized music services,
 and place their CDs and favorite mp3 files online. The
My.MP3.com service is currently in beta phase and free, and we
expect to continue to offer some free component of the My.MP3.com
 service in the future. However, we are exploring ways in which
we might charge customers an access fee for premium music
services.

Advertising Relationships.

Groupe Arnault.In July 1999, we entered into an agreement
 with Groupe Arnault, which committed to purchase an aggregate of
 $150 million in advertising, promotion and marketing
services from us over three years, including $5 million
 in 1999, $40 million in 2000, $70 million in 2001 and
$35 million in the first half of 2002. Under the agreement,
we received pre-payments from Groupe Arnault totaling
$45 million in July 1999. The remaining amounts owed under
the agreement are secured by an irrevocable letter of credit.
Groupe Arnault is a French corporation with interests in diverse
companies such as LVMH Moët Hennessy Louis Vuitton and
others. It is intended that our services under this agreement
will primarily be used with LVMH brands or brands of a similar
quality of other entities in which Groupe Arnault affiliates have
 investments.

Freeinternet.com.We entered into a strategic relationship
 with Freei Networks, Inc. (which does business under the name
Freeinternet.com), a leading provider of free and
anonymous Internet access services, in November 1999. As part of
this relationship, we invested in Freeinternet.coms
series B preferred stock financing, and entered into a
two-year promotional agreement under which we offer
Freeinternet.coms

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Visitalk.com.In December 1999, we entered into a
three-year Marketing and Promotional Agreement with Visitalk.com,
 Inc., an Internet services company that connects people around
the world to share voice, video and information. Our relationship
 with Visitalk.com is designed to enable MP3.coms artists
and consumers to communicate and collaborate online using
real-time voice and video. Under our agreement, Visitalk pays us
for marketing services. As part of our relationship with
Visitalk, we agreed to pay for certain premium services to be
offered to our artists and participated in Visitalks series
 E preferred stock financing. Visitalk may, at its option, elect
to terminate this agreement after one year.

Buy.com.We entered into a multidimensional relationship
with Buy.com, a leading Internet retailer, in December 1999.
Under our one-year cross promotion and marketing agreement,
Buy.com became the exclusive retailer of new commercial CDs on
our music search pages, allowing fans direct access to their
favorite mainstream musical artists. In addition, Buy.com has
agreed to open an MP3.com specialty store on its web site,
featuring music and merchandise from MP3.com artists.

Voquette.In February 2000, we established a relationship
with Voquette Inc., a company attempting to enable all types of
portable audio devices to play all forms of audio content found
on the Internet. Under our one-year cross promotional agreement,
we have agreed to purchase certain advertising and promotion
services from each other. In addition, we participated in
Voquettes series B preferred stock financing.

For the year ended December 31, 1999, 93.5% of our revenues
were from the sale of advertising. We expect that most of our
revenues will continue to be derived from third party advertising
 agreements like those we have with Groupe Arnault, Visitalk,
Freeinternet.com, Buy.com and Voquette.

Sales and Marketing

We sell advertising, certain marketing products and sponsorships
through our internal, direct advertising sales department. On
March 1, 2000, our sales force consisted of 20 people
located in our San Diego, California office and in other
locations around the country. For our electronic commerce
products, we depend on our web site to attract consumers and
encourage purchases.

Since our inception, our management team has focused on marketing
 and public relations efforts. We believe much of the public
awareness of MP3.com has been generated by frequent and
high-visibility media exposure both nationally and locally and
unsolicited third party promotion of our web site. We have also
used a combination of online and offline advertising to generate
awareness of our company and our web site. In addition, we have
pursued a number of viral and e-mail marketing
efforts to further promote our products, services and brand
awareness. We also employ a public relations team that is focused
 on generating awareness of MP3.com both within the music
industry and among the general public.

Viral Marketing

We have established an internal viral marketing group
 to implement a suite of programs and initiatives to market
MP3.com, our products and services, and to drive traffic to our
web site. Such programs and initiatives include the following:

Affiliate Program.Our affiliate program allows
individuals and entities to affiliate their web sites with
MP3.com and offer links to certain content on our web site. As of
 March 1, 2000, we had over 34,000 affiliated web sites.
This program has relatively low user acquisition costs for our
company because we pay affiliates commissions based solely upon
purchases of merchandise on our site by referred users. In
addition, the affiliate program increases exposure of our web
site to otherwise unavailable audiences through creative content
and links provided by our affiliates.

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MP3.com Music Greetings.The MP3.com music greetings
program attempts to capitalize on the popular practice of
distributing electronic greeting cards over the Internet. We
leverage our MP3.com music greetings product by allowing
consumers to include the MP3.com music of their choice in these
greetings. Users can tailor their electronic greetings for a
variety of occasions (e.g., Valentines Day, birthdays),
attach any full-length song from our catalog of music,
personalize the message and send it to anyone with a valid e-mail
 address.

New Music Army.Our New Music Army is a highly-specialized
 group of affiliates that, as of March 1, 2000, consisted of
 over 8,000 members. The NMAs mission is to promote MP3.com
 artists (both offline and online) and to recruit new artists to
our web site. We incentivize NMA members by paying them
commissions from a portion of their designated artists DAM
CD sales and Payback for Playback program earnings.

E-Mail Marketing

We actively market to our over ten million registered users via
highly-personalized e-mail campaigns. This is an important
marketing tool that allows us to reach millions of our registered
 users with specific offers, information and services several
times each month. With continual testing, tracking and analyses,
our e-mail marketing campaigns are optimized to drive maximum
click-through visitors back to our web site. Examples of our
e-mail marketing campaigns include:



| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MP3.Communicator: delivered three times a month currently,
	 and serves as our official e-mail newsletter filled with
	personal song recommendations, new web site services and
	features, product updates, news and exclusive offers for MP3.com
	users;
|
| |  | MP3.com New Visitor Welcome: sent to all new visitors to
	our web site, offering tips on how to get started, an overview of
	 main services and features, and special offers;                                                                            
|
| |  | My.MP3.com Users:delivered once every two weeks to
	My.MP3.com users with tips, offers, and other news relating
	specifically to the My.MP3.com music management services; and                                                                           
|
| |  | MP3.com Artist Newsletter: sent weekly to MP3.com artists,
	 highlighting band promotion tips and products, new features and
	services for the artist community and special offers.                                                                      

Other Sales and Marketing Efforts

In addition to our viral and e-mail marketing efforts, we attempt
 to generate additional brand awareness from specific promotional
 activities and other products and services such as:

Sponsorships of Third Party Concerts.We utilize
sponsorships to promote artists that have posted music on our web
 site and mp3-related technologies and products. In addition to
headliner acts, these events typically feature artists from our
web site as opening acts and performers.

Online Contests and Sweepstakes. We actively conduct
online promotional contests and sweepstakes. Most of our
promotions involve random drawing sweepstakes whereby no purchase
 is necessary for our users to participate. Periodically, we also
 conduct contests whereby users submit musical or other content
for consideration by various entertainment or other media
entities and companies. Examples of our recent promotions,
contests and sweepstakes include: the MP3.com Music and
Technology Sweepstakes; the Eagles Concert of the
Millennium Sweepstakes; the MP3.com/sephora.com
Sweepstakes; and the Totally Launch Your Career
Contest (with TLC).

MP3 Summit.In June 2000, our third annual MP3 Summit will
 be held for industry and technology participants to showcase new
 trends for the online and offline delivery of music and related
technologies.

Online Auctions.Periodically we will feature individual
items of value or interest to our users for auction on our web
site. We have an arrangement with an external online auction
provider to assist with such auctions. These auctions generally
serve as promotional vehicles for our web site and sponsors, and
are sometimes implemented in connection with charity fundraisers.

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Traditional Radio and Print Advertising.To date, we have
not extensively marketed our company through traditional radio
and print advertising because of exposure from general press and
media coverage and our significant viral marketing efforts.
However, we may need to expand our use of these forms of
advertising in the coming months. In addition, we plan on
expanding our overall radio presence in the spring of 2000 by
launching various syndicated radio programs for release in
certain U.S. markets.

Free CD Giveaways.We distribute a variety of promotional
CDs to registered users and other recipients worldwide. Each CD
contains certain promotional items such as music from our web
site, exclusive offers, free software and information about
MP3.com. The CDs provide exposure to the MP3.com brand, our
artist community and many of the tools and services available on
the web site. Examples of recent CD giveaways include the
Out of Bounds and Worldwide CDs.

Corporate Relationships

Boutit, Inc./ No Limit Records

In May 1999, we entered into a three-year agreement with Boutit,
Inc., which does business under the name No Limit
Records. Under this agreement, we obtained exclusive,
worldwide, on-demand streaming, digital distribution and custom
compilation rights to a number of No Limit master recordings. We
also obtained the right to distribute various No Limit
merchandise. Some of the artists represented by No Limit include
Master P and Snoop Dogg, along with other respected
platinum-selling artists. No Limit artists also may participate
in our chatrooms, display MP3.com signs at concert performances,
hold concerts with artists that have posted music on our web site
 and cooperate with us on other promotional activities. We record
 all revenues generated under the agreement and recognize royalty
 expense (included in cost of sales) representing the royalties
payable to No Limit in connection with the exercise of our
digital distribution, custom compilation or merchandise
distribution rights. The royalty percentage due to No Limit
varies depending on the source of revenue subject to the royalty
obligation. No Limit also became one of our stockholders at the
closing of our initial public offering.

Cox Interactive Media

In June 1999, Cox Interactive Media, Inc. invested
$45 million in us and formed a joint venture with us. Cox
Interactive Media is a subsidiary of Cox Enterprises, Inc., a
media company whose business includes newspapers, television,
cable television and radio. As part of the relationship,
David E. Easterly, a director of Cox Interactive Media,
 became a member of our board of directors and is a
Class III director. Under the terms of our agreement with
Cox Interactive Media, we are obligated to nominate a
representative from Cox Interactive Media to serve for two
additional three-year terms following expiration of the initial
term of Mr. Easterly, so long as Cox Interactive Media holds
 at least 5% of our outstanding common stock and the joint
venture continues.

ASCAP

We also have entered into an agreement with ASCAP, a music
performing rights organization. Under this agreement, we obtained
 a comprehensive music performance license that allows unlimited
interactive performances on our web site of all copyrighted works
 whose rights are held by ASCAP members. As part of this
agreement, we also provide prominent exposure of the benefits of
ASCAP membership to all unaffiliated writers, composers, artists
and publishers using the MP3.com site, as well as help facilitate
 the processing of membership applications.

Groupe Arnault

In July 1999, we entered into an agreement with Groupe Arnault,
which has committed to purchase an aggregate of $150 million
 in advertising, promotion and marketing services from us over
three years, including $5 million in 1999, $40 million
in 2000, $70 million in 2001 and $35 million in the
first half of 2002. Under the agreement, we received pre-payments
 from Groupe Arnault totaling $45 million in July 1999. The
remaining amounts owed under the agreement are secured by an
irrevocable letter of credit. Groupe Arnault is a French

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Cinram International, Inc.

In November 1999, we entered into a relationship with Cinram
International, Inc., one of the worlds largest independent
providers of pre-recorded multimedia products and services. With
facilities in Canada, the United States, Europe, and Latin
America, Cinram manufactures and distributes pre-recorded VHS
videocassettes, audio cassettes, music CDs, CD-ROM and DVD for
motion picture studios, music labels, publishers and computer
software companies around the globe. As part of this
relationship, we outsourced exclusively to Cinram our
just-in-time DAM CD production and fulfillment process, as well
as the production and fulfillment of our other promotional CD
products. Cinram also purchased from us all of the manufacturing
assets used in our just-in-time DAM CD production, and we
provided Cinram with certain software and intellectual property
we developed. We also purchased shares of Cinrams common
stock and a warrant to purchase shares of common stock.

PortalPlayer, Inc.

We formed a strategic relationship in February 2000 with
PortalPlayer, Inc., a provider of end-to-end systems for playback
 and recording of digital media content for consumer electronics
manufacturers. The strategic relationship with PortalPlayer is
intended to facilitate the integration of our content and web
site with next generation internet protocol, or IP
enabled consumer electronics devices. By collaborating to define
these next-generation devices and their web interfaces for
products such as portable mp3 players and mini-component systems,
 we hope to accelerate the introduction of devices that will
allow consumers to access their music anytime, anywhere. We also
participated in PortalPlayers series B preferred stock
financing.

Relationships with Artists

Our music submission agreement governs music submitted to us by
artists for free distribution from our web site, as well as music
 submitted to us for our DAM CD program. Under this agreement,
artists grant us a non-exclusive license to distribute their
music. Artists also make a number of representations and
warranties to us, including a representation and warranty that
the music being submitted will not infringe any third party
rights. For music sold through our DAM CD program, we typically
pay artists 50% of the net revenue we receive. Because this
agreement is non-exclusive, artists are free to grant similar
rights to others during and after the term of the agreement. In
addition, both MP3.com and the artist may terminate the agreement
 at any time.

Technology Infrastructure

Data Mining and Warehousing Activities

We maintain relational databases of all artists, music,
electronic commerce and other end-user information. These
databases are used to enhance the user experience at our web site
 and to provide us with information regarding our users. Our
content databases make content available for download, streaming,
 CD purchase, web site ranking and cataloging, and are updated as
 artists and users interact with our web site. Our statistics
databases maintain traffic and site analysis information
including the number of times that web pages were viewed,
download and streaming counts, and artist, song and CD rankings.
Our customer and commerce databases, which are firewalled for
protection, contain customer information and transaction
histories.

Infrastructure

Our technology infrastructure is based on an architecture
designed to be secure, reliable and expandable. Our software is a
 combination of proprietary applications, third party database
software and open operating systems that support acquisition of
content, management of that content, publication of our web site,
 downloads of

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During February 2000, our web site delivered over
126 million page views and 24 million song listens. We have
designed our infrastructure to allow each component to be
independently scalable, usually by purchasing additional
readily-available hardware and software components, to meet or
exceed future capacity requirements.

Data Center & Hosting Facilities

Our network infrastructure and our web site, e-commerce and
database servers are hosted in three data centers on three
different networks in three different cities. Our web site
servers are hosted at AT&T CERFnet in San Diego, CA, at
Exodus Communications in Irvine, CA and at Global Crossings/
Frontier Communications GlobalCenter in Sunnyvale, CA. CERFnet,
Exodus and Global Crossings all maintain suitable environmental
conditions and redundant power sources and network connectivity.

Monitoring of all servers, networks and systems is performed on a
 continuous basis. We employ numerous levels of firewall systems
to protect our databases, electronic commerce servers, customer
information and music archive. Backups of databases, data and
media files are performed on a regular basis. Data back-up tapes
are archived at Iron Mountain, Inc., a remote storage location.

Operations, Fulfillment, Customer Service and Artist Support

Fulfillment Operations

Our operations are centered around a just-in-time fulfillment
process which ties together all of the proprietary and
third-party software tools in our system and allows us to avoid
carrying inventory. Over the last several months, we have made
significant improvements to our just-in-time manufacturing and
fulfillment operations. In November 1999, we outsourced
exclusively to Cinram International, Inc. our just-in-time DAM CD
 production and fulfillment process, as well as the production
and fulfillment of our other promotional CD products. The
transition of fulfillment operations to Cinram was completed at
the end of March 2000. For redundancy, we also currently maintain
 certain minimal fulfillment capabilities at our main facility in
 San Diego.

Through Cinram, we are currently capable of shipping 2,100 DAM
CDs per day and have the combined infrastructure in place to
quickly scale operations by adding equipment and people as
dictated by volume needs. During the peak holiday season of
November and December 1999, record daily volumes were shipped
while maintaining our standards of shipping most orders within
24 hours of receipt of the order.

Orders for DAM CDs and other merchandise are received via our web
 site, queued up in our database for processing and then
transmitted to Cinram, our outside provider, for fulfillment. A
confirming e-mail is sent to the customer indicating that the
order was received and the order number. The order is assembled,
packed and shipped to the customer usually within 24 hours of
receipt of the order. The transaction information is transmitted
to our database and an e-mail is sent to the customer indicating
that their order has been shipped.

In an effort to continue to improve the DAM CD product and
provide a better tool for artists to promote themselves, several
enhancements have been made to the DAM CD including:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | providing additional promotional space inside the artwork cover;              
|
| |  | adding the artist name and title of the CD to the spine of the
	artwork cover;

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| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | enhancing the overall look and feel of the cover by improving the
	 color printing and using higher quality paper;
|
| |  | adding MP3.com logo artwork to the back jewel tray card; and                                                      
|
| |  | upgrading the multi-media portions of the DAM CD to more closely
	resemble an out-of-the-box mp3 player.          

Customer Service

Support for our customers is provided 12 hours a day, seven
days a week and most issues are resolved within 36 hours of
notice of the issue. Customer service personnel respond to a
broad range of questions and provide services such as:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | assisting customers with e-commerce transactions;                                                           
|
| |  | tracking orders and questions related to fulfillment;                                                       
|
| |  | providing technical support for web site issues including
	problems with downloading or playing music;      
|
| |  | maintaining the FAQ on our web site and keeping relevant
	information available for customers; and          
|
| |  | providing feedback internally to make improvements to the site to
	 enhance the overall customer experience.

We recently implemented an e-mail management system to more
efficiently address the external e-mail received from customers
and other users of our site. This system has a rule-based process
 that directs e-mails to the appropriate individual and escalates
 those issues requiring more attention. This system also enables
the customer service team to build a knowledge base to constantly
 maintain the FAQs on our web site.

Artist Support

We have an artist support department dedicated to addressing
questions and issues from artists that have posted music on our
web site. This team assists artists with technical issues related
 to publishing their music and artwork on our site. Artist
support is available six days a week, 12 hours a day.

Competition

The market for the online promotion and distribution of music and
 music-related products is competitive. Barriers to entry on the
Internet are relatively low, and we expect competition to
increase significantly in the future. We face competitive
pressures from numerous actual and potential competitors
including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Providers of online music content like Musicmaker.com,
	EMusic.com, Inc. (formerly GoodNoise Corporation), Launch Media,
	Inc., Artistdirect.com, Inc. (formerly the Ultimate Band List)
	and various private companies such as Tunes.com, some of which
	also offer artist services that compete with ours.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Companies offering mp3 or other audio compression formats, such
	as those of AT&T Corp., IBM Corporation, Liquid Audio, Inc.,
	Microsoft Corporation, and RealNetworks, Inc. Some of these
	companies also offer customers the ability to download music from
	 their web sites.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Online destination sites with greater resources than us such as
	online music retailers like Amazon.com, Inc. and CDNow Inc. and
	online portals like America Online, Inc., Excite@Home
	 Corporation, Infoseek Corporation, Lycos, Inc. and Yahoo!, Inc.
	Some of these companies have taken significant steps into the
	market for online music distribution. For example, Amazon.com has
	 announced its launch of a digital-download area on its web site,
	 allowing free song downloads. In addition, America Online has
	acquired two Internet music companies, Spinner Networks, Inc. and
	 Nullsoft, Inc., and offers downloadable music in leading
	formats. America Onlines proposed merger with Time Warner,
	Inc., if completed (and Time Warners proposed acquisition
	of EMI Group plc), will combine significant amounts of content
	with an established online distribution network.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional music industry companies, including BMG
	Entertainment, a unit of Bertelsmann AG; EMI Group plc; Sony
	Corporation; Time Warner Inc. and Universal Music Group, a unit
	of The Seagram Company Ltd. all of whom have made public
	statements that they intend to pursue digital distribution and
	online promotion of music through in-house development efforts
	and strategic alliances.

Other companies have agreed to work together to offer music over
the Internet, and we may face increased competitive pressures as
a result. For example, in 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of
cooperative activities. Sony has announced that it will make its
music content downloadable from the Internet using
Microsofts multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture
to form an online music store, and Musicmaker.com announced that
it signed an exclusive 5-year licensing agreement for EMIs
music catalog for custom compilation CDs.

The bases of competition in the online music promotion and
distribution industry include:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | quantity and variety of digital recorded music content;                                                             
|
| |  | ability of consumers to search and listen to music according to
	their preferences;                                 
|
| |  | ease of downloading music;                                                                                          
|
| |  | fidelity and quality of sound of the music; and                                                                     
|
| |  | ability to promote its web site, both online and through
	traditional marketing, concerts and business partnerships.

