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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

                        COMMISSION FILE NUMBER 000-25273

                               LAUNCH MEDIA, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      95-4463753
    (STATE JURISDICTION OF INCORPORATION)            (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>

            2700 PENNSYLVANIA AVENUE, SANTA MONICA, CALIFORNIA 90404
                                 (310) 526-4300

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                  COMMON STOCK
                          (PAR VALUE $.001 PER SHARE)

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

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

     The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of February 28, 2001, was approximately $15,350,000 based
on the $1.125 closing price for the Common Stock on The NASDAQ National Market
on such date. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant.

     The number of shares of Common Stock of the registrant outstanding as of
February 28, 2001 was 14,391,889.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this report, are incorporated by reference into Part III of this report

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                               LAUNCH MEDIA, INC.

                                 INDEX TO ITEMS

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                                   PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   13
Item 3.   Legal Proceedings...........................................   13
Item 4.   Submission of Matters to a Vote of Security Holders.........   13

                                  PART II
Item 5.   Market for the Registrant's Common Equity and Related
          Stockholder Matters.........................................   14
Item 6.   Selected Consolidated Financial Data........................   16
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operation....................................   17
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   35
Item 8.   Consolidated Financial Statements and Supplementary Data....   35
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   35

                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   36
Item 11.  Executive Compensation......................................   36
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   36
Item 13.  Certain Relationships and Related Transactions..............   36

                                  PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   36
</TABLE>

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     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," "should," "could," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," the
negative of such terms or other comparable terminology. These statements are
only predictions and reflect our expectations and assumptions as of the date of
this 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 that 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.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Launch is a media company that offers a compelling online music discovery
experience for consumers and provides a valuable marketing platform for record
labels, artists, advertisers and merchants. We create engaging music content
focused on both new and established artists, spanning almost all musical genres.
Launch's consumers are not confined to receiving music content in the
programmed, linear sequences broadcast by radio and television. Instead, we
deliver personalized music content to our users in an interactive format based
on their musical tastes and preferences. As part of our strategy to attract and
retain registered members from our target audience, we have created a vibrant
community of users who help each other discover new music by virtual
word-of-mouth. Our music content encourages our members to engage in community
activities, such as chatting online, listening to their internet radio station
and developing online friendships with others sharing similar tastes. Because
our content is designed to attract and retain an audience composed principally
of consumers who are 12 to 34 years old, including the 12 to 20 year old segment
that is part of Generation Y, advertisers on Launch can target a valuable and
elusive group of consumers. We currently deliver our content on the Internet at
www.launch.com and on Launch on CD-ROM. As broadband access to the Internet
achieves greater consumer acceptance and enables us to add our richest audio and
video content to launch.com, we intend to phase out delivery of Launch on
CD-ROM.

     We commenced operations in February 1994 as 2Way Media, Inc. and changed
our name to Launch Media, Inc. in March 1998.

     As of December 31, 2000, launch.com had approximately 5.6 million
registered users. DoubleClick, Inc., our third-party ad server, reported that,
in December 2000, Launch reached approximately 5.1 million unique visitors. A
unique visitor is defined as an unduplicated web site user within a given time
period. As of December 31, 2000, Launch on CD-ROM had a distribution of 265,000
units.

     We believe that Launch offers the active music consumer access to a greater
selection of music and artists than is typically available through traditional
media. Launch offers record labels the opportunity to promote and sell new music
to a broad market that can be difficult to reach through traditional media. We
work closely with most independent and major record labels, including Sony Music
Entertainment, Warner Music Group, Universal Music Group, EMI Music, and BMG.
Through these relationships, we have featured several of the biggest names in
music, including Alanis Morissette, Smashing Pumpkins, Matchbox 20,

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Wyclef Jean, Seal, R.E.M., and Jewel, and have introduced our audience to many
new artists. In December 2000, we streamed more than 5.7 million music videos on
launch.com.

     Original and Compelling Music Content. Launch creates exclusive and
original music content, including video interviews and performances, news,
biographies and album and concert reviews. Launch also offers on-demand music
videos and localized concert and tour information. Our musical coverage spans
all genres, including country, blues, jazz, rap, R&B, folk, and rock, excluding
only classical. We can offer this broad range of music content because digital
media permits users to navigate to content that interests them. As a marketing
channel for the music industry, Launch has regular access to a broad range of
artists who are the subjects of exclusive video and audio content for Launch. We
also have an editorial staff of more than twenty-five in offices in Los Angeles,
New York and Nashville, which gives us in depth music content across most
genres. We believe that our relationships with the music industry as well as our
expertise in digital media production will provide us a strategic advantage in
offering broadband music content to our users as broadband distribution systems
gain greater consumer acceptance.

     Personalization of Content Based on Music Preference. Digital media enables
personalization that allows our members to focus on musical genres that interest
them and to avoid unappealing types of music without exiting Launch. Members
register free with launch.com by providing zip code, age and gender information.
They also actively add information about their music preferences by rating
artists and albums. We collect this data in a database that grows as our members
spend more time on the site. We use this information to personalize our content
for our members based on their stated musical preferences. For example, a member
interested in country music but not heavy metal would receive targeted features
and reviews on country artists to the exclusion of heavy metal. We believe that
personalization increases the time a user spends on launch.com and discourages
changing to another music site. In February 2000, we introduced the commercial
release of LAUNCHcast, a streaming music player that provides our users with the
ability to listen to or watch the music they want.