We believe that MP3.com generally competes favorably on these
bases. However, many of our existing and potential competitors
have longer operating histories, greater brand name recognition,
larger consumer bases and significantly greater financial,
technical and marketing resources than we do. We cannot assure
you that web sites maintained by our existing and potential
competitors will not be perceived by consumers, artists, talent
management companies and other music-related vendors or
advertisers as being superior to ours. We also cannot assure you
that we will be able to maintain or increase our web site traffic
 levels, purchase inquiries and number of click-throughs on our
online advertisements or that competitors will not experience
greater growth in these areas than we do.

Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which
could harm our business.

Government Regulation

The laws and regulations that govern our business change rapidly.
 Although our operations are currently based in California, the
United States government and the governments of other states and
foreign countries have attempted to regulate activities on the
Internet. Because of this rapidly evolving and uncertain
regulatory environment, we cannot predict how these laws and
regulations might affect our business. In addition, these
uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or
forcing us to change how we do business. The following are some
of the evolving areas of law that are relevant to our business:

Privacy Laws

Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and
disclosure of personal information could limit our ability to use
 the information in our databases to generate revenues. In late
1998, the Childrens Online Privacy Protection Act, or
COPPA, was enacted, mandating that measures be taken to safeguard
 minors under the age of 13. Although we believe that our
information collection activities do not fall within the scope of
 COPPA, we may need to comply with its requirements in the
future. Compliance with COPPA could be costly for us and might
likely dissuade some percentage of our users from accessing our
web site and related services. In addition, if implementing a
system to adequately verify parental consent is too expensive, we
 may not be able to provide our services to children

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Encryption Laws

Record industry associations have lobbied the federal government
for laws requiring music transmitted over the Internet to be
digitally encrypted in order to track music rights and prevent
unauthorized use of copyrighted music. If these laws are adopted,
 we may need to incur substantial costs to comply with these
requirements or change the way we do business.

Content Regulation

Both foreign and domestic governments have adopted and proposed
laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, indecency,
libel and defamation. We could be liable if content delivered by
us or placed on our web site violates these regulations.

Sales and Use Tax

The taxation of goods sold over the Internet is currently
unsettled. We collect sales taxes for goods shipped to
California, Colorado and Massachusetts. A number of proposals
have been made at the state and local levels that would impose
additional taxes on the sale of goods through the Internet. Such
proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect our opportunity to
 derive financial benefit from electronic commerce. Recently,
though, the Internet Tax Freedom Act was signed into law, placing
 a three-year moratorium on new state and local taxes on Internet
 commerce. However, the tax moratorium may not continue. Failure
to renew this legislation would allow various states to impose
taxes on Internet-based commerce, which could adversely affect
our business.

In addition, foreign jurisdictions may seek to impose tax
collection obligations on companies like us that engage in online
 commerce. If they do, these obligations could limit the growth
of electronic commerce internationally and limit our ability to
profit from the sale of goods and services over the Internet in
foreign countries.

Contests and Sweepstakes

We actively conduct online promotional contests and sweepstakes.
Most of our promotions involve random drawing sweepstakes for
which no purchase is necessary to participate. Periodically,
however, we also conduct contests whereby users submit musical
content for consideration by various entertainment or other media
 entities and companies. We post the official rules for these
promotions, along with all material terms, conditions of
eligibility, dates of participation, prizes, methods of entry and
 limitations, if any, on our web site. While we attempt to comply
 with the laws of all 50 state jurisdictions (and Canada when
applicable), we may not be uniformly successful, and other
foreign jurisdictions may attempt to regulate or ban our
promotional contests. In that event, we could lose an effective
tool for increasing and keeping visitors to our web site, and our
 business could be adversely affected.

Intellectual Property

Content on Our Web Site and CDs

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



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

17



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We may also be liable for anything that is accessible from our
web site through links to other web sites.

We attempt to minimize these types of liability by requiring
representations and warranties relating to our artists
ownership of and rights to distribute and submit their content
and by taking related measures to review content on our web site
and on our CDs. For example, we require our artists to confirm
that their content does not infringe on any third-party
copyrights, is not defamatory or obscene, and that they have the
right to provide their content and have obtained all third-party
consents necessary to do so. Artists also agree to indemnify us
against liability we might sustain due to the content they
provide.Our in-house musicologists listen to a significant amount
 of the music submitted to us for posting on our web site. If we
have good reason to suspect non-compliance with copyright or
trademark laws, we employ a system of verifying compliance
through independent investigation and cross-checking of license
rights with our in-house musicologists.

It is our belief that the artist is responsible for the material
he or she submits. Although we have not experienced a material
loss due to content-related liability to date, we cannot assure
you that our measures to limit this liability will continue to be
 successful or that we will not be held liable for our content.
Liability or alleged liability could harm our business by
damaging our reputation, requiring us to incur legal costs and
diverting managements attention away from our business.
Moreover, future claims may not be adequately covered by our
insurance.

Our Proprietary Rights

Our intellectual property includes our trademarks and copyrights,
 proprietary software, and other proprietary rights. We believe
that our intellectual property is important to our success and
our competitive position and we seek to protect it. However, our
efforts may be inadequate. Although we own the domain name
mp3.com and have applied for U.S. federal trademark
registration for mp3.com, we do not have any
registered trademarks in mp3 or any variation of the
term. Our trademark registration applications could be denied for
 various reasons, including if the term mp3 is found
to be a descriptive term. This could limit our ability to use and
 to keep others from using the term mp3 and further
limit our ability to protect the mp3.com domain name.
 Use of the mp3.com name by others could dilute our
brand identity and confuse the market.

Third Party Intellectual Property Claims

In addition, third parties have claimed and may claim in the
future that we violate their intellectual property rights. For
example, we are currently the named defendant in a lawsuit
brought by ten of the largest companies in the music recording
industry and a separate lawsuit by two major music publishers.
Both lawsuits claim that our My.MP3.com service violates
copyrights, including those of the record companies and their
affiliated artists and publishers, by making available to
consumers mp3 files containing music from the CDs they have in
their possession. To the extent that the courts find that we may
be in violation of the copyright or other intellectual property
laws with regard to our My.MP3.com service, we may be required to
 pay substantial damages, including statutory or other damages
that far exceed the resources and overall market capitalization
of our company. We also may be required at any time by the courts
 to cease all operations of the My.MP3.com, Instant Listening,
Beam-it or other related services. Furthermore, our insurance
coverage and other capital resources, if any, may be inadequate
to cover costs of these lawsuits or any possible settlements or
licenses.

In addition, other companies from time to time have asserted that
 online music providers, including MP3.com, violate various
patent rights that they allegedly own covering the sale or
distribution of music over the Internet through digital
downloads, streams or other proprietary technologies. However, to
 the extent that the patent rights are valid and enforceable and
cover our activities, we may be required to pay damages, obtain a
 license to use such patents or use non-infringing methods to
accomplish our activities with regard to digital downloads,
streams or other MSP services. It is possible that a license from
 such entities would not be available on commercially acceptable
terms, or at all, or that we would be unable to provide digital
downloads, streams or other MSP services in a non-infringing
manner.

If successful, any of the above-mentioned third party claims, or
claims by others that we violate their intellectual property
rights, could seriously harm our business by forcing us to cease
using important

18



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##### Table of Contents





Employees

On March 1, 2000, we had 284 employees, including
119 in sales and marketing, 112 in engineering product
development, four in operations and fulfillment and 49 in
general administration. We consider our relations with our
employees to be good. We have never had a work stoppage, and no
employees are represented under collective bargaining agreements.
 We believe that our future success will depend in part on our
continued ability to attract, integrate, retain and motivate
highly qualified personnel, and upon the continued service of our
 senior management and key technical personnel. Competition for
qualified personnel in our industry and geographical location is
intense, and we cannot assure you that we will be successful in
attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct our business in the
future.

Legal Matters

We are currently involved in two major lawsuits, in which the
major music recording companies and certain music publishers have
 alleged that our My.MP3.com service violates copyrights. See
Item 3. Legal Proceedings.

Directors, Executive Officers and Key Employees

The following table sets forth information about our directors,
executive officers and key employees as of March 31, 2000:

|                                 |  |     |    |          |  |                                                     
|-------------------------------- |  | --- | -- | -------- |  | ----------------------------------------------------
|Name                             |  | Age |    | Position
|                                 |  |     |    |         
|Directors and Executive Officers |  |     |    |          |  |                                                     
|                                
|                                
|                                
|                                
|Michael L. Robertson             |  |     | 32 |          |  | Chief Executive Officer and Chairman of the Board   
|                                
|                                
|                                
|                                
|Robin D. Richards                |  |     | 43 |          |  | President, Chief Operating Officer and Director     
|                                
|                                
|                                
|                                
|Paul L. H. Ouyang                |  |     | 42 |          |  | Chief Financial Officer and Executive Vice President
|                                
|                                
|                                
|                                
|Steven G. Sheiner                |  |     | 45 |          |  | Executive Vice President, Sales and Marketing       
|                                
|                                
|                                
|                                
|Gregory P. Kostello              |  |     | 35 |          |  | Executive Vice President, Technology                
|                                
|                                
|                                
|                                
|David E. Easterly                |  |     | 57 |          |  | Director                                            
|                                
|                                
|                                
|                                
|Lawrence F. Probst III(1)        |  |     | 49 |          |  | Director                                            
|                                
|                                
|                                
|                                
|Mark A. Stevens(1)(2)            |  |     | 40 |          |  | Director                                            
|                                
|                                
|                                
|                                
|Theodore W. Waitt(1)(2)          |  |     | 37 |          |  | Director                                            
|Key Employees                    |  |     |    |          |  |                                                     
|                                
|                                
|                                
|                                
|William P. Dow                   |  |     | 35 |          |  | Controller                                          
|                                
|                                
|                                
|                                
|Joseph L. Fleischer              |  |     | 35 |          |  | Corporate Vice President                            
|                                
|                                
|                                
|                                
|Daniel K. ONeill                |  |     | 38 |          |  | Vice President, Engineering                         
|                                
|                                
|                                
|                                
|Steven M. Przesmicki             |  |     | 33 |          |  | Vice President, Legal Affairs and Secretary         




|    |                                 
|--- | --------------------------------
|(1) | Member of Compensation Committee
|   
|(2) | Member of Audit Committee       

Michael L. Robertsonfounded MP3.com and has served as our
 Chief Executive Officer and Chairman of the Board since March
1998. From September 1995 to March 1998, Mr. Robertson
operated several web sites that focused on merging search
technologies with commerce. From September 1995 to September
1996, Mr. Robertson was President and Chief Executive
Officer of Media Minds, Inc., a developer of digital picture
software. From January 1994 to August 1995, Mr. Robertson
was President and Chief Executive Officer of MR Mac
Software, a developer of networking and security tools.
Mr. Robertson received his Bachelor of Arts from the
University of California, San Diego.

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Robin D. Richardshas served as our President, Chief
Operating Officer and as one of our directors since January 1999.
 From October 1998 to January 1999 he served as Managing Director
 of Tickets.com, Inc., an Internet ticketing company. From March
1986 to October 1997 he was a founder and President and Chief
Executive Officer of Lexi International, a tele-services company.
 Mr. Richards is a director of Cash Technologies Inc., a
publicly-held company that provides solutions for coin and
currency handling, cash management and electronic commerce
transactions. Mr. Richards holds a Bachelor of Science from
Michigan State University.

Paul L. H. Ouyanghas served as our Chief Financial
Officer and Executive Vice President since February 1999. From
September 1998 to February 1999 he served as Chief Financial
Officer and Executive Vice President of Operations of
Tickets.com, Inc., an Internet ticketing company. From April 1998
 to August 1998, Mr. Ouyang served as a consultant to UDP,
Inc., a company involved in dental practices management. From
November 1996 to March 1998, he served as Chief Financial Officer
 and Executive Vice President for Cheap Tickets, Inc., a ticket
distribution company. From June 1994 to November 1996,
Mr. Ouyang served as the Managing Director of Corporate
Finance at KPMG Peat Marwick LLP. From September 1982 to June
1994, Mr. Ouyang held various positions with
J.P. Morgan & Co., Incorporated ending with Vice
President in Corporate Finance. Mr. Ouyang holds a Bachelor
of Arts from Amherst College and a Master in Business
Administration from the Wharton School of the University of
Pennsylvania.

Steven G. Sheinerhas served as our Executive Vice
President, Sales and Marketing since February 1999. From October
1997 to January 1999 he served as Vice President Business
Development at Aegis Communications, Inc., a telecommunications
company. From May 1995 to September 1997 he served as a direct
marketing consultant. From June 1987 to April 1995 he served as
President of Sheiner Direct Marketing & Advertising,
Inc., a marketing firm. Mr. Sheiner holds a Bachelor of Arts
 from Concordia University.

Gregory P. Kostellocame to MP3.com in June 1999 with more
 than a decade of experience as a software engineer, most
recently serving as engineering manager at Netscape
Communications. In 1995, Mr. Kostello co-founded Digital
Style Corporation, a software development company focused on
creating Internet tools for web sites. Digital Style was
subsequently acquired by Netscape in 1997. Before that, he held
software engineering positions at Pages Software and Claris
Corporation. He earned his bachelor of science degree in
information and computer science from the University of
California, Irvine.

David E. Easterlyhas served as one of our directors since
 June 1999. Since October 1994, Mr. Easterly has served as
President and Chief Operating Officer of Cox Enterprises, Inc., a
 diversified media company. From May 1986 to October 1994,
Mr. Easterly served as President of Cox Newspapers, Inc., a
subsidiary of Cox Enterprises, Inc. Mr. Easterly serves as a
 member of the board of directors of Cox Communications, Inc.,
Cox Radio, Inc. and several private companies. Mr. Easterly
holds a Bachelor of Arts from Austin College.

Lawrence F. Probst IIIhas served as one of our directors
since April 1999. Since June 1994, Mr. Probst has served as
Chairman and Chief Executive Officer of Electronic Arts, Inc., an
 interactive entertainment software company. Mr. Probst
holds a Bachelor of Science from the University of Delaware.

Mark A. Stevenshas served as one of our directors since
January 1999. Since 1993, Mr. Stevens has been a General
Partner of Sequoia Capital, a venture capital investment firm.
From 1989 to 1993, Mr. Stevens was an Associate with Sequoia
 Capital. From 1982 to 1987, Mr. Stevens held technical
sales and marketing positions at Intel Corporation.
Mr. Stevens currently serves on the Board of Directors of
NVIDIA Corp., Terayon Communications Systems, Inc., Medicalogic,
Inc., Pixelworks, Inc., and several privately-held companies.
Mr. Stevens holds a Bachelor of Science, a Bachelor of Arts
and a Master of Science from the University of Southern
California and a Master in Business Administration from Harvard
Business School.

Theodore W. Waitthas served as one of our directors since
 March 1999. From 1985 to 1999, Mr. Waitt served as both
Chairman of the Board and Chief Executive Officer of Gateway,
Inc., a large computer manufacturer. Currently, he acts as
Chairman of the Board for Gateway. Mr. Waitt attended the
University of Iowa.

William P. Dowhas served as our Controller since March
1999. From June 1997 to March 1999, Mr. Dow served as Vice
President of Finance for Data Tree Corporation, an information
services company. From April 1995 to June 1997, Mr. Dow
served as Controller of GTI Corporation, a supplier of networking
 and network-

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Joseph L. Fleischerhas served as our Corporate Vice
President since January 2000. From 1993 to 2000,
Mr. Fleischer was the Vice President/ Senior Editor of Hits Magazine, a leading music industry publication. In
addition, from 1997 to 1999, Mr. Fleischer was a music
industry columnist for Spin Magazine,as well as a co-host
 and co-producer of Rolling Stonemagazines
Live From the Pit nationally syndicated radio show
from 1996 to 1999. From 1990 to 1991, he was the West Coast
Director of A&R for A&M Records. Mr. Fleischer holds
 a Bachelor of Arts from the University of California, Los
Angeles.

Daniel K. ONeillhas served as our Vice President of
 Engineering since March 1999. From July 1990 to March 1999,
Mr. ONeill held various technical and management
positions with Cadence Design Systems, Inc., a manufacturer of
semiconductor design automation software, serving most recently
as a Senior Member of the Consulting Staff. Mr. ONeill
 holds a Bachelor of Science and a Master of Science from Santa
Clara University.

Steven M. Przesmickijoined MP3.com in March 1999 and
currently serves as Vice President, Legal Affairs and Secretary.
From 1995 to 1999, he was an attorney with Cooley Godward LLP,
where he focused on the representation of emerging growth high
technology and biotech companies in general corporate and
securities matters. Mr. Przesmicki holds a Bachelor of
Science and Juris Doctor from the University of Wisconsin,
Madison. He is a member of the state bars of California and
Wisconsin.

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RISK FACTORS

THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. YOU ARE
CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING
SUCH STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS FORM 10-K, INCLUDING THOSE
DISCUSSED BELOW, WHICH COULD CAUSE ACTUAL EVENTS OR RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING
STATEMENTS.

Risks Related To Our Business Model

We Are Currently Engaged In Two Major Lawsuits That May Result
 In Monetary Damages Substantially Greater Than Our Overall
Market Capitalization And The Discontinuation Or Interruption Of
Services To Our Consumers.

We are currently the named defendant in a lawsuit brought by
several of the largest companies from the music recording
industry, and a separate lawsuit by two major music publishers.
These lawsuits allege that among other things, our My.MP3.com and
 related services violate their respective copyrights. We cannot
assure you that we will be successful in defending these
lawsuits, and we may be required to pay license fees or
substantial damages, including statutory or other damages that
far exceed the resources and overall market capitalization of our
 company. We also may be required at any time by the courts to
cease all operations of the My.MP3.com, Instant Listening,
Beam-it or other services. Furthermore, our insurance coverage
and other capital resources may be inadequate to cover
anticipated costs of the lawsuit or any possible settlements or
licenses. If successful, either of these lawsuits could seriously
 harm our business by forcing us to cease providing services to
our consumers or requiring us to pay monetary damages. Even if
unsuccessful, these claims still can harm our business severely
by damaging our reputation, requiring us to incur legal costs,
lowering our stock price and public demand for our stock, and
diverting managements attention away from our primary
business activities in general. See Item 3. Legal
Proceedings.

Our Business Model Is Not Typical Of Traditional, More
Established Business Enterprises And May Not Generate Sufficient
Revenues For Our Business To Survive.

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



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

Since our business revenue may evolve rapidly, including from the
 development of our My.MP3.com and other MSP services, these
sources of revenue may change or increase or decrease in
importance, as well. It is uncertain whether a music-based web
site that relies on attracting people to learn about, listen to
and download music, mostly from lesser-known artists, can
generate sufficient revenues to survive. In addition, our efforts
 to exploit sources of revenue from the My.MP3.com and other MSP
services in development may not be successful or may meet
significant consumer resistance. We cannot assure you that our
business model will succeed or will be sustainable as our
business grows. In order for our business to be successful, we
must not only develop services that directly generate revenue,
but also provide content and services that attract consumers to
our web site frequently. We will need to develop new offerings as
 consumer preferences change and new competitors emerge. We
cannot assure you that we will be able to provide consumers with
an acceptable blend of products, services, and informational and
community offerings that will attract consumers

22



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

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

We Have A Limited Operating History That Makes An Evaluation
Of Our Business Difficult.

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

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

We currently are experiencing a period of rapid expansion in our
web site traffic, personnel, facilities and infrastructure. For
example, the number of daily visitors to our web site increased
approximately 210% from December 1998 to December 1999. Our
number of employees increased from eight on December 31,
1998 to 276 on December 31, 1999. We expect further
significant expansion will be required to address potential
growth in our artist and consumer bases, the breadth of our
product and service offerings, and other opportunities. This
expansion has placed, and we expect it will continue to place, a
significant strain on our management, operational and financial
resources. Our failure to manage growth could disrupt our
operations and ultimately prevent us from generating the revenues
 we expect.

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

Although our business model contemplates multiple sources of
revenue, we anticipate that in the foreseeable future we will
depend substantially on revenue from advertising. In 1999,
revenue from advertising accounted for 93.5% of our net revenues.
 We currently depend on a small group of customers for our
revenue from advertising. During fiscal year 1999, one customer
accounted for approximately 21.3% of net revenues, and our top
ten customers accounted for approximately 46.8% of net revenues.
We expect that most of our revenues will continue to be derived
from third party advertising agreements like those we have with
Groupe Arnault,

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

Our failure to achieve these objectives could reduce our revenue
from online advertising and ultimately prevent us from generating
 the revenues we expect.

A Substantial Portion Of Our Revenues And Revenue Growth For
At Least The Next Two Years Will Come From Groupe Arnault. If
This Relationship Is Not Renewed, Or If Other Significant Sources
 Of Revenue Are Not Developed, We May Not Have Sufficient
Revenues To Sustain Our Growth And Our Stock Price May Fall.

In July 1999, we entered into a three-year advertising, promotion
 and marketing agreement with Groupe Arnault. We anticipate that
for at least the next two years a substantial portion of our
revenues will come from sales of our advertising, promotion and
marketing services under this agreement. Although payment for
these services has been secured for the term of the agreement by
a $45 million pre-payment and a letter of credit for the
remaining $105 million of services to be provided under the
agreement, Groupe Arnault is under no obligation to renew its
relationship with us after the current agreement terminates at
the end of June 2002. Furthermore, we anticipate that our revenue
 growth for the next two years will largely be due to the
scheduled growth in revenues under our agreement with Groupe
Arnault. Historically, most of our revenue sources have not
provided for a similarly-scheduled growth in revenues. If we do
not develop significant additional revenue sources in the future
our business will be substantially dependent on the Groupe
Arnault agreement. Moreover, if Groupe Arnault does not renew its
 relationship after termination of the current agreement at the
end of June 2002, or renews the relationship but at a lower level
 of commitment, our revenues or growth rate may decline in
periods subsequent to the end of the current agreement. We cannot
 guarantee that we will be able to develop enough additional
revenue to offset the loss of revenues that would result if
Groupe Arnault does not renew its relationship or that the other
revenue sources we may develop will be sufficient to maintain our
 rate of revenue growth. If either event causes our revenues or
our revenue growth rate to be substantially reduced, we may not
have sufficient revenues to support our business and the market
price of our stock may fall.

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

Given the online nature of our business, without the continued
development and maintenance of the Internet infrastructure, we
could fail to meet our overall strategic objectives and
ultimately fail to generate the web site traffic and revenues we
expect. This continued development of the Internet includes
maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of
complementary products including high speed modems, for providing
 reliable Internet access and services. Because global commerce
on the Internet and the online exchange of information is new and
 evolving, we cannot predict whether the Internet will prove to
be a viable commercial marketplace in the long term. The success
of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and
commerce, as well as an efficient medium for the delivery and
distribution of music. Our business will depend on the ability of
 our artists and consumers to continue to upload and download mp3
 and other music files, as well as to conduct commercial
transactions with us, without significant delays or

24



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##### Table of Contents





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

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

Our Brand Name And Revenues Could Be Damaged If The Music
Provided By Lesser-Known Artists Fails To Meet Consumer
Expectations.

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

Development Of New Standards For The Electronic Delivery Of
Music May Diminish Our Brand Identity And Disrupt The Way We Do
Business.

We currently rely on mp3 technology for both brand identity and
as a delivery method for the digital distribution of music. Mp3
is an open standard adopted by the Moving Picture Experts Group
that makes music files smaller. We do not own or control mp3
technology. The onset of competing industry standards for the
electronic delivery of music could significantly affect the way
we operate our business as well as the publics perception
of MP3.com as a company. For example, some of the major recording
 studios have devoted resources to develop a universal standard
for the electronic delivery of music, called the Secured

25



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##### Table of Contents





Mp3 Technology Is Controversial Within The Traditional Music
Industry And May Face Continued Opposition, Which May Negatively
Affect The Perception Of Our Business, Lead To Market Confusion,
Alienate Advertisers And Consumers And Reduce Our Revenue.

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

We May Have Difficulty Competing For Or Executing Business
Partnerships And Making Acquisitions That We May Need To Expand
Our Content And Distribution Channels, Which Could Impair Our
Overall Strategic Goals.

Our business strategy includes entering into business
partnerships and may include acquiring complementary businesses,
technologies, content or products. For example, in June 1999 we
entered into a joint venture with Cox Interactive Media to create
 and operate music-related web sites. We cannot assure you that
this joint venture or any other business partnership will be
successful. We may be unable to complete suitable business
partnerships and acquisitions on commercially reasonable terms,
if at all. We expect to face competition for business partnership
 and acquisition candidates and sponsorships. This competition
could impair our ability to successfully pursue these aspects of
our business strategy. Business partnerships or acquisitions
could disrupt our ongoing business, distract our management and
employees and increase our expenses. If we acquire a company, we
could face difficulties assimilating that companys
personnel, culture and operations. In addition, the key personnel
 of the acquired company may decide not to work for us.
Acquisitions of additional services or technologies also involve
risks of incompatibility and lack of integration into our
existing operations. If we finance the acquisitions by incurring
debt or issuing equity securities, this could dilute our existing
 stockholders. Any amortization of goodwill or other assets, or
other charges resulting from the costs of acquisitions, could
adversely affect our operating results.

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Financial Risks

Our Quarterly Revenues And Operating Results Are Not
Indicative of Future Performance And Are Difficult To Forecast,
And Our Stock Price May Fall If Our Performance Does Not Meet
Analysts Or Investors Expectations.

As a result of our limited operating history, we do not have
historical financial data for a significant number of periods
upon which to forecast quarterly revenues and results of
operations. We believe that period-to-period comparisons of our
operating results are not meaningful and should not be relied
upon as indicators of future performance. In addition, our
revenue and earnings may vary substantially as a result of
holiday-based buying and the business cycles of the music
industry and of Internet commerce in general. However, the actual
 effect of these factors on the price of our stock will be
difficult to assess due to our limited operating history. In one
or more future quarters our results of operations may fall below
the expectations of securities analysts and investors, and the
trading price of our common stock may drop.

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

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

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

Our available cash and equivalents and short and long-term
investments in marketable securities are expected to be
sufficient to meet our cash requirements for at least the next
12 months. However, we may need to raise additional funds in
 order to:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | satisfy any damage awards or settlement costs related to our
	current litigation proceedings;
|
| |  | finance unanticipated working capital requirements;                                          
|
| |  | develop or enhance existing services or products;                                            
|
| |  | fund distribution relationships;                                                             
|
| |  | respond to competitive pressures; or                                                         
|
| |  | acquire complementary businesses, technologies, content or
	products.                        

We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability
to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly
 limited. If we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced, and these securities may have
rights, preferences or privileges senior to those of our
stockholders.

Our Stock Price and Trading Volume Has Been And May Continue
To Be Extremely Volatile.

The trading price of our common stock has been and is likely to
continue to be extremely volatile. Our stock price could be
subject to wide fluctuations in response to a variety of factors,
 including the following:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | developments related to our current or future legal proceedings;               
|
| |  | actual or anticipated variations in quarterly and/or annual
	operating results;

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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of technological innovations;                                                                                         
|
| |  | new products or services offered by us or our competitors;                                                                          
|
| |  | changes in financial estimates and/or ratings by securities
	analysts;                                                              
|
| |  | announcements of significant acquisitions, strategic
	partnerships, joint ventures or capital commitments by us or our
	competitors;
|
| |  | additions or departures of key personnel;                                                                                           
|
| |  | sales of common stock;                                                                                                              
|
| |  | perceived and/or actual sales of our stock by company insiders;
	and                                                                
|
| |  | other events or factors, may of which are beyond our control.                                                                       

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

Substantial Future Sales of Our Common Stock in the Public
Market Could Cause Our Stock Price to Fall.

Sales of a large number of shares of our common stock in the
public market or the perception that such sales could occur could
 cause the market price of our common stock to drop. As of
March 1, 2000, we had 68,426,730 shares of common stock
outstanding, of which approximately 41,854,689 shares are
freely transferable without restriction or registration under the
 Securities Act of 1933, unless such shares are held by our
affiliates, as that term is defined in Rule 144 under the
Securities Act. Sales of common stock by existing stockholders in
 the public market, or the availability of such shares for sale,
could adversely affect the market price of the common stock.

In July 1999, we filed a registration statement on Form S-8
with the Securities and Exchange Commission covering the
7,606,781 shares of common stock reserved for issuance under our
1998 Equity Incentive Plan and 1999 Employee Stock Purchase Plan
and for options issued outside such plans. In February 2000, our
board of directors approved our 2000 Equity Incentive Plan, which
 includes a reserve of 1,100,000 shares available for grant
for which we plan to file a registration statement on
Form S-8 sometime in the future. Once issued, any shares
registered on such Form S-8 registration statements, could
be freely transferable without restriction or registration under
the Securities Act of 1933, unless such shares are held by our
affiliates, as that term is defined in Rule 144 under the
Securities Act. Sales of a large number of shares could have an
adverse effect on the market price for our common stock.

Holders of approximately 17,088,152 shares of our Common Stock
have certain registration rights. In addition, 10% of the
3,347,233 shares purchased by Arkaro Holding B.V. in our initial
public offering became available for sale to the public market on
 January 21, 2000, with an additional 10% becoming eligible
on the 21st day of each of the five months thereafter. If such
holders, by exercising either their registration rights or their
rights under Rule 144 or Rule 701, cause a large number
 of securities to be registered and/or sold in the public market,
 such sales could have an adverse effect on the market price for
our common stock. If we were to include in a company-initiated
registration shares held by such holders pursuant to the exercise
 of their registration rights, such sales may have an adverse
effect on our ability to raise needed capital.

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Risks Related To Sales, Marketing And Competition

Unless We Develop A Strong Brand Identity, Our Business May
Not Continue To Grow And Our Financial Results May Suffer.

We believe that our historical growth and brand recognition have
been largely attributable to frequent and visible national and
local media exposure as well as individual, unsolicited promotion
 of our web site. The frequency or quality of this media exposure
 or promotion may not continue. We believe that continuing to
strengthen our brand will be critical to achieve widespread
acceptance of our products and services. Favorable public
perception of our brand will depend largely on our ability to
continue providing users with high quality products and services
and the success of our marketing efforts. We plan to increase our
 marketing expenditures to create and maintain brand recognition.
 However, brand promotion activities may not yield increased
revenues and, even if they do, any increased revenues may not
offset the expenses we incur in building our brand.

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

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

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

We plan to use consumer data to expand, refine and target our
marketing and sales efforts. We collect most of our data from
users who report information to us as they conduct transactions
on our web site. If a large proportion of users impede our
ability to collect data or if they falsify data, our marketing
and sales efforts would be less effective since advertisers
generally require detailed demographic data on their target
audiences. In addition, laws relating to privacy and the use of
the Internet to collect personal information could limit our
ability to collect data and utilize our database. Failure to
collect accurate and useful data could result in a substantial
reduction in advertising revenues, which represented 93.5% of our
 total revenues during 1999. Because we use e-mail for direct
marketing, any legislative or consumer efforts to regulate
unsolicited bulk e-mails, commonly referred to as
spam, as well as other laws regulating the use of
e-mail, could significantly impair our sales and marketing
efforts and our associated advertising revenue.

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

The market for the online promotion and distribution of music and
 music-related products is competitive. Barriers to entry on the
Internet are relatively low, and we expect competition to
increase significantly in the future. We face competitive
pressures from numerous actual and potential competitors, many of
 which have longer operating histories, greater brand name
recognition, larger consumer bases and significantly greater
financial, technical and marketing resources than we do. We
cannot assure you that web sites maintained by our existing and
potential competitors will not be perceived by consumers,
artists, talent management companies and other music-related
vendors or advertisers as being superior to ours. We also cannot
assure you that we will be able to maintain or increase our web
site traffic levels, purchase inquiries and number of
click-throughs on our online advertisements or that competitors
will not experience greater growth in these areas than we do.
Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which
could damage the long-term or short-term prospects of our
business.

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Risks Related To Operations

Our Business Operations Could Be Significantly Disrupted If We
 Lose Members Of, Or Fail To Properly Integrate, Our Management
Team.

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

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

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

We May Not Be Able To Hire And Retain A Sufficient Number Of
Qualified Employees, And As A Result We May Not Be Able To Grow
As We Expect, Or Maintain The Quality Of Our Services.

Our future success will depend on our ability to attract, train,
retain and motivate other highly skilled technical, managerial,
marketing and customer support personnel. Competition for these
personnel is intense, especially for engineers, web designers and
 advertising sales personnel, and we may be unable to
successfully attract sufficiently qualified personnel.
Substantially all of our employees have joined us in 1999 and we
expect that our rate of hiring will continue at a very rapid
pace. If we cannot integrate these employees into our business,
we will not be able to effectively manage our growth. Also, our
inability to hire, integrate and retain qualified personnel in
sufficient numbers may reduce the quality of our programs,
products and services.

We Must Continue To Upgrade Our Technology Infrastructure, Or
We Will Be Unable To Effectively Meet Demand On Our Web site.

In December 1999, an average of approximately 38 gigabytes
of musical content was added to our web site each week and
traffic to the site increased by approximately 16% from the
previous month. We must continue to add hardware and enhance
software to accommodate the increased content and use of our web
site. If we are unable to increase the data storage and
processing capacity of our systems at least as fast as the growth
 in demand, our web site may become unstable and may fail to
operate for unknown periods of time. Unscheduled downtime could
harm our business and also could discourage users of our web site
 and reduce future revenues.

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Our New Financial Accounting System And Other Internal Systems
 May Not Work Effectively And As A Result We May Not Have The
Information We Need To Record Transactions And Meet Our
Accounting And Reporting Obligations, Which In Turn Could Affect
Our Ability To Run Our Business Efficiently Or Profitably.

In 1999, we installed a new financial accounting system. If our
accounting system does not work effectively, we may experience
delays or failures in our accounting processes. This could
adversely impact the promptness and accuracy of our transaction
processes, and our financial accounting and reporting. To manage
the expected growth of our operations and personnel, we will need
 to improve our operational and financial systems, transaction
processing, procedures and controls. Our current and planned
systems, transaction processing, procedures and controls may not
be adequate to support future operations.

Our Data Warehousing And Web Server Systems May Stop Working
Or Work Improperly Due To Natural Disasters, Failure Of
Third-Party Services And Other Unexpected Problems.

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

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

If the security measures that we use to protect personal
information are ineffective, we may lose visitors to our web site
 which could reduce our revenues. We rely on security and
authentication technology licensed from third parties. With this
technology, we perform real-time credit card authorization and
verification. We cannot predict whether new technological
developments could allow these security measures to be
circumvented. In addition, our software, databases and servers
may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to spend
significant resources to protect against security breaches or to
alleviate problems caused by any breaches. We cannot assure that
we can prevent all security breaches.

Risks Related To Government Regulation, Content and
Intellectual Property

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

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

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

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



|  |                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | if the music, text, graphics, software or other content on our
	web site or CDs violates their copyright, trademark, or other
	intellectual property rights;

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|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
| | if our artists violate their contractual obligations to others by
	 providing content on our web site or CDs; or
| 
| | if anything on our web site or CDs is deemed obscene, indecent or
	 defamatory.                                 

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

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

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

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Item 2. Properties

Our principal administrative, marketing and product development
facilities are located in two buildings of approximately 61,000
and 47,000 square feet, respectively, of office space in San
 Diego, California. Additionally, we have three small offices in
Beverly Hills, California, San Francisco, California and Denver,
Colorado that are primarily used for sales and marketing
activities. A listing of all primary facilities and the
corresponding location, square feet, expiration date of the
lease, and principal activities is set forth below.

|                                         |  |                                                                                                   |  |             |        |                 |  |  |            | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ----------- | ------ | --------------- |  |  | ---------- | 
|                                         |  |                                                                                                   |  | Approximate |        | Expiration Date
|Location                                 |  | Principal Activities                                                                              |  | Square Feet |        | of Lease       
|                                         |  |                                                                                                   |  |             |        |                
|4790 Eastgate Mall,
	San Diego, CA 92121 |  | Sales and Marketing, Product Development, Operations and
	Fulfillment, and General Administrative |  |             | 61,000 |                 |  |  | July 2005  | 
|4780 Eastgate Mall,
	San Diego, CA 92121 |  | Sales and Marketing, Product Development, Operations and
	Fulfillment, and General Administrative |  |             | 47,000 |                 |  |  | March 2009 | 

Item 3. Legal Proceedings

On January 21, 2000, ten major recording companies filed a
copyright infringement lawsuit against MP3.com in the United
States District Court for the Southern District of New York. The
complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleges that offering the
new My.MP3.com service, which allows a user to listen, via the
Internet, to the tracks of certain commercial audio CDs of his or
 her choosing, constitutes unauthorized copying and willful
infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to
$150,000 per violation) and injunctive relief prohibiting MP3.com
 from operating its My.MP3.com service or any other service that
uses reproductions of plaintiffs copyrighted sound
recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein,
and the plaintiffs moved for summary judgement. In March 2000,
MP3.com filed materials in opposition to the plaintiffs
motion for summary judgement, which is scheduled to be heard by
the court on April 14, 2000.

On March 14, 2000, two large music publishing companies
filed a copyright infringement lawsuit against MP3.com in the
United States District Court for the Southern District of New
York. The complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the Copyright
Act, and that MP3.com, in connection with the streaming of audio
content to users of the My.MP3.com service, continues to make
unauthorized digital phonorecords in violation of the Copyright
Act. The complaint further alleges that MP3.coms actions
constitute unauthorized copying and willful infringement of
plaintiffs copyrights. Plaintiffs seek damages (including
statutory damages of up to $150,000 per violation) and injunctive
 relief prohibiting MP3.com from operating its My.MP3.com service
 or any other service that uses unauthorized reproductions of
plaintiffs copyrighted works.

MP3.com believes that it has meritorious defenses to the
plaintiffs claims, including the fair use
doctrine, based in part on the belief that these services augment
 the market for music and music CDs, and we intend to vigorously
defend against such claims. However, we cannot assure you that we
 will be successful in defending these lawsuits, and we may be
required to pay license fees or substantial damages, including
statutory or other damages that far exceed the resources and
overall market capitalization of our company. We also may be
required at any time by the courts to cease all operations of the
 My.MP3.com, Instant Listening, Beam-it or other services.
Furthermore, our insurance coverage and other capital resources
may be inadequate to cover anticipated costs of the lawsuit or
any possible settlements or licenses. If successful, either of
these lawsuits could seriously harm our business by forcing us to
 cease providing services to our consumers or requiring us to pay
 monetary damages. Even if unsuccessful, these claims still can
harm our business severely by damaging

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

No matters were submitted to a vote of security holders during
the fourth quarter of 1999.

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PART II




Item 5. Market for Registrants Common
Equity and Related Stockholder Matters

(a)  Our common stock began trading on the Nasdaq National
Market under the symbol MPPP on July 21, 1999.
The following table sets forth the range of high and low closing
(last sale) prices for our Common Stock, as reported on the
Nasdaq National Market for the periods indicated:

|                                        |  |      |       |     |  |   |       | 
|--------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                        |  | High |       | Low
|                                        |  |      |       |    
|1999                                    |  |      |       |     |  |   |       | 
|                                       
|                                       
|                                       
|                                       
|Third Quarter (beginning July 21, 2000) |  | $    | 63.31 |     |  | $ | 26.75 | 
|                                       
|                                       
|                                       
|                                       
|Fourth Quarter                          |  | $    | 61.25 |     |  | $ | 25.25 | 

As of March 1, 2000, there were approximately 228
stockholders of record of our common stock. Covenants in our
financing arrangements will prohibit or limit our ability to
declare or pay any cash dividends. We have never declared or paid
 any cash dividends on our common stock, currently intend to
retain any future earnings to finance the growth and development
of our business and do not anticipate paying any cash dividends
in the foreseeable future.

(b)  The effective date of our registration statement on
Form S-1 (No. 333-78545) relating to our initial public
 offering was July 20, 1999. A total of 13,697,233 shares of
 the Companys common stock in the aggregate were sold at a
price of $28.00 per share to (i) an underwriting syndicate
led by Credit Suisse First Boston, Hambrecht & Quest, and
BancBoston Robertson Stephens, Inc. and (ii) Arkaro
Holding B.V. The offering commenced on July 21, 1999,
and closed on July 26, 1999. The initial public offering
resulted in gross proceeds of approximately $383.5 million,
of which $20.6 million was applied toward the underwriting
discount. Expenses related to the offering totaled approximately
$2.5 million. Net proceeds to the Company were
$360.4 million. From the time of receipt through
December 31, 1999, the net proceeds were all applied to
temporary investments in corporate commercial paper and notes,
U.S. government and agency notes, and money market funds.

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Item 6. Selected Financial Data

In the table below, we provide you with selected historical
financial data. We have prepared this information using our
audited financial statements for the period from March 17,
1998 (inception) to December 31, 1998 and the year
ended December 31, 1999. When you read this selected
historical financial data, it is important that you read the
historical financial statements and related notes as well as the
section titled Managements Discussion and Analysis of
 Financial Condition and Operating Results included
elsewhere in this Form 10-K. Historical results are not
necessarily indicative of future results (amounts in thousands,
except per share data).

SELECTED HISTORICAL FINANCIAL DATA

|                                                       |                                             |                          |         |                |        |   |       |        |       | 
|------------------------------------------------------ | ------------------------------------------- | ------------------------ | ------- | -------------- | ------ | - | ----- | ------ | ----- | 
|                                                       |                                             |                          |         | Period from   
|                                                       |                                             |                          |         | March 17, 1998
|                                                       |                                             | The Year Ended           |         | (inception) to
|                                                       |                                             | December 31,             |         | December 31,  
|                                                       |                                             | 1999                     |         | 1998          
|                                                       |                                             |                          |         |               
|Statement of Operations Data:                          |                                             |                          |         |                |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|Net revenues                                           |                                             | $                        | 21,899  |                |        | $ | 1,162 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenues                                       |                                             |                          | 9,211   |                |        |   | 215   |       
|                                                       |                                             |                          |         |                |        |   |       |       
|Gross profit                                           |                                             |                          | 12,688  |                |        |   | 947   |       
|                                                      
|                                                      
|                                                      
|                                                      
|Operating expenses:                                    |                                             |                          |         |                |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing                         |                          |         | 23,998         |        |   |       | 79     |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product development                         |                          |         | 9,417          |        |   |       | 395    |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative                  |                          |         | 9,307          |        |   |       | 142    |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Amortization of deferred compensation       |                          |         | 22,288         |        |   |       | 550    |      
|                                                       |                                             |                          |         |                |        |   |       |       
|                                                       |                                             | Total operating expenses |         |                | 65,010 |   |       |        | 1,166 | 
|                                                       |                                             |                          |         |                |        |   |       |       
|Loss from operations                                   |                                             |                          | (52,322 | )              |        |   | (219  | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income (expense), net                         |                                             |                          | 10,852  |                |        |   | (4    | )     
|                                                       |                                             |                          |         |                |        |   |       |       
|Loss before minority interest and income taxes         |                                             |                          | (41,470 | )              |        |   | (223  | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Provision (benefit) for income taxes                   |                                             |                          | (93     | )              |        |   | 134   |       
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in loss of unconsolidated subsidiary |                                             |                          | (1,105  | )              |        |   |      |       
|                                                       |                                             |                          |         |                |        |   |       |       
|Net loss                                               |                                             | $                        | (42,482 | )              |        | $ | (357  | )     
|                                                       |                                             |                          |         |                |        |   |       |       
|Net loss per share(1):                                 |                                             |                          |         |                |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic and diluted                           |                          | $       | (0.78          | )      |   | $     | (0.01  | )    
|                                                       |                                             |                          |         |                |        |   |       |       
|                                                       | Weighted average shares  basic and diluted |                          |         | 54,194         |        |   |       | 26,183 |      
|                                                       |                                             |                          |         |                |        |   |       |       

|                                                   |  |              |         |      |  |   |     | 
|-------------------------------------------------- |  | ------------ | ------- | ---- |  | - | --- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 1999         |         | 1998
|                                                   |  |              |         |     
|Balance Sheet Data:                                |  |              |         |      |  |   |     | 
|                                                  
|                                                  
|                                                  
|                                                  
|Cash, cash equivalents, and short-term investments |  | $            | 427,981 |      |  | $ | 39  | 
|                                                  
|                                                  
|                                                  
|                                                  
|Working capital                                    |  |              | 388,192 |      |  |   | 133 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Total assets                                       |  |              | 471,882 |      |  |   | 463 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Total stockholders equity                         |  |              | 417,550 |      |  |   | 195 | 




|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 1 of Notes to Financial Statements for a description of
	the computation of the net loss per share and the number of
	shares used in the per share calculation.

36



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##### Table of Contents






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

Forward Looking Statements

This document contains forward-looking statements within the
meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate
 to future events or MP3.coms future financial performance.
 In some cases, you can identify forward-looking statements by
terminology such as may, will,
should, could, expect,
plan, anticipate, believe,
estimate, predict, potential
or continue, the negative of such terms or other
comparable terminology. These statements are only predictions and
 reflect our expectations and assumptions as of the date of this
annual report based on currently available operating, financial
and competitive information.

Although MP3.com believes that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future events or results, levels of activity, performance or
achievements, all of which may differ materially. We urge you to
carefully review and consider the various disclosures made by us
which attempt to describe some of the factors which affect our
business and may cause such material differences, including
without limitation the disclosures made under the caption
Risk Factors, in the audited financial statements and
 related footnotes included herein and elsewhere in this annual
report on Form 10-K.

Neither MP3.com nor any other person assumes responsibility for
the accuracy and completeness of the forward-looking statements
made in this document. Also, MP3.com is under no obligation, and
we assume no obligation, to update any of the forward-looking
statements for any reason, even if new information becomes
available or other events occur in the future.

Overview

MP3.com, Inc. (MP3.com) is pioneering a revolutionary
 approach to the promotion and distribution of music.
MP3.coms web site has grown into a premier online music
destination for Internet users around the world. MP3.com uses the
 Internet and file formats that make music files smaller to
enable a growing number of artists to distribute and promote
their music worldwide and to enable consumers to conveniently
access this expanding music catalog. As of March 1, 2000,
MP3.coms web site contained over 346,000 songs from over
56,000 artists, which we believe represents one of the largest
collections of digital music available on the Internet. Consumers
 can search for, listen to and download music free of charge.

In addition to the wide variety of music available on our web
site, consumers have a substantial amount of music already in
their personal music collections that they want to access, manage
 and listen to in a variety of ways. Just as consumers use an
Internet service provider as the central mechanism through which
they interact with the Internet, individuals are increasingly
looking for one central resource, or a Music Service
Provider (or MSP), that allows them to access,
manage and listen to all of their music. In January 2000, MP3.com
 launched the foundation of our Music Service Provider
initiative, our upgraded My.MP3.com service. The
My.MP3.com service allows users to place their CDs and favorite
mp3 files online, organize their music and receive personalized
music services. In order to maintain MP3.coms position as
the premiere Music Service Provider, MP3.com intends to work
through strategic partnerships with leading web sites,
application developers, device manufacturers, wireless carriers
and connectivity providers to enable our users to access their
music anytime, anywhere, on any web-enabled device or
application.

MP3.com generates revenue from online advertising, offline
advertising and electronic commerce. For the year ended
December 31, 1999, 93.5% of MP3.coms revenues was from
 the sale of advertising space. MP3.com sells CDs online, both
fully-packaged albums created by artists sold through our Digital
 Automatic Music system, which we call DAM CDs, and
albums we compile featuring the work of multiple artists, which
we call compilation CDs. MP3.com also receives
revenue from advertisers for their sponsorship of CD samplers,
which are distributed free of charge to consumers and contain
collections of music. Although the My.MP3.com service is
currently free to our users, MP3.com may eventually charge
customers a subscription or access fee to such service.

MP3.com was incorporated in March 1998. During 1998, its
operations consisted largely of developing the infrastructure
necessary to download music on the Internet. Since the beginning
of 1999, its growth has been

37



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##### Table of Contents





The Year Ended December 31, 1999 Compared to the
Period from March 17, 1998 (inception) to
December 31, 1998:

Results of Operations

The following table sets forth certain financial data for the
periods indicated as a percentage of total net revenues:

|                                                       |                                                             |                          |        |                |        |    |       |      |       |   
|------------------------------------------------------ | ----------------------------------------------------------- | ------------------------ | ------ | -------------- | ------ | -- | ----- | ---- | ----- | --
|                                                       |                                                             |                          |        | Period from   
|                                                       |                                                             |                          |        | March 17,     
|                                                       |                                                             |                          |        | 1998          
|                                                       |                                                             | Year Ended               |        | (inception) to
|                                                       |                                                             | December 31,             |        | December 31,  
|                                                       |                                                             | 1999                     |        | 1998          
|                                                       |                                                             |                          |        |               
|Net revenues:                                          |                                                             |                          |        |                |        |    |       |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Online advertising                                          |                          |        | 53.0           | %      |    |       | 91.2 | %    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Offline advertising                                         |                          |        | 40.5           |        |    |       | 0.0  |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Electronic commerce                                         |                          |        | 6.5            |        |    |       | 8.8  |      
|                                                       |                                                             |                          |        |                |        |    |       |     
|                                                       |                                                             | Total net revenues       |        |                | 100.0  |    |       |      | 100.0 |   
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenues                                       |                                                             |                          | 42.1   |                |        |    | 18.5  |     
|                                                       |                                                             |                          |        |                |        |    |       |     
|Gross profit                                           |                                                             |                          | 57.9   |                |        |    | 81.5  |     
|                                                      
|                                                      
|                                                      
|                                                      
|Operating expenses:                                    |                                                             |                          |        |                |        |    |       |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing                                         |                          |        | 109.6          |        |    |       | 6.8  |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product development                                         |                          |        | 43.0           |        |    |       | 34.0 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative                                  |                          |        | 42.5           |        |    |       | 12.3 |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Amortization of deferred and other stock based compensation |                          |        | 101.8          |        |    |       | 47.3 |      
|                                                       |                                                             |                          |        |                |        |    |       |     
|                                                       |                                                             | Total operating expenses |        |                | 296.9  |    |       |      | 100.4 |   
|                                                       |                                                             |                          |        |                |        |    |       |     
|Loss from operations                                   |                                                             |                          | (239.0 | )              |        |    | (18.9 | )   
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income (expense), net                         |                                                             |                          | 49.6   |                |        |    | (0.3  | )   
|                                                       |                                                             |                          |        |                |        |    |       |     
|Loss before minority interest and income taxes         |                                                             |                          | (189.4 | )              |        |    | (19.2 | )   
|                                                      
|                                                      
|                                                      
|                                                      
|Provision (benefit) for income taxes                   |                                                             |                          | (0.4   | )              |        |    | 11.6  |     
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in loss of unconsolidated subsidiary |                                                             |                          | (5.0   | )              |        |    |      |     
|                                                       |                                                             |                          |        |                |        |    |       |     
|                                                       |                                                             | Net loss                 |        |                | (194.0 | )% |       |      | (30.8 | )%
|                                                       |                                                             |                          |        |                |        |    |       |     

Net Revenues

For the year ended December 31, 1999, net revenues were
$21,899,000, derived from online advertisements on our web site,
offline advertisements through various promotions and events that
 were not hosted on our web site and the online sale of CDs and
music-related merchandise. This compares to $1,162,000 during the
 period from March 17, 1998 (inception) to
December 31, 1998. The increase in net revenues during the
year ended December 31, 1999 over the period from
March 17, 1998 (inception) to December 31, 1998 was
mostly attributable to a significant increase in online
advertisements, the introduction of various offline
advertisements and events and a significant increase in CD sales
on our web site.

Revenue from online advertising. For the year ended
December 31, 1999, revenues from online advertising were
$11,616,000 or 53.0% of net revenues compared to $1,061,000 or
91.2% of net revenues for the period from March 17, 1998
(inception) to December 31, 1998. Online advertising
revenues primarily consist of banner, button, portal and
sponsorship advertisements on MP3.coms web site in addition
 to advertisements placed in e-mail and greeting card campaigns.
The duration of MP3.coms online advertising commitments
range from one month to approximately three years. Banner,
button and portal advertisements

38



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##### Table of Contents





Revenue from offline advertising. For the year ended
December 31, 1999, revenues from offline advertising were
$8,877,000 or 40.5% of net revenues compared to zero for the
period from March 17, 1998 (inception) to December 31,
1998. During the year ended December 31, 1999, offline
advertising revenues primarily consisted of advertising
sponsorships of CD sampler products, the 28-college Music and
Technology Tour (the M&T Tour), contests and
special events. CD Samplers are multi-media CDs containing
advertising, free software, videos and games as well as
collections of music from artists that have posted music on the
MP3.com web site. These CDs are sponsored by several different
advertisers and distributed free of charge to users of
MP3.coms web site who register to receive the CD. The
M&T Tour united two internationally known artists with a
variety of MP3.com artists to perform at 28 college campuses
across the nation. MP3.com recognized revenue from this event in
the form of tour sponsorships and ticket sales. MP3.com also held
 contests during the year that were sponsored by various
advertisers and provided prizes to the winners of each contest.
Special events consist of functions such as the MP3 Summit which
is a two-day event consisting of presentations, panel discussions
 and sponsors showcasing a variety of technology products and
services at the forefront of digital music. Revenues from this
event were recognized in the form of event sponsorships and
attendee registration fees. The increase in revenue from offline
advertising is due to the introduction of all offline products
and events during the year ended December 31, 1999. Since
MP3.com is considering discontinuing the M&T Tour, we do not
anticipate any significant revenues from this product during
2000.

Revenue from online sales of CDs and other music-related
merchandise. For the year ended December 31, 1999,
revenues from online sales of CDs and other music-related
merchandise was $1,406,000 or 6.5% of net revenues compared to
$101,000 or 8.8% of net revenues for the period from
March 17, 1998 (inception) to December 31, 1998. Online
 e-commerce sales consist of DAM and compilation CDs and, to a
lesser extent, other music-related merchandise. Since these
products were released during September 1998, there was minimal
revenue from online sales of CDs and music-related merchandise
during the period from March 17, 1998 (inception) to
December 31, 1998. The increase in revenues from online
sales of CDs and other music-related merchandise during the year
ended December 31, 1999 as compared to the period from
March 17, 1998 (inception) to December 31, 1999 was
primarily due to an increase in the sales volume of DAM CDs
(approximately 139,000 units) resulting from increased musical
content available on MP3.coms web site as a result of
increased brand awareness, an increase in the average selling
price of CDs and, to a lesser extent, the introduction of other
music-related merchandise such as clothing and books. In the
future, if the number of visitors to MP3.coms web site
continues to grow, and the musical content available continues to
 grow and improve, revenue from the online sale of CDs could
constitute an increasing portion of total net revenues.

Revenue Concentration; Revenues from Groupe Arnault. We
expect that most of our revenues will continue to be derived from
 third party advertising agreements like those we have with
Groupe Arnault, Visitalk, Freeinternet.com, Buy.com and Voquette.
 In July 1999, MP3.com entered into an agreement with Groupe
Arnault, which committed to purchase an aggregate of
$150.0 million in advertising, promotion and marketing
services from MP3.com over a three-year period beginning October
1999, including $5.0 million in 1999, $40.0 million in
2000, $70.0 million in 2001 and $35.0 million in the
first half of 2002. Under this agreement, MP3.com received
pre-payments of $45.0 million in July 1999 representing
advertising, promo-

39



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##### Table of Contents





Cost of Revenues

Cost of revenues for the year ended December 31, 1999 were
$9,211,000 or 42.1% of net revenues compared to $215,000 or 18.5%
 of net revenues during the period from March 17, 1998
(inception) to December 31, 1998, resulting in gross margins
 of 57.9% and 81.5%, respectively. The increase in cost of
revenues and resulting decrease in gross margin, as a percentage
of net revenue, was primarily due to increases in fulfillment
costs associated with increased CD volume, bandwidth
requirements, royalties to artists, and costs associated with
newly introduced products such as CD sampler production costs and
 costs incurred in conjunction with the M&T Tour and MP3
Summit. CD and other music related merchandise sales typically
have unfavorable gross margins which offset the higher gross
margins from online and offline advertising products. Since the
M&T Tour was a development stage product, direct costs
associated with it were substantially in excess of the revenues
earned. Since MP3.com is considering discontinuing the M&T
Tour, we do not anticipate any significant revenues from this
product during 2000. MP3.com anticipates that future gross
margins will fluctuate depending on changes in its revenue mix
and the timing of expenditures in web site and fulfillment
operations.

Sales and Marketing

During the year ended December 31, 1999, sales and marketing
 expense was $23,998,000 or 109.6% of net revenues compared to
$79,000 or 6.8% of net revenues during the period from
March 17, 1998 (inception) to December 31, 1999.
The increase in sales and marketing expense, both in absolute
dollar amounts and as a percentage of net revenue, was primarily
due to new marketing programs, substantial increases in sales and
 marketing payroll and related expenses, non-cash charges related
 to certain employee costs, marketing and promotion costs
associated with the Alanis Morissette and Tori Amos
5 1/2 Weeks Summer 1999 tour sponsorship,
marketing and promotion costs associated with the M&T Tour,
amortization of prepaid marketing expenses in connection with our
 arrangements with internationally known artists, and costs
associated with the growth of our business. MP3.com anticipates
that overall sales and marketing expense will increase
significantly in the foreseeable future; however, sales and
marketing expense as a percentage of net revenues may fluctuate
depending on the timing of new marketing programs and the
addition of sales and marketing personnel.

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

Product Development

During the year ended December 31, 1999, product development
 expense was $9,417,000 or 43.0% of net revenues compared to
$395,000 or 34.0% of net revenues during the period from
March 17, 1998 (inception) to December 31, 1998.
The increase in the level of product development expense, both in
 absolute dollar amounts and as a percentage of net revenue, was
primarily due to increased payroll and related expenses
associated with increased headcount, non-cash charges related to
certain employee costs, expensed computer supplies, increased
computer equipment depreciation, and costs associated with the
growth of MP3.coms business. MP3.com anticipates that
overall product development expenses will increase in the
foreseeable future; however, product development expenses as a
percentage of net revenues may fluctuate depending on the level
of future net revenues and the timing of investments in product
development and hiring.

40



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##### Table of Contents



General and Administrative

General and administrative expense was $9,307,000 or 42.5% of net
 revenues during the year ended December 31, 1999 compared
to $142,000 or 12.3% of net revenues during the period from
March 17, 1998 (inception) to December 31, 1998.
The increase in general and administrative expense, both in
absolute dollar amounts and as a percentage of net revenue, was
primarily a result of increased finance and administrative
payroll and related expenses, increased legal and accounting
expenses, increased facility related cost, the one-time non-cash
charge associated with the relocation to MP3.coms new
facility, and costs associated with the growth of its business.
MP3.com anticipates that overall general and administrative
expense will increase in the foreseeable future; however, general
 and administrative expense as a percentage of net revenues may
fluctuate depending on the level of future net revenues and the
timing of additional investments in general and administrative
infrastructure.

Amortization of Deferred Compensation and Other Stock Based
Compensation

During the year ended December 31, 1999, MP3.com recorded
aggregate deferred compensation of $37,999,000, net, for the
grant of stock options which were granted at exercise prices less
 than the fair value on the grant date. Deferred compensation is
being amortized over the vesting period of the granted stock
options, which is generally four years. Of total deferred
compensation, $20,029,000 was amortized to expense during the
year ended December 31, 1999 compared to $550,000 during the
 period from March 17, 1998 (inception) to
December 31, 1998. Additionally, MP3.com recorded $2,259,000
 of other stock based compensation expense during the year ended
December 31, 1999, primarily related to stock bonus awards
and other stock based compensation. The increase in deferred
compensation and other stock based compensation expense is
primarily related to the increase in the granting of stock
options to newly hired executive management and employees, the
issuance of stock bonus awards and other director compensation.

Interest Income (Expense), Net

Interest income (net of interest expense) during the year ended
December 31, 1999 was $10,852,000 compared to interest
expense of $4,000 during the period from March 17, 1998
(inception) to December 31, 1998. The interest income
during the year ended December 31, 1999 is directly related
to interest income earned on cash and cash equivalent balances
and short term investments associated with proceeds from the
issuance of common stock in connection with MP3.coms
initial public offering in July 1999, the exercise of stock
options and a warrant for the purchase of common stock, and the
issuance of Series A, B, and C convertible preferred stock
for an aggregate of approximately $426.3 million during
1999. Interest expense during the period from March 17, 1998
 (inception) to December 31, 1998 is due to interest
incurred on a capital lease.

Provision for Income Taxes

During the year ended December 31, 1999, MP3.com recorded an
 income tax benefit of $93,000. The income tax benefit is a
result of net operating losses incurred during 1999 for which a
portion will be carried back to 1998 to obtain an income tax
refund. The remaining portion of the 1999 net operating loss for
income tax purposes will be carried forward; however, for
financial statement purposes, it has been fully reserved. For the
 period from March 17, 1998 (inception) to
December 31, 1998, MP3.com recorded a provision for income
taxes of $134,000 as a result of the amortization of deferred
compensation, which is not deductible for income tax purposes.

Minority Interest in Loss of an Unconsolidated Subsidiary

Minority interest in the loss of a subsidiary during the year
ended December 31, 1999 was $1,105,000 compared to zero for
the period from March 17, 1998 (inception) to
December 31, 1998. The increase in minority interest in the
loss of an unconsolidated subsidiary is directly related to the
establishment of MP3Radio.com, a joint venture with Cox
Interactive Media, Inc., and reflects expenses incurred to grow
the MP3Radio.com business.

41



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##### Table of Contents



Liquidity and Capital Resources

Overview

To date, MP3.coms operations have been financed from
internally generated cash, proceeds from the sale of convertible
preferred stock, the proceeds from its initial public offering
and, to a lesser extent, the exercise of stock options and
equipment financing through a line of credit. As of
December 31, 1999, MP3.com had approximately
$413.2 million in cash and cash equivalents and short-term
investment grade marketable securities. Additionally, MP3.com has
 a line of credit of $4,766,000 to fund future capital equipment
purchases and working capital draws, with a sub-limit of
$1,500,000 for credit cards; and a $1,234,000 seventeen-month
fully amortizing term loan requiring monthly principal and
interest payments expiring in May 2001. Borrowings under the
amended line of credit accrue interest at the banks prime
rate plus 1% (9.25% as of December 31, 1999) and convert
into a term loan on November 30, 2000, which shall provide
for thirty equal principal payments plus interest as evidenced in
 a promissory note. MP3.com is required to comply with debt
covenants, the most restrictive of which is a minimum liquidity
ratio which requires MP3.com to maintain a cash, cash equivalents
 and accounts receivable balance of the greater of two times
current liabilities plus all bank debt or six months cash
burn measured on a two month rolling average basis. As of
December 31, 1999, we were in compliance with all debt
covenants.

Operating Activities

Net cash provided by operating activities during the year ended
December 31, 1999 was approximately $29.6 million,
consisting primarily of the following:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | net loss of approximately $42,482,000;                                                                 
|
| |  | amortization of deferred compensation and other stock based
	compensation of approximately $22,288,000;
|
| |  | amortization of stock based marketing costs of approximately
	$2,857,000;                              
|
| |  | certain employee costs of approximately $4,488,000;                                                    
|
| |  | non-cash charge associated with the relocation of our facilities
	of approximately $815,000;           
|
| |  | an increase in accounts and unbilled receivables of approximately
	 $7,792,000;                        
|
| |  | an increase in prepaid expenses and other assets of approximately
	 $5,353,000;                        
|
| |  | an increase in accounts payable and accrued expenses of
	approximately $10,296,000; and                
|
| |  | an increase in deferred revenue of approximately $42,405,000.                                          

Investing Activities

Net cash used in investing activities during the year ended
December 31, 1999 was approximately $263,932,000, consisting
 primarily of property and equipment expenditures of $15,921,000,
 net purchases of short-term investment grade marketable
securities of $233,335,000, and purchases of strategic equity
investments of approximately $11,983,000.

Financing Activities

Net cash provided by financing activities during the year ended
December 31, 1999 was approximately $427,499,000, consisting
 primarily of proceeds from the issuance of common stock in
connection with MP3.coms initial public offering during
July 1999, the exercise of stock options and the issuance of
Series A, B, and C convertible preferred stock.

42



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##### Table of Contents



MP3.com has no material financial commitments other than
obligations under its financing agreement with its Cox
Interactive Media joint venture MP3Radio.com, its financial
commitment to Trans Computing International Corporation
(TCI), d.b.a. seeUthere.com, credit facilities and
operating leases. MP3.com expects to substantially increase
expenditures for applications including:



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

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

Recent Events

On January 21, 2000, ten major recording companies filed a
copyright infringement lawsuit against MP3.com in the United
States District Court for the Southern District of New York. The
complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleges that offering the
new My.MP3.com service, which allows a user to listen, via the
Internet, to the tracks of certain commercial audio CDs of his or
 her choosing, constitutes unauthorized copying and willful
infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to
$150,000 per violation) and injunctive relief prohibiting MP3.com
 from operating its My.MP3.com service or any other service that
uses reproductions of plaintiffs copyrighted sound
recordings. In February 2000, MP3.com filed an answer to the
complaint denying each of the substantive allegations therein,
and the plaintiffs moved for summary judgement. In March 2000,
MP3.com filed materials in opposition to the plaintiffs
motion for summary judgement, which is scheduled to be heard by
the court on April 14, 2000.

On March 14, 2000, two large music publishing companies
filed a copyright infringement lawsuit against MP3.com in the
United States District Court for the Southern District of New
York. The complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the Copyright
Act, and that MP3.com, in connection with the streaming of audio
content to users of the My.MP3.com service, continues to make
unauthorized digital phonorecords in violation of the Copyright
Act. The complaint further alleges that MP3.coms actions
constitute unauthorized copying and willful infringement of
plaintiffs copyrights. Plaintiffs seek damages (including
statutory damages of up to $150,000 per violation) and injunctive
 relief prohibiting MP3.com from operating its My.MP3.com service
 or any other service that uses unauthorized reproductions of
plaintiffs copyrighted works.

MP3.com believes that it has meritorious defenses to the
plaintiffs claims and intends to vigorously defend such
claims. However, no assurances can be made that MP3.com will be
successful in these or any other lawsuits, and MP3.com may be
required to pay significant legal damages, fees and/or settlement
 amounts or be required to discontinue significant aspects of our
 business, which could have a material adverse affect on MP3.com
and its results of operation and financial position.

During the first three months of 2000, MP3.com made equity
investments in privately-held Internet and other technology-based
 companies, including PacketVideo, Visitalk.com, PortalPlayer,
Voquette and TCI, for an aggregate of approximately
$31.2 million in cash. PacketVideo provides mobile users
with access to streaming media versions of corporate
communications, musical and visual entertainment, and information
 currently

43



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Future Capital Requirements

MP3.com believes that its cash and cash equivalent balances,
short-term investments in marketable securities, funds available
under its existing line of credit reduced by its financing
commitment to the Cox Interactive Media joint venture will be
sufficient to satisfy its cash requirements for at least the next
 12 months. MP3.com intends to invest its cash in excess of
current operating requirements in short-term, interest-bearing,
investment-grade securities.

To the extent MP3.coms net revenues increase in the future,
 MP3.com anticipates significant increases in its working capital
 requirements to finance higher relative levels of associated
accounts receivable, unbilled receivables and other assets,
offset by increases in accounts payable and other liabilities.
However, MP3.com does not expect that the increases in accounts
payable and other liabilities will offset the increases in
accounts receivable, unbilled receivables and other assets.

MP3.com may need to raise additional capital if it expands more
rapidly than initially planned, to develop new or enhanced
products and/or services, to respond to competitive pressures or
to acquire complementary products, content, businesses or
technologies. If additional funds are raised through the sale of
equity or convertible debt securities, the percentage ownership
of MP3.coms stockholders will be reduced, its stockholders
may experience additional dilution and these securities may have
rights, preferences or privileges senior to those of its
stockholders. There can be no assurance that additional financing
 will be available at all or on terms favorable to MP3.com. If
adequate funds are not available or are not available on
acceptable terms, MP3.coms ability to fund its expansion,
take advantage of unanticipated opportunities, develop or enhance
 products or services or otherwise respond to competitive
pressures could be significantly limited. MP3.coms business
 may be harmed by these limitations.

Impact of Year 2000

During the year ended December 31, 1999, MP3.com discussed
the nature and progress of its plans to become year 2000
ready. In late 1999, MP3.com completed its remediation and
testing of systems. As a result of those planning and
implementation efforts, MP3.com experienced no significant
disruptions in mission critical information technology and
non-information technology systems and believes those systems
successfully responded to the year 2000 date change.
MP3.coms year 2000 assessment, remediation and testing
activities were conducted by internal personnel, for which
MP3.com did not track the employee time expended on these tasks.
Accordingly, MP3.com is unable to determine the cost of employee
time devoted to year 2000 matters. MP3.com estimates the
cost of its year 2000 readiness efforts, including any
necessary modifications, upgrading or replacement of computer
equipment or software, was less than $100,000. MP3.com is not
aware of any material problems resulting from year 2000
issues, either with its products, its internal systems, or the
products and services of third parties. MP3.com will continue to
monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure
 that any latent year 2000 matters that may arise are
addressed promptly.

44



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##### Table of Contents






Item 7A. Quantitative and Qualitative Disclosures
about Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve
 principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we
maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including U.S. government
 and agencies, corporate debt securities, commercial paper, and
money market funds. As of December 31, 1999, approximately
99% of our total portfolio matures in one year or less, with the
remainder maturing in less than two years. See Note 1 and 2
of Notes to Financial Statements.

Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would
not materially affect the fair value of interest sensitive
financial instruments at December 31, 1999.

The following table presents the fair value balances of our cash
equivalents and short-term investments that are subject to
interest rate risk by year of expected maturity and average
interest rates as of December 31, 1999 (dollars in
thousands):

|                                                     |                        |      |         |      |   |   |       |      |  
|---------------------------------------------------- | ---------------------- | ---- | ------- | ---- | - | - | ----- | ---- | -
|                                                     |                        | 2000 |         | 2001
|                                                     |                        |      |         |     
|Cash equivalents                                     |                        | $    | 193,192 |      |   | $ |      |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |      |         | 6.21 | % |   |       |      |  
|                                                    
|                                                    
|                                                    
|                                                    
|Short term investments, excluding equity investments |                        | $    | 215,086 |      |   | $ | 4,953 |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Average interest rates |      |         | 5.90 | % |   |       | 6.31 | %

As of December 31, 1999, we held one derivative financial
instrument, a warrant to purchase 1.5 million shares of
Cinram International, Inc. The deemed fair value of this warrant
was $2,611,000. See Note 2 of the financial statements for
an explanation of how this financial instrument was valued. In
addition, we had outstanding debt as of December 31, 1999 of
 approximately $1.2 million.

Foreign Currency Risk

Currently, all of MP3.com, Inc.s sales and expenses are
denominated in U.S. dollars and as a result the Company has
experienced no foreign exchange gains and losses.

45



---



##### Table of Contents






Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

CONTENTS

|                                                                                                                                              |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                              |  | Page
|                                                                                                                                              |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                                                             |  |      | 47 | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Financial Statements                                                                                                                          |  |      |    | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Balance Sheets as of December 31, 1999 and 1998                                                                                               |  |      | 48 | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Statements of Operations for the year ended December 31,
	1999 and the period from March 17, 1998 (inception) to
	December 31, 1998           |  |      | 49 | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Statements of Stockholders Equity for the year ended
	December 31, 1999 and the period from March 17, 1998
	(inception) to December 31, 1998 |  |      | 50 | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Statements of Cash Flows for the year ended December 31,
	1999 and the period from March 17, 1998 (inception) to
	December 31, 1998           |  |      | 51 | 
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|                                                                                                                                             
|Notes to Financial Statements                                                                                                                 |  |      | 52 | 

46



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders



We have audited the accompanying balance sheets of MP3.com, Inc.
as of December 31, 1999 and 1998, and the related statements
 of operations, stockholders equity and cash flows for the
year ended December 31, 1999 and for the period from
March 17, 1998 (inception) to December 31, 1998.
Our audit also included the financial statement schedule listed
in the index at Item 14(a). These financial statements are
the responsibility of MP3.coms management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of MP3.com, Inc. at December 31, 1999 and 1998, and the results
of its operations and its cash flows for the year ended
December 31, 1999 and for the period from March 17,
1998 (inception) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the
information set forth therein.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

San Diego, California







47



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##### Table of Contents



MP3.com, Inc.

BALANCE SHEETS

(In Thousands, Except Share Data)


ASSETS

|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |      |     | 
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | --- | ---- | --- | 
|                                                        |                                                                                                                                                                                                                              |                           
|                                                        |                                                                                                                                                                                                                              | December 31,              
|                                                        |                                                                                                                                                                                                                              |                           
|                                                        |                                                                                                                                                                                                                              | 1999                       |         | 1998   
|                                                        |                                                                                                                                                                                                                              |                            |         |        
|Current assets:                                         |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Cash and cash equivalents                                                                                                                                                                                                    |                            | $       | 193,192 |         |   | $   | 39   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Short-term investments in marketable securities                                                                                                                                                                              |                            |         | 234,789 |         |   |     |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts receivable, net of allowance for doubtful accounts of
	$600 and $57 in 1999 and 1998, respectively                                                                                                                  |                            |         | 6,871   |         |   |     | 293  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Unbilled receivables                                                                                                                                                                                                         |                            |         | 1,279   |         |   |     | 65   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Prepaid expenses                                                                                                                                                                                                             |                            |         | 2,878   |         |   |     |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other current assets                                                                                                                                                                                                         |                            |         | 3,456   |         |   |     |     |    
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                        |                                                                                                                                                                                                                              | Total current assets       |         |         | 442,465 |   |     |      | 397 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Property and equipment, net of accumulated depreciation |                                                                                                                                                                                                                              |                            | 13,849  |         |         |   | 52  |     
|                                                       
|                                                       
|                                                       
|                                                       
|Strategic investments                                   |                                                                                                                                                                                                                              |                            | 11,983  |         |         |   |    |     
|                                                       
|                                                       
|                                                       
|                                                       
|Prepaid marketing and promotions expense                |                                                                                                                                                                                                                              |                            | 2,162   |         |         |   |    |     
|                                                       
|                                                       
|                                                       
|                                                       
|Other non-current assets                                |                                                                                                                                                                                                                              |                            | 1,423   |         |         |   | 14  |     
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                        |                                                                                                                                                                                                                              | Total assets               |         | $       | 471,882 |   |     | $    | 463 | 
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|                                                       
|                                                       
|                                                       
|                                                       
|Current liabilities:                                    |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accounts payable                                                                                                                                                                                                             |                            | $       | 5,659   |         |   | $   | 37   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Line of credit                                                                                                                                                                                                               |                            |         | 1,234   |         |   |     | 14   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accrued expenses                                                                                                                                                                                                             |                            |         | 5,019   |         |   |     | 104  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred revenues                                                                                                                                                                                                            |                            |         | 42,361  |         |   |     | 15   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred income taxes                                                                                                                                                                                                        |                            |         |        |         |   |     | 94   |    
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                        |                                                                                                                                                                                                                              | Total current liabilities  |         |         | 54,273  |   |     |      | 264 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Other liabilities                                       |                                                                                                                                                                                                                              |                            | 59      |         |         |   | 4   |     
|Commitments and contingencies (Notes 5 and 8)           |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                       
|                                                       
|                                                       
|                                                       
|Stockholders equity:                                   |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock, par value $0.001 per share; 15,000,000 and none
	authorized at December 31, 1999 and 1998, respectively, none
	 issued and outstanding at December 31, 1999 and 1998                                        |                            |         |        |         |   |     |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common stock, par value $0.001 per share; authorized 300,000,000
	and 50,000,000 at December 31, 1999 and 1998, respectively;
	68,620,913 and 29,249,999 issued and outstanding at
	December 31, 1999 and 1998, respectively |                            |         | 69      |         |   |     | 29   |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Additional paid in capital                                                                                                                                                                                                   |                            |         | 477,272 |         |   |     | 701  |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Notes receivable from stockholder                                                                                                                                                                                            |                            |         | (258    | )       |   |     |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Deferred compensation                                                                                                                                                                                                        |                            |         | (18,148 | )       |   |     | (178 | )  
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated other comprehensive income                                                                                                                                                                                       |                            |         | 1,454   |         |   |     |     |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Accumulated deficit                                                                                                                                                                                                          |                            |         | (42,839 | )       |   |     | (357 | )  
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|                                                        |                                                                                                                                                                                                                              | Total stockholders equity |         |         | 417,550 |   |     |      | 195 | 
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     
|Total liabilities and stockholders equity              |                                                                                                                                                                                                                              | $                          | 471,882 |         |         | $ | 463 |     
|                                                        |                                                                                                                                                                                                                              |                            |         |         |         |   |     |     

See accompanying notes.

48



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MP3.com, Inc.

STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)


|                                                       |                                                             |                          |         |                |        |   |       |        |       | 
|------------------------------------------------------ | ----------------------------------------------------------- | ------------------------ | ------- | -------------- | ------ | - | ----- | ------ | ----- | 
|                                                       |                                                             |                          |         | Period from   
|                                                       |                                                             |                          |         | March 17,     
|                                                       |                                                             |                          |         | 1998          
|                                                       |                                                             | Year Ended               |         | (inception) to
|                                                       |                                                             | December 31,             |         | December 31,  
|                                                       |                                                             | 1999                     |         | 1998          
|                                                       |                                                             |                          |         |               
|Net revenues                                           |                                                             | $                        | 21,899  |                |        | $ | 1,162 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenues                                       |                                                             |                          | 9,211   |                |        |   | 215   |       
|                                                       |                                                             |                          |         |                |        |   |       |       
|Gross profit                                           |                                                             |                          | 12,688  |                |        |   | 947   |       
|                                                      
|                                                      
|                                                      
|                                                      
|Operating expenses:                                    |                                                             |                          |         |                |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing                                         |                          |         | 23,998         |        |   |       | 79     |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product development                                         |                          |         | 9,417          |        |   |       | 395    |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative                                  |                          |         | 9,307          |        |   |       | 142    |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Amortization of deferred and other stock based compensation |                          |         | 22,288         |        |   |       | 550    |      
|                                                       |                                                             |                          |         |                |        |   |       |       
|                                                       |                                                             | Total operating expenses |         |                | 65,010 |   |       |        | 1,166 | 
|                                                       |                                                             |                          |         |                |        |   |       |       
|Loss from operations                                   |                                                             |                          | (52,322 | )              |        |   | (219  | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income (expense), net                         |                                                             |                          | 10,852  |                |        |   | (4    | )     
|                                                       |                                                             |                          |         |                |        |   |       |       
|Loss before minority interest and income taxes         |                                                             |                          | (41,470 | )              |        |   | (223  | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Provision (benefit) for income taxes                   |                                                             |                          | (93     | )              |        |   | 134   |       
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in loss of unconsolidated subsidiary |                                                             |                          | (1,105  | )              |        |   |      |       
|                                                       |                                                             |                          |         |                |        |   |       |       
|Net loss                                               |                                                             | $                        | (42,482 | )              |        | $ | (357  | )     
|                                                       |                                                             |                          |         |                |        |   |       |       
|Net loss per share:                                    |                                                             |                          |         |                |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic and diluted                                           |                          | $       | (0.78          | )      |   | $     | (0.01  | )    
|                                                       |                                                             |                          |         |                |        |   |       |       
|                                                       | Weighted average shares  basic and diluted                 |                          |         | 54,194         |        |   |       | 26,183 |      
|                                                       |                                                             |                          |         |                |        |   |       |       

See accompanying notes.

49



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MP3.com, Inc.

STATEMENTS OF STOCKHOLDERS EQUITY

(In Thousands)


|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |   | 
|----------------------------------------------------------------------------------------------------------- | --------------------------------------------- | --------- | ------- | --------- |  | ------ | --- | ------ |  | ---------- | ------ | ----------- |  | - | -- | - |  | - | ------- | - |  | - | ---- | - | 
|                                                                                                            |                                               |           |         |           |  |        |     |        |  | Notes      |        |            
|                                                                                                            |                                               |           |         |           |  |        |     |        |  | Additional |        | Receivable 
|                                                                                                            |                                               | Preferred |         | Preferred |  | Common |     | Common |  | Paid In    |        | from       
|                                                                                                            |                                               | Shares    |         | Stock     |  | Shares |     | Stock  |  | Capital    |        | Stockholder
|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |            
|Issuance of common stock in exchange for certain assets and
	liabilities                                    |                                               |           |        |           |  | $      |    |        |  |            | 26,179 |             |  | $ | 26 |   |  | $ | (26     | ) |  | $ |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of stock options                                                                                   |                                               |           |        |           |  |        |    |        |  |            | 3,071  |             |  |   | 3  |   |  |   | (1      | ) |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation related to the grant of stock options for
	common stock                               |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   | 728     |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   |        |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss and comprehensive loss                                                                             |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   |        |   |  |   |     |  
|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |  
|Balance at December 31, 1998                                                                                |                                               |           |        |           |  |        |    |        |  |            | 29,250 |             |  |   | 29 |   |  |   | 701     |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of stock options in exchange for notes receivable
	from stockholders                               |                                               |           |        |           |  |        |    |        |  |            | 3,169  |             |  |   | 3  |   |  |   | 335     |   |  |   | (338 | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Cancellation of notes receivable from stockholder                                                           |                                               |           |        |           |  |        |    |        |  |            | (724   | )           |  |   | (1 | ) |  |   | (77     | ) |  |   | 78   |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Repayment of note receivable from stockholder                                                               |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   |        |   |  |   | 2    |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of Series A, B and C convertible preferred
	stock, net of issuance costs of $93                    |                                               |           | 12,872  |           |  |        | 13  |        |  |            |       |             |  |   |   |   |  |   | 60,977  |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of common stock in conjunction with the initial public
	offering, net of issuance costs of $23,124 |                                               |           |        |           |  |        |    |        |  |            | 13,697 |             |  |   | 14 |   |  |   | 360,398 |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Conversion of convertible preferred stock to common stock                                                   |                                               |           | (12,872 | )         |  |        | (13 | )      |  |            | 19,308 |             |  |   | 19 |   |  |   | (6      | ) |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of warrants in connection with promotion agreement                                                 |                                               |           |        |           |  |        |    |        |  |            | 659    |             |  |   | 1  |   |  |   | 2,410   |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of common stock in connection with certain promotion
	agreements                                   |                                               |           |        |           |  |        |    |        |  |            | 112    |             |  |   | 1  |   |  |   | 2,610   |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of stock bonus
	awards                                                                             |                                               |           |        |           |  |        |    |        |  |            | 62     |             |  |   |   |   |  |   | 1,890   |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Contribution of common stock to MP3.com Foundation                                                          |                                               |           |        |           |  |        |    |        |  |            | 100    |             |  |   |   |   |  |   | 767     |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of common stock options                                                                            |                                               |           |        |           |  |        |    |        |  |            | 2,988  |             |  |   | 3  |   |  |   | 5,021   |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Acceleration of stock option
	vesting                                                                       |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   | 4,247   |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation, net of forfeitures                                                                   |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   | 37,999  |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   |        |   |  |   |     |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Comprehensive loss:                                                                                         |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Net loss                                      |           |         |          |  |        |     |       |  |            |        |            |  |   |    |  |  |   |         |  |  |   |      |  | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Net, unrealized gain on marketable securities |           |         |          |  |        |     |       |  |            |        |            |  |   |    |  |  |   |         |  |  |   |      |  | 
|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |  
|Total comprehensive loss                                                                                    |                                               |           |        |           |  |        |    |        |  |            |       |             |  |   |   |   |  |   |        |   |  |   |     |  
|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |  
|Balance at December 31, 1999                                                                                |                                               |           |        |           |  | $      |    |        |  |            | 68,621 |             |  | $ | 69 |   |  | $ | 477,272 |   |  | $ | (258 | )
|                                                                                                            |                                               |           |         |           |  |        |     |        |  |            |        |             |  |   |    |   |  |   |         |   |  |   |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                            |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |         |  
|----------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------ | ------- | ------------- |  | ----------- | ----- | ------------- |  | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                            |                                               |              |         | Accumulated   |  |             |       |              
|                                                                                                            |                                               |              |         | Other         |  |             |       | Total        
|                                                                                                            |                                               | Deferred     |         | Comprehensive |  | Accumulated |       | Stockholders
|                                                                                                            |                                               | Compensation |         | Income        |  | Deficit     |       | Equity       
|                                                                                                            |                                               |              |         |               |  |             |       |              
|Issuance of common stock in exchange for certain assets and
	liabilities                                    |                                               | $            |        |               |  | $           |      |               |  | $ |        |         |   | $ |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of stock options                                                                                   |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 2       |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation related to the grant of stock options for
	common stock                               |                                               |              | (728    | )             |  |             |      |               |  |   |        |         |   |   |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |                                               |              | 550     |               |  |             |      |               |  |   |        |         |   |   | 550     |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss and comprehensive loss                                                                             |                                               |              |        |               |  |             |      |               |  |   | (357    | )       |   |   | (357    | )      
|                                                                                                            |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |        
|Balance at December 31, 1998                                                                                |                                               |              | (178    | )             |  |             |      |               |  |   | (357    | )       |   |   | 195     |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of stock options in exchange for notes receivable
	from stockholders                               |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Cancellation of notes receivable from stockholder                                                           |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Repayment of note receivable from stockholder                                                               |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 2       |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of Series A, B and C convertible preferred
	stock, net of issuance costs of $93                    |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 60,990  |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of common stock in conjunction with the initial public
	offering, net of issuance costs of $23,124 |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 360,412 |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Conversion of convertible preferred stock to common stock                                                   |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of warrants in connection with promotion agreement                                                 |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 2,411   |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of common stock in connection with certain promotion
	agreements                                   |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 2,611   |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of stock bonus
	awards                                                                             |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 1,890   |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Contribution of common stock to MP3.com Foundation                                                          |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 767     |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Exercise of common stock options                                                                            |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 5,024   |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Acceleration of stock option
	vesting                                                                       |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | 4,247   |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation, net of forfeitures                                                                   |                                               |              | (37,999 | )             |  |             |      |               |  |   |        |         |   |   |        |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |                                               |              | 20,029  |               |  |             |      |               |  |   |        |         |   |   | 20,029  |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Comprehensive loss:                                                                                         |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |        
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Net loss                                      |              |         |              |  |             |       |              |  |   |         | (42,482 | ) |   |         | (42,482 | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Net, unrealized gain on marketable securities |              |         |              |  |             |       | 1,454         |  |   |         |        |   |   |         | 1,454   |  
|                                                                                                            |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |        
|Total comprehensive loss                                                                                    |                                               |              |        |               |  |             |      |               |  |   |        |         |   |   | (41,028 | )      
|                                                                                                            |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |        
|Balance at December 31, 1999                                                                                |                                               | $            | (18,148 | )             |  | $           | 1,454 |               |  | $ | (42,839 | )       |   | $ | 417,550 |        
|                                                                                                            |                                               |              |         |               |  |             |       |               |  |   |         |         |   |   |         |        

See accompanying notes.

50



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##### Table of Contents



MP3.com, Inc.

STATEMENTS OF CASH FLOWS

(In Thousands)


|                                                                                                    |                                                             |                                           |          |                |        |   |      |     |      |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | -------- | -------------- | ------ | - | ---- | --- | ---- | -
|                                                                                                    |                                                             |                                           |          | Period from   
|                                                                                                    |                                                             |                                           |          | March 17, 1998
|                                                                                                    |                                                             | Year Ended                                |          | (inception) to
|                                                                                                    |                                                             | December 31,                              |          | December 31,  
|                                                                                                    |                                                             | 1999                                      |          | 1998          
|                                                                                                    |                                                             |                                           |          |               
|Operating activities:                                                                               |                                                             |                                           |          |                |        |   |      |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net loss                                                                                            |                                                             | $                                         | (42,482  | )              |        | $ | (357 | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Adjustments to reconcile net loss to cash provided by operating
	activities:                        |                                                             |                                           |          |                |        |   |      |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Depreciation                                                |                                           |          | 1,395          |        |   |      | 10  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Deferred income taxes                                       |                                           |          | (98            | )      |   |      | 98  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Employee costs                                              |                                           |          | 4,488          |        |   |      |    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Amortization of stock based marketing                       |                                           |          | 2,857          |        |   |      |    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Amortization of deferred and other stock based compensation |                                           |          | 22,288         |        |   |      | 550 |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Contribution to the MP3.com Foundation                      |                                           |          | 767            |        |   |      |    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Non-cash lease abandonment expense                          |                                           |          | 815            |        |   |      |    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Changes in operating assets and liabilities:                |                                           |          |                |        |   |      |     |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Accounts receivable                       |          |                | (6,578 | ) |      |     | (224 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Unbilled receivables                      |          |                | (1,214 | ) |      |     | (65  | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Prepaid expenses and other current assets |          |                | (5,353 | ) |      |     |     |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Accounts payable                          |          |                | 5,622  |   |      |     | 25   |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Accrued expenses                          |          |                | 4,674  |   |      |     | 105  |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                             | Deferred revenues                         |          |                | 42,405 |   |      |     | 15   |  
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    
|Cash provided by operating activities                                                               |                                                             |                                           | 29,586   |                |        |   | 157  |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Investing activities:                                                                               |                                                             |                                           |          |                |        |   |      |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Purchase of property and equipment                                                                  |                                                             |                                           | (15,921  | )              |        |   | (29  | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Maturities of marketable securities                                                                 |                                                             |                                           | 45,000   |                |        |   |     |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Purchases of marketable securities                                                                  |                                                             |                                           | (278,335 | )              |        |   |     |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Purchases of strategic investments                                                                  |                                                             |                                           | (11,983  | )              |        |   |     |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other assets                                                                                        |                                                             |                                           | (2,693   | )              |        |   | (14  | )  
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    
|Cash used in investing activities                                                                   |                                                             |                                           | (263,932 | )              |        |   | (43  | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Financing activities:                                                                               |                                                             |                                           |          |                |        |   |      |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proceeds from notes receivable                                                                      |                                                             |                                           | 2        |                |        |   |     |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Payments of notes payable                                                                           |                                                             |                                           |         |                |        |   | (73  | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Payments under capital lease obligations                                                            |                                                             |                                           | (14      | )              |        |   | (19  | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proceeds from line of credit                                                                        |                                                             |                                           | 1,234    |                |        |   |     |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proceeds from the issuance of convertible preferred stock, common
	 stock and common stock warrants |                                                             |                                           | 426,277  |                |        |   | 2    |    
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    
|Cash provided by (used in) financing activities                                                     |                                                             |                                           | 427,499  |                |        |   | (90  | )  
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    
|Increase in cash and cash equivalents                                                               |                                                             |                                           | 193,153  |                |        |   | 24   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cash and cash equivalents at beginning of period                                                    |                                                             |                                           | 39       |                |        |   | 15   |    
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    
|Cash and cash equivalents at end of period                                                          |                                                             | $                                         | 193,192  |                |        | $ | 39   |    
|                                                                                                    |                                                             |                                           |          |                |        |   |      |    

See accompanying notes.

51



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##### Table of Contents



MP3.com, Inc.

NOTES TO FINANCIAL STATEMENTS

1. The Company and Summary of Significant Accounting
Policies

The Company

MP3.com, Inc. (MP3.com) is developing a revolutionary
 approach to the promotion and distribution of music. MP3.com
uses the Internet and file formats that make music files smaller
to enable a growing number of artists to distribute and promote
their music worldwide and to enable consumers to conveniently
access this expanding music catalog. Consumers can search for,
listen to and download music free of charge. MP3.com also is
developing its role as a central resource, Music Service Provider
 (MSP), to allow users to access, manage and listen
to their personal music collections anytime, anywhere, on any
web-enabled device or application. MP3.com was incorporated in
the state of Delaware on March 17, 1998 and commenced
operations on that date.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the financial
statements and accompanying footnotes. Actual results could
differ from those estimates.

Concentration of Credit Risks

Financial instruments that potentially subject MP3.com to
significant concentration of credit risk consist primarily of
cash, cash equivalents, short-term and strategic investments, and
 accounts receivable. Substantially all of MP3.coms cash,
cash equivalents, and short-term investments are managed by three
 financial institutions. Accounts receivable are typically
unsecured and are derived from revenues earned from customers
primarily located in the United States and France. MP3.com
maintains reserves for potential credit losses; historically,
such losses have been within managements expectations.

One customer accounted for 21.3% of net revenues for the year
ended December 31, 1999. Three customers accounted for
19.0%, 12.2%, and 10.3%, respectively, of net revenues for the
period from March 17, 1998 (inception) to
December 31, 1998. Additionally, MP3.com obtains a
significant percentage of its revenues through various
advertising products from Internet and high technology companies.

Cash and Cash Equivalents, Short and Long-Term Investments

MP3.com invests its excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate
issuers. All highly liquid instruments with an original maturity
of three months or less are considered cash equivalents, and
 those with original maturities greater than three months are
considered short-term investments.

MP3.coms short-term investments in marketable securities
are classified as available-for-sale and are reported at fair
value, with unrealized gains and losses, recorded in
stockholders equity as comprehensive income. Realized gains
 or losses and permanent declines in value, if any, on
available-for-sale securities are reported in other income or
expense as incurred. As of December 31, 1999, MP3.com
recorded net unrealized gains, net of income taxes, of
approximately $1.5 million.

MP3.com also invests in equity instruments of privately-held
Internet and other technology companies for strategic business
purposes. These investments are included in strategic investments
 and are accounted for under the cost method when ownership is
less than 20%. For these investments, MP3.coms policy is to
 regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying
values. MP3.com identifies and records impairment losses on
long-lived assets when events and circumstances indicate that
such assets might be impaired. To date, no such impairment has
been recorded.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

Fair Value of Financial Instruments

MP3.coms financial instruments include cash and cash
equivalents, short-term investments, accounts receivable,
unbilled receivables, accounts payable, deferred revenues,
accrued expenses and line of credit. Cash equivalents and
short-term investments are stated at fair value, based on quoted
market prices. The estimated value of all other financial
instruments at December 31, 1999 and 1998 was not materially
 different from the values presented in the respective balance
sheets.

Computer Software for Internal Use

MP3.com does not sell or license the rights to future use of its
software; accordingly, software development costs, consisting of
internally developed software and web site development costs, are
 accounted for in accordance with Statement of Position
(SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
In accordance with SOP 98-1, internal and external costs
incurred to develop internal-use computer software during the
application development stage are capitalized. Application
development stage costs generally include software configuration,
 coding, installation and testing. Costs of significant upgrades
and enhancements that result in additional functionality are also
 capitalized. Costs incurred for maintenance and minor upgrades
and enhancements are expensed as incurred. Capitalized
internal-use software development costs are included in property
and equipment and are amortized on a straight-line basis over the
 useful lives of the related software application of up to three
years. The estimated useful lives are based on planned or
expected significant modification or replacement of software
applications, in response to the rapid rate of change in the
Internet industry and technology in general. MP3.com capitalized
$410,000 and $0 of software development costs for the year ended
December 31, 1999 and for the period from March 17,
1998 (inception) to December 31, 1998, respectively.
Depreciation associated with the capitalized software development
 costs totaled $48,000 and $0 for the year ended
December 31, 1999 and for the period from March 17,
1998 (inception) to December 31, 1998, respectively.

Depreciation and Amortization

Property and equipment is stated at historical cost and
depreciated using the straight-line method over the estimated
useful lives of 2 to 5 years. Leasehold improvements are
amortized over the shorter of their estimated useful lives,
generally five years, or the lease term.

Impairment of Long-Lived Assets

MP3.com evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of.
SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of these assets exceeds
the future undiscounted cash flows attributable to these assets.
MP3.com assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances
have made recovery of the assets carrying value unlikely.
Should an impairment exist, the impairment loss would be measured
 based on the excess of the carrying value of the asset over the
assets fair value or discounted estimates of future cash
flows. MP3.com has identified no such impairment losses as of
December 31, 1999. All of MP3.coms long-lived assets are
located in the United States.

Revenue Recognition

MP3.coms revenues are derived from online advertising,
offline advertising and electronic commerce. Online advertising
revenues primarily consist of banner, button, portal and
sponsorship advertisements on our web site in addition to
advertisements placed in e-mail and greeting card campaigns.
Banner, button, portal, e-mail and greeting card advertisements
are impression based, requiring the advertisement to be displayed
 or delivered a minimum number of times over the contract period.
 Sponsorship advertising contracts involve static

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

advertisements, whereby the advertisement is continually
displayed on a specified area of the MP3.com web site during the
contract period. Impression based contract revenues are
recognized as the impression is displayed on the MP3.com web site
 or delivered via e-mail or greeting card to the intended
addressee. In these circumstances, MP3.com recognizes revenues as
 impressions are delivered. To the extent minimum guaranteed
impressions are not met, MP3.com defers recognition of the
corresponding revenues until the remaining guaranteed impressions
 are delivered. Sponsorship advertisement contract revenues are
recognized evenly over the period in which the advertisement is
displayed.

Offline advertising revenues primarily consist of advertising
sponsorships of CD sampler products, the Music and Technology
Tour (M&T Tour), contests and special events. CD
sampler revenue is recognized upon the shipment of each CD to the
 registered recipient. M&T Tour revenue consisted of ticket
sales, recognized the day of the concert, and tour sponsorships,
recognized evenly over the dates of the tour. Contest revenue is
recognized upon determination of the contest winner and revenue
associated with special events is recognized on the date the
event occurs.

Electronic commerce revenues primarily consist of online sales of
 DAM CDs and other music-related merchandise. Revenue derived
from the sale of DAM CDs and music-related merchandise is
recognized upon shipment at the gross sales price. The portion of
 the sales price payable to artists as royalties is expensed to
cost of revenues and accrued at the time revenue is recorded.

Deferred revenue represents payments or billings in excess of
revenue recognized. Unbilled receivables represent revenues
recognized in excess of billings. At December 31, 1999,
deferred revenue primarily consisted of approximately
$40.3 million related to a prepayment from Groupe Arnault
for advertising, promotion and marketing services to be provided
by MP3.com through December 31, 2000.

Product Development Costs

Product development costs include expenses incurred by MP3.com to
 manage, monitor, maintain and operate MP3.coms web site.
Product development costs are expensed as incurred.

Advertising Costs

MP3.com recognizes advertising expenses in accordance with
Statement of Position (SOP) 93-7 Reporting on
Advertising Costs. As such, MP3.com expenses the costs of
producing advertisements at the time the respective advertisement
 is first used. MP3.com does not incur any direct-response
advertising costs. Advertising expense totaled approximately
$2 million and $10,000 for the year ended December 31,
1999 and for the period from March 17, 1998
(inception) to December 31, 1998, respectively.

Stock-Based Marketing Promotions

MP3.com, on occasion, enters into agreements with internationally
 known artists whereby the artists typically provide content for
the MP3.com web site and agree to various promotional activities
in exchange for equity instruments of MP3.com. These transactions
 are recorded as prepaid stock-based marketing promotions and are
 charged to expense as sales and marketing costs over the term of
 the agreement. The recorded value of the prepaid marketing
promotion is based on the fair market value of the equity
instruments on the issuance date. Depending upon the nature of
the promotional activity, a portion of the prepaid marketing
promotion costs could be amortized to cost of revenues. During
the year ended December 31, 1999, we recorded approximately
$4.8 million as prepaid stock-based marketing promotions, of
 which approximately $2.9 million was charged to expense as
sales and marketing costs. At December 31, 1999,
approximately $1.9 million of prepaid stock-based marketing
promotions were classified as other current assets and other
non-current assets.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation

MP3.com accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and complies with the disclosure
provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is
recognized over the vesting period based on the excess, if any,
on the date of grant of the deemed fair value of MP3.coms
stock over the employees exercise price. When the exercise
price of the employee stock option is less than the fair value
price of the underlying stock on the grant date, deferred stock
compensation is recognized and amortized to expense in accordance
 with FASB Interpretation No. 28 over the vesting period of
the individual options, generally four years. Deferred
compensation for options granted to non-employees has been
determined in accordance with SFAS No. 123 and EITF 98-16,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Accordingly, deferred compensation is
determined using the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is
more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying
options vest. MP3.com has recorded deferred compensation cost
corresponding to the grants of stock options to employees and
consultants of $20 million and $550,000 during the year
ended December 31, 1999 and for the period from March 17,
1998 (inception) to December 31, 1998, respectively.

Net Loss Per Share

MP3.com computes net loss per share following SFAS No. 128,
Earnings Per Share and SEC Staff Accounting Bulletin
No. 98. Under the provisions of SFAS No. 128, basic net
 loss per share is computed by dividing the net
loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of unvested restricted
 common shares and incremental common shares issuable upon the
exercise of stock options, are included in diluted net
loss per share to the extent these shares are dilutive.
Common equivalent shares are not included in the computation of
dilutive net loss per share for the year ended December 31,
1999 and for the period from March 17, 1998
(inception) to December 31, 1998, because the effect
would be anti-dilutive.

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

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

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

|                                              |                                                                           |              |         |                |   |   |        |        |  
|--------------------------------------------- | ------------------------------------------------------------------------- | ------------ | ------- | -------------- | - | - | ------ | ------ | -
|                                              |                                                                           |              |         | Period from   
|                                              |                                                                           |              |         | March 17,     
|                                              |                                                                           |              |         | 1998          
|                                              |                                                                           | Year Ended   |         | (inception) to
|                                              |                                                                           | December 31, |         | December 31,  
|                                              |                                                                           | 1999         |         | 1998          
|                                              |                                                                           |              |         |               
|Numerator:                                    |                                                                           |              |         |                |   |   |        |       
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |                                                                           | $            | (42,482 | )              |   | $ | (357   | )     
|                                              |                                                                           |              |         |                |   |   |        |       
|Denominator:                                  |                                                                           |              |         |                |   |   |        |       
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average shares outstanding                                       |              |         | 59,306         |   |   |        | 26,200 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average unvested common shares subject to repurchase
	agreements |              |         | (5,112         | ) |   |        | (17    | )
|                                              |                                                                           |              |         |                |   |   |        |       
|Denominator for basic and diluted calculation |                                                                           |              | 54,194  |                |   |   | 26,183 |       
|                                              |                                                                           |              |         |                |   |   |        |       
|Net loss per share:                           |                                                                           |              |         |                |   |   |        |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic and diluted                                                         |              | $       | (0.78          | ) |   | $      | (0.01  | )
|                                              |                                                                           |              |         |                |   |   |        |       

Dilutive common stock equivalents include common stock options
and preferred stock as if converted and restricted stock that has
 not yet fully vested. Potentially dilutive securities totaled
5,050,035 and 17,146 for the year ended December 31, 1999
and for the period from March 17, 1998 (inception) to
December 31, 1998, respectively, and were excluded from the
diluted earnings per share because of their anti-dilutive effect.

Comprehensive Income

MP3.com adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as
defined, includes all changes in equity (net assets) during a
period from non-owner sources. Net loss and other comprehensive
loss, including foreign currency translation adjustments, and
unrealized gains and losses on investments shall be reported, net
 of their related tax effect, to arrive at comprehensive loss.
There were no differences between MP3.coms net loss and its
 total comprehensive loss for the year ended December 31,
1999, except for net unrealized gains on investments of
approximately $1.5 million.

Segment Information

MP3.com adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires public companies to
report financial and descriptive information about their
reportable operating segments. MP3.com identifies its operating
segments based on how management internally evaluates separate
financial information, business activities and management
responsibility. MP3.com believes it operates in a single business
 segment and adoption of this standard did not have a material
impact on MP3.coms financial statements. Through
December 31, 1999, there have been no foreign operations.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

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

|            |  |              |        |                |  |   |       | 
|----------- |  | ------------ | ------ | -------------- |  | - | ----- | 
|            |  |              |        | Period from   
|            |  |              |        | March 17, 1998
|            |  | Year Ended   |        | (inception) to
|            |  | December 31, |        | December 31,  
|            |  | 1999         |        | 1998          
|            |  |              |        |               
|Advertising |  | $            | 20,493 |                |  | $ | 1,061 | 
|           
|           
|           
|           
|Merchandise |  |              | 1,406  |                |  |   | 101   | 
|            |  |              |        |                |  |   |       | 
|            |  | $            | 21,899 |                |  | $ | 1,162 | 
|            |  |              |        |                |  |   |       | 

Statements of Cash Flows

The table below discloses supplemental cash flow information and
non-cash activities (in thousands):

|                                                                                         |  |              |        |                |  |   |     | 
|---------------------------------------------------------------------------------------- |  | ------------ | ------ | -------------- |  | - | --- | 
|                                                                                         |  |              |        | Period from   
|                                                                                         |  |              |        | March 17, 1998
|                                                                                         |  | Year Ended   |        | (inception) to
|                                                                                         |  | December 31, |        | December 31,  
|                                                                                         |  | 1999         |        | 1998          
|                                                                                         |  |              |        |               
|Supplemental disclosures of cash flow information:                                       |  |              |        |                |  |   |     | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Interest paid                                                                            |  | $            | 119    |                |  | $ | 3   | 
|                                                                                         |  |              |        |                |  |   |     | 
|Taxes paid                                                                               |  | $            | 171    |                |  | $ | 1   | 
|                                                                                         |  |              |        |                |  |   |     | 
|Supplemental schedule of non-cash activities:                                            |  |              |        |                |  |   |     | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Property and equipment acquired under capital leases                                     |  | $            |       |                |  | $ | 33  | 
|                                                                                         |  |              |        |                |  |   |     | 
|Common stock issued for notes receivable                                                 |  | $            | 338    |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Cancellation of stockholder notes receivable                                             |  | $            | 78     |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Unrealized gain on marketable securities, net                                            |  | $            | 1,454  |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Issuance of common stock and common stock warrants for marketing
	promotions and bonuses |  | $            | 6,692  |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Compensation associated with acceleration of stock option
	vesting                       |  | $            | 4,247  |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Contribution of common shares to the MP3.com Foundation                                  |  | $            | 767    |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Other stock based compensation                                                           |  | $            | 369    |                |  | $ |    | 
|                                                                                         |  |              |        |                |  |   |     | 
|Deferred compensation, net of forfeitures                                                |  | $            | 37,999 |                |  | $ | 728 | 
|                                                                                         |  |              |        |                |  |   |     | 

Recent Accounting Pronouncements

In June 1999, the FASB issued Statement No. 137,
Accounting for Derivative Instruments and Hedging
Activities  Deferral of Effective Date of FASB
Statement No. 133 (SFAS No. 137). The
 Statement defers for one year the effective date of FASB
Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS
No. 133). SFAS No. 137 now will apply to all
fiscal quarters of all fiscal years beginning after June 15,
 2000. In June 1998, the FASB issued Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years
beginning after June 15, 1999. SFAS No. 133 will
require MP3.com to recognize all derivatives on the balance sheet
 at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivatives change in fair value will be
immediately recognized in earnings. MP3.com has not yet

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

determined if it will early adopt and what the effect of SFAS
No. 133 will be on the earnings and financial position of
MP3.com.

2. Investments

Marketable Securities

At December 31, 1999, short-term investments in marketable
securities were classified as available-for-sale as follows (in
thousands):

|                                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|--------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | -- |  |  | - | ------- | 
|                                  |  | Gross     |         | Gross      |  | Gross      |       |           
|                                  |  | Amortized |         | Unrealized |  | Unrealized |       | Estimated 
|                                  |  | Costs     |         | Gains      |  | Losses     |       | Fair Value
|                                  |  |           |         |            |  |            |       |           
|Short-term Investments            |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|                                 
|                                 
|                                 
|                                 
|Corporate debt securities         |  | $         | 151,384 |            |  | $          | 22    |            |  | $ | 23 |  |  | $ | 151,383 | 
|                                 
|                                 
|                                 
|                                 
|U.S. government and agencies      |  |           | 68,655  |            |  |            | 1     |            |  |   |   |  |  |   | 68,656  | 
|                                 
|                                 
|                                 
|                                 
|Publicly traded equity securities |  |           | 13,347  |            |  |            | 1,403 |            |  |   |   |  |  |   | 14,750  | 
|                                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|                                  |  | $         | 233,386 |            |  | $          | 1,426 |            |  | $ | 23 |  |  | $ | 234,789 | 
|                                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|                                 
|Cash Equivalents                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|                                 
|                                 
|                                 
|                                 
|Commercial paper                  |  | $         | 102,962 |            |  | $          | 37    |            |  |   |   |  |  | $ | 102,999 | 
|                                 
|                                 
|                                 
|                                 
|Money market fund                 |  |           | 17,307  |            |  |            |      |            |  |   |   |  |  |   | 17,307  | 
|                                 
|                                 
|                                 
|                                 
|U.S. government and agencies      |  |           | 72,959  |            |  |            | 14    |            |  |   |   |  |  |   | 72,973  | 
|                                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 
|                                  |  | $         | 193,228 |            |  | $          | 51    |            |  | $ |   |  |  | $ | 193,279 | 
|                                  |  |           |         |            |  |            |       |            |  |   |    |  |  |   |         | 

As of December 31, 1999, the balance sheet caption
cash and cash equivalents included a book cash
deficit of approximately $87.

At December 31, 1999, MP3.com held a warrant in a publicly
traded company. The warrant was classified as available-for-sale
marketable securities and reported at fair value with unrealized
gains recorded in stockholders equity as comprehensive
income. The fair value of the warrant was determined using the
Black-Scholes model based on the following assumptions:

|                             |  |              |      |  
|---------------------------- |  | ------------ | ---- | -
|                             |  | December 31,
|                             |  | 1999        
|                             |  |             
|Risk free interest rate      |  |              | 5.5  | %
|                            
|                            
|                            
|                            
|Expected life (years)        |  |              | 4.0  |  
|                            
|                            
|                            
|                            
|Dividend yield               |  |              | 1.0  | %
|                            
|                            
|                            
|                            
|Expected volatility          |  |              | 46.7 | %
|                            
|                            
|                            
|                            
|Public price of common stock |  | $            | 8.09 |  

The contractual maturities of debt securities classified as
available-for-sale as of December 31, 1999 are as follows
(in thousands):

|                                     |  |            |         | 
|------------------------------------ |  | ---------- | ------- | 
|                                     |  | Estimated 
|                                     |  | Fair Value
|                                     |  |           
|Due within one year                  |  | $          | 408,365 | 
|                                    
|                                    
|                                    
|                                    
|Due after one year through two years |  |            | 4,953   | 
|                                     |  |            |         | 
|                                     |  | $          | 413,318 | 
|                                     |  |            |         | 

Realized gains and losses for the year ended December 31,
1999 were immaterial to MP3.coms financial results. MP3.com
 did not hold any investments at December 31, 1998.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

Investments in Joint Venture, Internet, and Other
Technology-Based Companies

Investments in joint ventures and other companies that MP3.com
does not control but has the ability to exercise significant
influence over operating and financial policies are accounted for
 by the equity method. Equity method investments are stated at
their cost of acquisition adjusted for MP3.coms equity in
undistributed net income (loss) since the date of acquisition.
Investments that the MP3.com does not control and does not have
the ability to exercise significant influence over operating and
financial policies are accounted for by the cost method. Cost
method investments are carried at their cost of acquisition. Cost
 method investments in publicly traded companies are subsequently
 marked to market with unrealized gains and losses, net of income
 taxes, reported as a component of accumulated other
comprehensive income (loss) within stockholders equity
 in the balance sheet.

During the year ended December 31, 1999, MP3.com closed a
number of investments focused on establishing strategic business
relationships. These investments provided MP3.com with equity
ownership interests in Internet and other technology-based
companies in exchange for $25.3 million in cash.
Additionally, MP3.com recognized revenues of $495,000 from these
strategic business relationships during the year ended
December 31, 1999. The investment in Cinram is accounted for
 under the provisions of SFAS No. 115. The investments in
Freeinternet.com and Colleges.com are accounted for under the
cost method. The investment in MP3Radio.com is accounted for
under the equity method of accounting.

Subsequent to an investment purchase, MP3.com evaluates whether
later events and circumstances indicate that the carrying amount
of such investment is impaired. If a decline in fair value of the
 investment below its cost basis is judged to be other than
temporary, the investment is considered to be impaired, and the
carrying amount of the investment is written down to fair value
as a new cost basis and recognized in equity losses of
unconsolidated affiliated companies. The new cost basis is not
changed for subsequent recovery, if any, in the fair value of the
 investment. MP3.coms future results of operations for a
quarter or a year could be materially affected by a non-cash
write down in the carrying amount of these investments to
recognize an impairment loss due to an other than temporary
decline in the value of these investments. To date, no such
impairment has occurred.

3. Property and Equipment

Property and equipment consist of the following (in thousands):

|                               |  |              |        |      |  |   |     |  
|------------------------------ |  | ------------ | ------ | ---- |  | - | --- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 1999         |        | 1998
|                               |  |              |        |     
|Compact disc database          |  | $            | 385    |      |  | $ |    |  
|                              
|                              
|                              
|                              
|Computer equipment             |  |              | 8,321  |      |  |   | 53  |  
|                              
|                              
|                              
|                              
|Software                       |  |              | 1,461  |      |  |   |    |  
|                              
|                              
|                              
|                              
|Office furniture and equipment |  |              | 3,711  |      |  |   | 9   |  
|                              
|                              
|                              
|                              
|Leasehold improvements         |  |              | 1,310  |      |  |   |    |  
|                               |  |              |        |      |  |   |     |  
|                               |  |              | 15,188 |      |  |   | 62  |  
|                              
|                              
|                              
|                              
|Accumulated depreciation       |  |              | (1,339 | )    |  |   | (10 | )
|                               |  |              |        |      |  |   |     |  
|                               |  | $            | 13,849 |      |  | $ | 52  |  
|                               |  |              |        |      |  |   |     |  

During the year ended December 31, 1999, MP3.com incurred a
lease abandonment charge of $815,000 when it moved to its new
facilities. This charge includes a write-off of certain furniture
 and leasehold improvements of $795,000, net of accumulated
depreciation of $66,000.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

4. Related Party Transactions

On January 25, 1999, MP3.com loaned to its President and
Chief Operating Officer $260,000 which was used to exercise an
option to purchase 2,437,500 shares of common stock that was
granted to him under the Companys 1998 Equity Incentive
Plan. The loan, as amended, is a full recourse note secured by
187,500 shares of MP3.coms common stock that bears interest
 at 4.64% and is due in January 2003. During the year ended
December 31, 1999, payments totaling approximately $2,000
were made to repay an amount equal to the par value of the shares
 purchased.

During the year ended December 31, 1999, the Chairman and
Chief Executive Officer of Gateway, Inc.
(Gateway) held a seat on the Board of Directors of
MP3.com. During this same period of time, MP3.com purchased
approximately $510,000 of computers and computer related
equipment from Gateway.

5. Lease Commitments

MP3.com leases its facilities and some of its furniture under
noncancellable operating leases, expiring at various dates
through March 2009.

Future minimum annual lease payments under noncancellable
operating leases at December 31, 1999 are as follows (in
thousands):

|                             |            |                  |        |       | 
|---------------------------- | ---------- | ---------------- | ------ | ----- | 
|                             |            | Operating Leases
|                             |            |                 
|Year ended December 31, 2000 |            | $                | 1,950  |      
|                            
|                            
|                            
|                            
|                             | 2001       |                  |        | 1,935 | 
|                            
|                            
|                            
|                            
|                             | 2002       |                  |        | 2,001 | 
|                            
|                            
|                            
|                            
|                             | 2003       |                  |        | 1,984 | 
|                            
|                            
|                            
|                            
|                             | 2004       |                  |        | 1,914 | 
|                            
|                            
|                            
|                            
|                             | Thereafter |                  |        | 4,554 | 
|                             |            |                  |        |      
|Minimum lease payments       |            | $                | 14,338 |      
|                             |            |                  |        |      

Rent expense totaled $896,000 and $10,000 for the year ended
December 31, 1999 and for the period from March 17,
1998 (inception) to December 31, 1998, respectively.

6. Stockholders Equity

Common Stock

In July 1999, the Board of Directors authorized a 3-for-2 stock
split of all outstanding common stock. All share and per share
information has been retroactively restated to reflect the stock
splits.

On July 21, 1999, MP3.com effected its initial public
offering of common stock. A total of 13,697,233 shares were sold
at a price of $28.00 per share. The offering resulted in net
proceeds to MP3.com of approximately $360.4 million, net of
an underwriting fee of $20.6 million and offering expenses
of $2.5 million. Upon the closing of MP3.coms initial
public offering, all 12,871,681 shares of the Series A, B,
and C Convertible Preferred Stock converted into 19,307,516
shares of common stock.

Stock Options

During 1998, MP3.com adopted the Founders Stock Option Plan (the
Founders Plan) and the 1998 Equity Incentive Plan
(the Incentive Plan) for the granting of both
incentive and non-qualified stock options. Under the plans,
incentive stock options may be granted to employees, directors,
and officers of MP3.com and non-qualified stock options may be
granted to consultants, employees, directors, and officers of
MP3.com. Options granted under the plans are for periods not to
exceed ten years, and must be issued at prices not less

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

than 100% and 50%, for incentive and nonqualified stock options,
respectively, of the fair value of the stock on the date of
grant, as determined by the Board of Directors. Options granted
to stockholders who own greater than 10% of the outstanding stock
 are for periods not to exceed five years and must be issued at
prices not less than 110% of the fair value of the stock on the
date of grant, as determined by the Board of Directors.

The Founders Plan reserved 3,071,250 shares of common stock for
grants to founders of MP3.com. During 1998, all of the shares
reserved in the Founders Plan were granted, and in December 1998
all of the shares were exercised at $0.001 per share. The
Founders shares were obtained by an early exercise and are
subject to be repurchased by MP3.com at the original exercise
price. As of December 31, 1999, there were 1,694,687 shares
vested and 1,376,564 shares could be repurchased by MP3.com.

The Incentive Plan reserved 12,750,000 shares, as amended, of
common stock for granting to employees and non-employees of
MP3.com. Grants under the Incentive Plan generally vest over four
 years with 25% of the shares vesting on the first anniversary of
 the grant and   1/36 of the remaining shares vesting in
equal installments monthly for the following 36 months.

The following table summarizes MP3.coms stock option
activity for both the Founders Plan and Incentive Plan:

|                                      |                              |               |           |             |   |                  |           |            |   |   |       |       | 
|------------------------------------- | ---------------------------- | ------------- | --------- | ----------- | - | ---------------- | --------- | ---------- | - | - | ----- | ----- | 
|                                      |                              |               |           |             |   | Weighted Average
|                                      |                              | Available For |           | Options     |   | Exercise Price  
|                                      |                              | Grant         |           | Outstanding |   | Per Share       
|                                      |                              |               |           |             |   |                 
|Balance at March 17, 1998 (inception) |                              |               |          |             |   |                  |          |            |   |   |      |      
|                                     
|                                     
|                                     
|                                     
|                                      | Shares reserved              |               |           | 9,821,250   |   |                  |           |           |   |   |       |      | 
|                                     
|                                     
|                                     
|                                     
|                                      | Shares granted               |               |           | (3,071,250  | ) |                  |           | 3,071,250  |   |   | $     | 0.001 | 
|                                     
|                                     
|                                     
|                                     
|                                      | Shares exercised             |               |           |            |   |                  |           | (3,071,250 | ) |   | $     | 0.001 | 
|                                      |                              |               |           |             |   |                  |           |            |   |   |       |      
|Balance as of December 31, 1998       |                              |               | 6,750,000 |             |   |                  |          |            |   |   |      |      
|                                     
|                                     
|                                     
|                                     
|                                      | Increase in shares available |               |           | 6,000,000   |   |                  |           |           |   |   |       |      | 
|                                     
|                                     
|                                     
|                                     
|                                      | Shares granted               |               |           | (13,106,260 | ) |                  |           | 13,106,260 |   |   | $     | 8.28  | 
|                                     
|                                     
|                                     
|                                     
|                                      | Shares exercised             |               |           |            |   |                  |           | (5,769,479 | ) |   | $     | 0.85  | 
|                                     
|                                     
|                                     
|                                     
|                                      | Shares forfeited             |               |           | 902,600     |   |                  |           | (902,600   | ) |   | $     | 3.66  | 
|                                      |                              |               |           |             |   |                  |           |            |   |   |       |      
|Balance as of December 31, 1999       |                              |               | 546,340   |             |   |                  | 6,434,181 |            |   | $ | 15.53 |      
|                                      |                              |               |           |             |   |                  |           |            |   |   |       |      

For the period from March 17, 1998 (inception) to
December 31, 1998, the weighted average exercise price and
weighted average grant date fair value for options to purchase
2,193,750 shares of common stock that were granted at exercise
prices less than deemed fair value were approximately $0.001 and
$0.33, respectively. The remaining options to purchase 877,500
shares of common stock were granted at exercise prices equal to
the fair value. For the year ended December 31, 1999, the
weighted average grant date fair value for options granted at
exercise prices less than fair value was approximately $4.93 and
2,641,260 options were granted at exercise prices equal to or in
excess of fair value.

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

The following table summarizes information about stock options
outstanding as of December 31, 1999:

|                |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted            |  |          |     |            
|                |  |                     |           | Average             |  | Weighted |     |             |  | Weighted
|                |  |                     |           | Remaining           |  | Average  |     |             |  | Average 
|                |  | Number              |           | Contractual         |  | Exercise |     | Number      |  | Exercise
|Exercise Prices |  | Outstanding         |           | Life                |  | Price    |     | Outstanding |  | Price   
|                |  |                     |           |                     |  |          |     |             |  |         
|$ 0.11  $14.00 |  |                     | 3,872,971 |                     |  |          | 9.3 |             |  | $        | 2.20  |  |  |  | 641,893 |  |  | $ | 0.84  | 
|$28.00  $40.19 |  |                     | 1,933,610 |                     |  |          | 9.8 |             |  | $        | 32.02 |  |  |  | 18,750  |  |  | $ | 35.99 | 
|$42.25  $55.63 |  |                     | 627,600   |                     |  |          | 9.8 |             |  | $        | 47.05 |  |  |  | 4,200   |  |  | $ | 43.62 | 
|                |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|                |  |                     | 6,434,181 |                     |  |          | 9.5 |             |  | $        | 15.53 |  |  |  | 214,843 |  |  | $ | 4.40  | 

Employee Stock Purchase Plan

In May 1999, MP3.coms Board of Directors adopted the
Employee Stock Purchase Plan (the Purchase Plan),
which provides for the issuance of a maximum of 300,000 shares of
 Common Stock. Eligible employees can have up to 15% of their
earnings withheld, up to certain maximums, to be used to purchase
 shares of MP3.coms Common Stock on every January 31
and July 31. The price of the Common Stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair
market value of the Common Stock on the commencement date of the
offering period or the specified purchase date. There were no
shares purchased under the Purchase Plan during the year ended
December 31, 1999.

Pro Forma Disclosures

Pro forma information regarding net loss is required by SFAS
No. 123 and has been determined as if MP3.com accounted for
its employee stock options and stock purchase plan under the fair
 value method of SFAS No. 123. The compensation cost
associated with MP3.coms stock-based compensation plans,
determined using the minimum value method prescribed by
SFAS 123, did not result in a material difference from the
reported net income for the period from March 17, 1998
(inception) to December 31, 1998.

MP3.com calculated the minimum fair value of each option grant on
 the date of grant using the Black-Scholes option pricing model
as prescribed by SFAS 123 using the following assumptions:

|                          |  |              |     |                |  |  |     |  
|------------------------- |  | ------------ | --- | -------------- |  |  | --- | -
|                          |  |              |     | Period from   
|                          |  |              |     | March 17,     
|                          |  |              |     | 1998          
|                          |  | Year Ended   |     | (inception) to
|                          |  | December 31, |     | December 31,  
|                          |  | 1999         |     | 1998          
|                          |  |              |     |               
|Risk-free interest rates  |  |              | 5.3 | %              |  |  | 5.5 | %
|                         
|                         
|                         
|                         
|Expected lives (in years) |  |              | 4.6 |                |  |  | 5.0 |  
|                         
|                         
|                         
|                         
|Dividend yield            |  |              | 0   | %              |  |  | 0   | %
|                         
|                         
|                         
|                         
|Expected volatility       |  |              | 107 | %              |  |  | 0   | %

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

The effect of compensation cost on net income and earnings per
share for the year ended December 31, 1999 is as follows (in
 thousands, except per share amounts):

|                                                               |  |              |         |  
|-------------------------------------------------------------- |  | ------------ | ------- | -
|                                                               |  | Year Ended  
|                                                               |  | December 31,
|                                                               |  | 1999        
|                                                               |  |             
|Net loss as reported                                           |  | $            | (42,482 | )
|                                                               |  |              |         |  
|Pro forma net loss under SFAS 123                              |  | $            | (47,341 | )
|                                                               |  |              |         |  
|Pro forma net loss per share, basic and diluted under SFAS 123 |  | $            | (0.87   | )
|                                                               |  |              |         |  
|Weighted average fair value of options granted                 |  | $            | 6.26    |  
|                                                               |  |              |         |  

Because grants of additional stock options are expected to occur
each year, the above pro forma disclosures are not representative
 of pro forma effects on reported financial results for future
years.

7. Income Taxes

MP3.com accounts for income taxes following the provisions of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, under which the
liability method is used to calculate deferred income taxes.
Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting
and income tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.

The provision (benefit) for income taxes is as follows (in
thousands):

|                           |         |                |     |                |     |   |     |    |    | 
|-------------------------- | ------- | -------------- | --- | -------------- | --- | - | --- | -- | -- | 
|                           |         |                |     | Period from   
|                           |         |                |     | March 17,     
|                           |         |                |     | 1998          
|                           |         | Year Ended     |     | (inception) to
|                           |         | December 31,   |     | December 31,  
|                           |         | 1999           |     | 1998          
|                           |         |                |     |               
|Current:                   |         |                |     |                |     |   |     |   
|                          
|                          
|                          
|                          
|                           | Federal |                | $   | (93            | )   |   | $   | 28 |   
|                          
|                          
|                          
|                          
|                           | State   |                |     |               |     |   |     | 7  |   
|                           |         |                |     |                |     |   |     |   
|                           |         | Total current  |     |                | (93 | ) |     |    | 35 | 
|                          
|                          
|                          
|                          
|Deferred:                  |         |                |     |                |     |   |     |   
|                          
|                          
|                          
|                          
|                           | Federal |                |     |               |     |   |     | 77 |   
|                          
|                          
|                          
|                          
|                           | State   |                |     |               |     |   |     | 22 |   
|                           |         |                |     |                |     |   |     |   
|                           |         | Total deferred |     |                |    |   |     |    | 99 | 
|                           |         |                |     |                |     |   |     |   
|Provision for income taxes |         | $              | (93 | )              |     | $ | 134 |   
|                           |         |                |     |                |     |   |     |   

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

Significant components of the net deferred tax assets are shown
below (in thousands). A valuation allowance of $6,078,000 has
been recognized at December 31, 1999 as realization of such
assets is uncertain.

|                                      |                             |                                         |        |       |       |   |     |     |     |  
|------------------------------------- | --------------------------- | --------------------------------------- | ------ | ----- | ----- | - | --- | --- | --- | -
|                                      |                             |                                        
|                                      |                             | December 31,                           
|                                      |                             |                                        
|                                      |                             | 1999                                    |        | 1998 
|                                      |                             |                                         |        |      
|Deferred tax assets:                  |                             |                                         |        |       |       |   |     |    
|                                     
|                                     
|                                     
|                                     
|                                      | Net operating loss          |                                         | $      | 5,723 |       |   | $   |    |    
|                                     
|                                     
|                                     
|                                     
|                                      | Accounts receivable reserve |                                         |        | 195   |       |   |     |    |    
|                                     
|                                     
|                                     
|                                     
|                                      | Accrued vacation            |                                         |        | 214   |       |   |     |    |    
|                                      |                             |                                         |        |       |       |   |     |    
|                                      |                             | Total deferred tax assets               |        |       | 6,132 |   |     |     |    |  
|                                     
|                                     
|                                     
|                                     
|Deferred tax liabilities:             |                             |                                         |        |       |       |   |     |    
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation                |                                         |        | (42   | )     |   |     |    |    
|                                     
|                                     
|                                     
|                                     
|                                      | Accrual to cash basis       |                                         |        |      |       |   |     | (97 | )  
|                                     
|                                     
|                                     
|                                     
|                                      | Other                       |                                         |        | (12   | )     |   |     | (2  | )  
|                                      |                             |                                         |        |       |       |   |     |    
|                                      |                             | Total deferred tax liabilities          |        |       | (54   | ) |     |     | (99 | )
|                                      |                             |                                         |        |       |       |   |     |    
|                                      |                             | Total deferred tax assets (liabilities) |        |       | 6,078 |   |     |     | (99 | )
|                                     
|                                     
|                                     
|                                     
|Valuation allowance                   |                             |                                         | (6,078 | )     |       |   |    |    
|                                      |                             |                                         |        |       |       |   |     |    
|Net deferred tax assets (liabilities) |                             | $                                       |       |       |       | $ | (99 | )  
|                                      |                             |                                         |        |       |       |   |     |    

A reconciliation of income taxes at the statutory federal income
tax rate to the provision for income taxes is as follows (in
thousands):

|                                                     |  |              |         |                |  |   |     |  
|---------------------------------------------------- |  | ------------ | ------- | -------------- |  | - | --- | -
|                                                     |  |              |         | Period from   
|                                                     |  |              |         | March 17,     
|                                                     |  |              |         | 1998          
|                                                     |  | Year Ended   |         | (inception) to
|                                                     |  | December 31, |         | December 31,  
|                                                     |  | 1999         |         | 1998          
|                                                     |  |              |         |               
|U.S. federal taxes at the statutory rate             |  | $            | (14,099 | )              |  | $ | (76 | )
|                                                    
|                                                    
|                                                    
|                                                    
|State taxes, net of federal benefit                  |  |              | 12      |                |  |   | 20  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Non-deductible amortization of deferred compensation |  |              | 7,578   |                |  |   | 187 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Non-deductible stock based compensation              |  |              | 1,780   |                |  |   |    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Valuation allowance                                  |  |              | 4,578   |                |  |   |    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Other non-deductible expenses                        |  |              | 58      |                |  |   | 3   |  
|                                                     |  |              |         |                |  |   |     |  
|                                                     |  | $            | (93     | )              |  | $ | 134 |  
|                                                     |  |              |         |                |  |   |     |  

As of December 31, 1999, MP3.com has federal net operating
loss carryforwards of approximately $13.1 million expiring
in 2019 and state net operating loss carryforwards of
approximately $13.4 million expiring in 2006.

8. Subsequent Events

Legal Proceedings

On January 21, 2000, ten major recording companies filed a
copyright infringement lawsuit against MP3.com in the United
States District Court for the Southern District of New York. The
complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the
Copyright Act. The complaint further alleges that offering the
new My.MP3.com service, which allows a user to listen, via the
Internet, to the tracks of certain commercial audio CDs of his or
 her choosing, constitutes unauthorized copying and willful
infringement of plaintiffs copyrighted sound recordings.
Plaintiffs seek damages (including statutory damages of up to
$150,000 per violation) and injunctive relief prohibiting MP3.com
 from operating its My.MP3.com service or

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MP3.com, Inc.


NOTES TO FINANCIAL STATEMENTS (Continued)

any other service that uses reproductions of plaintiffs
copyrighted sound recordings. In February 2000, MP3.com filed an
answer to the complaint denying each of the substantive
allegations therein, and the plaintiffs moved for summary
judgement. In March 2000, MP3.com filed materials in opposition
to the plaintiffs motion for summary judgement, which is
scheduled to be heard by the court on April 14, 2000.

On March 14, 2000, two large music publishing companies
filed a copyright infringement lawsuit against MP3.com in the
United States District Court for the Southern District of New
York. The complaint alleges that MP3.com, in connection with its
recently-introduced My.MP3.com service, made unauthorized copies
of approximately 45,000 audio CDs in violation of the Copyright
Act, and that MP3.com, in connection with the streaming of audio
content to users of the My.MP3.com service, continues to make
unauthorized digital phonorecords in violation of the Copyright
Act. The complaint further alleges that MP3.coms actions
constitute unauthorized copying and willful infringement of
plaintiffs copyrights. Plaintiffs seek damages (including
statutory damages of up to $150,000 per violation) and injunctive
 relief prohibiting MP3.com from operating its My.MP3.com service
 or any other service that uses unauthorized reproductions of
plaintiffs copyrighted works.

MP3.com believes that it has meritorious defenses to the
plaintiffs claims and intends to vigorously defend such
claims. However, no assurances can be made that MP3.com will be
successful in these or any other lawsuits, and MP3.com may be
required to pay significant legal damages, fees and/or settlement
 amounts or be required to discontinue significant aspects of our
 business, which could have a material adverse affect on MP3.com
and its results of operations and financial position.

Investments (unaudited)

During the first three months of 2000, MP3.com made investments
in the convertible preferred stock of privately held Internet and
 other technology-based companies, including PacketVideo,
Visitalk.com, PortalPlayer, Voquette and TransComputing
International Corporation (TCI), d.b.a.
seeUthere.com, for an aggregate of approximately
$31.2 million in cash. PacketVideo provides mobile users
with access to streaming media versions of corporate
communications, musical and visual entertainment, and information
 currently available through wired networks. Visitalk.com
connects people around the world by enabling unlimited free voice
 and video calls from any PC to any other PC worldwide.
PortalPlayers products support Internet-based delivery of
multimedia content including music and other audio content,
print, and ultimately video content to a variety of playback
devices including portable mp3 players, home and automotive
entertainment systems, and cellular phones. Voquette provides
software solutions that enable its users to collect, organize,
transfer and play any form of digital audio from the Internet,
including mp3 files and streaming audio programming. TCI provides
 end-to-end event planning services designed to help
corporations, organizations and individuals successfully
organize, promote and manage events through automated
invitations, RSVP management, event resources and online
ticketing. MP3.com shall, at the request of TCI, purchase up to
$12 million of Series C convertible preferred stock on
or before August 2000.

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Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

Not Applicable.




PART III




Item 10. Directors and Executive Officers of the
Registrant

The information required by this item is incorporated by
reference from the information under the caption Directors,
 Executive Officers and Key Employees contained in
Item 1 of Part I of this Form 10-K.




Item 11. Executive Compensation

The information required by this item is incorporated by
reference from the information under the caption Executive
Compensation in our proxy statement to be filed in
connection with the solicitation of proxies for our 2000 Annual
Meeting of Stockholders (the Proxy Statement).




Item 12. Security Ownership of Certain Beneficial
Owners and Management

The information required by this item is incorporated by
reference from the information under the caption Security
Ownership of Certain Beneficial Owners and Management
contained in the Proxy Statement.




Item 13. Certain Relationships and Related
Transactions

The information required by this item is incorporated by
reference from the information contained under the caption
Certain Transactions in the Proxy Statement.

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PART IV




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

(a)(1)  Financial Statements



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements required by this item are submitted in a
	 separate section with the index beginning on page 46 of
	this report.

(2)  Financial Statement Schedules



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following financial statement schedule of MP3.com is included
	 in Item  14(d):                                                                                                                                                         
|
| | Schedule II  Valuation and Qualifying Accounts                                                                                                                                                                                             
|
| | All other schedules for which provisions are made in the
	applicable accounting regulation of the Securities and Exchange
	Commission are not required under the related instructions or are
	 inapplicable and therefore have been omitted.

(3)  Exhibits



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | See Item 14 (c) below. Each management contract or
	compensatory plan or arrangement is identified separately in
	Item  14(c).

(b)     Reports on Form 8-K



| |                                                                               
| | ------------------------------------------------------------------------------
| | No reports on Form 8-K were filed during the quarter ended
	December 31, 1999.

(c)     Exhibits

|        |  |                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                      
|Number  |  | Description of Document                                                                                                              
|        |  |                                                                                                                                      
|3.1*    |  | Restated Certificate of Incorporation, as currently in effect.                                                                       
|3.2*    |  | Bylaws, as currently in effect.                                                                                                      
|4.1     |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                           
|4.2*    |  | Specimen Stock Certificate.                                                                                                          
|10.1*   |  | 1998 Equity Incentive Plan (the 1998 Plan).                                                                                        
|10.2*   |  | Form of Stock Option Agreement pursuant to the 1998 Plan.                                                                            
|10.3*   |  | 1999 Employee Stock Purchase Plan and related offering documents.                                                                    
|10.4*   |  | Employment Agreement between the Company and Michael L.
	Robertson dated May 13, 1999.                                               
|10.5*   |  | Letter Agreement regarding employment by and between the Company
	and Robin D. Richards dated January 6, 1999.                       
|10.6*   |  | Letter Agreement regarding employment between the Company and
	Paul L. H. Ouyang dated February 19, 1999.                            
|10.7*   |  | Letter Agreement regarding employment between the Company and
	Steven G. Sheiner, as amended, dated May 19, 1999.                    
|10.8*   |  | Second Amended and Restated Investor Rights Agreement among the
	Company and certain stockholders of the Company dated
	June 4, 1999.
|10.9*   |  | Founder Stock Purchase Agreement between the Company and
	Michael L. Robertson dated March 18, 1998.                                 
|10.10*  |  | Form of Indemnity Agreement between the Company and its directors
	 and officers.                                                    
|10.11*  |  | Form of Music Submission Agreement.                                                                                                  
|10.12*  |  | Consulting Agreement between the Company and Atlas/ Third Rail
	Management, Inc. dated April 19, 1999.                               
|10.13*  |  | Promissory Note from Robin D. Richards to the Company dated
	January 25, 1999.                                                       

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|        |  |                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                              
|Number  |  | Description of Document                                                                                                                                      
|        |  |                                                                                                                                                              
|10.14*  |  | Stock Pledge Agreement, as amended, from Robin D. Richards
	to the Company dated January 25, 1999.                                                           
|10.15*  |  | Memorandum of Agreement between the Company and Boutit, Inc.
	d/b/a No Limit Records dated May 12, 1999.                                                     
|10.16*  |  | Series C Preferred Stock Purchase Agreement between the
	Company and Cox Interactive Media, Inc. dated May 19, 1999.                                         
|10.17*  |  | Advertising, Promotion and Marketing Agreement between the
	Company and Groupe Arnault dated July 10, 1999.                                                  
|10.18*  |  | IPO Equity Offer Agreement between the Company and Arkaro Holding
	 B.V. dated July 10, 1999.                                                                
|10.19** |  | Sublease between the Company and ADC Wireless System, Inc. dated
	July 22, 1999, regarding property located at 4790 
	Eastgate Mall, San Diego, California.  
|10.20  |  | Manufacturing and Fulfillment Services Agreement between the
	Company and Cinram, Inc. dated November 4, 1999.                                               
|10.21   |  | Sublease between the Company and Franklin Resources, Inc. dated
	December 13, 1999, regarding property located at
	4780 Eastgate Mall, San Diego, California.
|10.22  |  | Marketing and Promotion Agreement between the Company and
	Visitalk.com, Inc. dated December 31, 1999.                                                       
|23.1    |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                          
|27.1    |  | Financial Data Schedule.                                                                                                                                     




|  |                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment has been requested with respect to certain
	 portions of this exhibit. Omitted portions have been filed
	separately with the Securities and Exchange Commission.



|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed as an exhibit to the Companys Registration Statement
	on Form S-1, Registration No. 333-78545, and
	incorporated herein by reference.



|   |                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------
|** | Filed as an exhibit to the Companys Form 10-Q for the
	quarter ended September  30, 1999, and incorporated herein
	by reference.

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##### Table of Contents



(d)  Financial Statement Schedules

Schedule II

MP3.com, Inc.

Valuation and Qualifying Accounts

|                                                                |  |            |        |            |  |           |         |            |  |            |   |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------- |  | ---------- | ------ | ---------- |  | --------- | ------- | ---------- |  | ---------- | - |  |  | - | ------- |  |  | - | ------- | 
|                                                               
|                                                               
|COL. A                                                          |  | COL. B     |        | COL. C     |  | COL. D    |         | COL. E    
|                                                               
|                                                               
|                                                                |  |            |        |           
|                                                                |  | Additions  |        | Deductions |  |          
|                                                                |  |            |        |            |  |          
|                                                                |  |            |        | Charged to |  |           |         |           
|                                                                |  | Balance at |        | Charged to |  | Other     |         |            |  | Balance at
|                                                                |  | Beginning  |        | Costs and  |  | Accounts- |         |            |  | End of    
|Description                                                     |  | of Period  |        | Expenses   |  | Describe  |         | Write-Offs |  | Period    
|                                                                |  |            |        |            |  |           |         |            |  |           
|Allowance for doubtful accounts                                 |  |            |        |            |  |           |         |            |  |            |   |  |  |   |         |  |  |   |         | 
|                                                               
|                                                               
|                                                               
|                                                               
|For the year ended December 31, 1999                            |  | $          | 56,615 |            |  | $         | 677,819 |            |  | $          |  |  |  | $ | 134,434 |  |  | $ | 600,000 | 
|                                                               
|                                                               
|                                                               
|                                                               
|For the period March 17, 1998 (inception)
	to December 31, 1998 |  |            |       |            |  |           | 56,615  |            |  |            |  |  |  |   |        |  |  |   | 56,615  | 

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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 30, 2000.



| |              
| | -------------
| | MP3.COM, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ ROBIN D. RICHARDS

| |                                      
| | -------------------------------------
| |                                      
| | Robin D. Richards                    
| | President and Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
 capacities and on the dates indicated.

|                                                 |  |                                                                                                  |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                        |  | Title                                                                                            |  | Date          
|                                                 |  |                                                                                                  |  |               
|/s/ MICHAEL L. ROBERTSONMichael L. Robertson     |  | Chief Executive Officer
	and Director(Principal Executive Officer)                               |  | March 30, 2000
|                                                
|/s/ ROBIN D. RICHARDSRobin D. Richards           |  | President, Chief Operating Officer and Director                                                  |  |               
|                                                
|/s/ PAUL L. H. OUYANGPaul L. H. Ouyang           |  | Chief Financial Officer and Executive Vice President(Principal Financial and Accounting Officer) |  | March 30, 2000
|                                                
|/s/ DAVID E. EASTERLYDavid E. Easterly           |  | Director                                                                                         |  | March 30, 2000
|                                                
|/s/ LAWRENCE F. PROBST IIILawrence F. Probst III |  | Director                                                                                         |  | March 30, 2000
|                                                
|/s/ MARK A. STEVENSMark A. Stevens               |  | Director                                                                                         |  | March 30, 2000
|                                                
|/s/ THEODORE W. WAITTTheodore W. Waitt           |  | Director                                                                                         |  | March 30, 2000

70