     Active Membership and Community Participation. We have created a vibrant
community of users who help each other discover new music by virtual
word-of-mouth. We believe that active music consumers consider musical tastes to
be an important part of personal identity. Music is a shared experience and a
powerful catalyst for community formation. Our music content encourages our
members to engage in community activities, such as chatting online, listening to
their internet radio station and developing online friendships with others
sharing similar tastes. As of December 31, 2000, there were approximately 5.6
million registered members of launch.com. Our members can rate their favorite
artists and albums on their personalized launch.com home pages and write their
own reviews. This user-generated content provides an additional source of music
discovery and encourages regular, active participation in the community. We
believe that members with strong ties to the community tend to spend significant
amounts of time interacting with others and are less likely to switch to a
different music site.

     Powerful Promotional Outlet for Record Labels and Artists. Record labels
and artists can work with Launch to promote their new releases to the large
group of active music buyers who make up the Launch user community. Because
consumers can avoid music they dislike but still remain in the Launch
environment, Launch can cover a broader spectrum of musical genres and expose
users to a greater number of artists. Record companies, including Sony, Warner,
Universal, BMG and EMI, use Launch to introduce users to a variety of new
artists and to inform them of new releases from established artists. We often
feature established artists in order to draw users in to discover new names.
Because of the synergistic relationships we have developed with the record
labels, we have access to high-profile personalities in music. Since May 1995,
we have featured exclusive interviews and performances by popular recording
artists such as Alanis Morissette, Jewel, Smashing Pumpkins, R.E.M., Sheryl
Crow, Aqua, Matchbox 20, No Doubt, Wyclef Jean, Counting Crows, Shaggy,
Coldplay, Jill Scott, LL Cool J, Dave Matthews Band, Britney Spears, Blink182,
Live, Filter, Bush, Eminem, and Smash Mouth.

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     Attractive, Targeted Demographic Group. Launch focuses on the valuable 12
to 34 year old audience, including the 12 to 20 year old segment that is part of
Generation Y, who have begun spending more time using the Internet. Our research
demonstrates that our audience is principally composed of members of Generation
Y and others in the 12 to 34 age group. We believe that our audience members
generally:

     - spend substantial amounts of time learning about and listening to music;

     - identify strongly with music they like;

     - value being the first to discover new music;

     - enjoy being a member of a community built around music; and

     - adopt technological advancements early.

Advertisers who have difficulty reaching this audience can turn to Launch for
targeted advertising and direct marketing to this valuable group.

     Effective Environment for Advertising and Commerce. Launch provides
advertisers with access to a highly desirable group of consumers in an active
entertainment environment. The Launch environment captures consumers for long
periods of time, and advertisements can be targeted to specific users. Launch
collects demographic and music preference information from its users that can be
used to target advertising and commerce opportunities. We believe that Launch's
access to a large audience of targeted demographics may also provide us a
strategic advantage in selling a variety of products through e-commerce
partners.

     Revenue and Traffic Opportunity from Content Syndication. We leverage the
content we create for launch.com by licensing it to various online and off-line
customers. For example, we generate revenue by syndicating our music and
entertainment news to radio stations across the U.S. Our online syndication
relationships are often crafted to drive traffic to launch.com.

THE LAUNCH MEDIA PROPERTIES

     Launch seeks to create the premier online destination for music. In
addition to launch.com, we distribute Launch on CD-ROM, which will be eliminated
as its content can be streamed over broadband networks such as cable and DSL
modems and satellite data broadcast.

  Launch.com

     Launch.com is the place for active music consumers to discover new music
and meet other music fans with similar tastes. The music content we produce for
launch.com consists of streaming audio of full-length songs, music videos and
audio samples, text, concert tour information, and photographs. Launch.com
enables users to personalize the content they view to focus on music that
appeals to them individually. Further, registered members of launch.com can
share their tastes and preferences with other members of the community by
creating reviews, rating songs, artists and albums. Launch covers all musical
genres other than classical. Some of the key features available on launch.com
include the following:

     - music videos;

     - streaming audio;

     - digital downloads;

     - music news updated multiple times per day;

     - artists interviews and feature articles;

     - concert reviews;

     - album reviews;

     - artist biographies, photographs and discographies;

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     - album artwork, track listings and song samples;

     - new and upcoming album release information;

     - concert tour information; and

     - CD and cassette purchasing.

     As more consumers gain faster access to the Internet through broadband
distribution systems, we intend to increase the amount of higher-quality audio
and video content available on launch.com. Because we have created, and continue
to produce, exclusive, high-quality audio and visual content, we believe that
Launch will have a strategic advantage in offering broadband music content to
our users as broadband distribution systems gain greater consumer acceptance.

     Launch believes a large and active membership base is critical to its
success. Membership is free and available to launch.com visitors who disclose
their e-mail address, zip code, age and gender, and choose a member name and
password to be used throughout the site. Registered members form launch.com's
core audience and are its most valuable users. Launch recognizes the importance
of maintaining confidentiality of member information and has established a
privacy policy to protect such information.

     Registered members have the ability to enhance their Launch experience
through LAUNCHcast. In creating their LAUNCHcast stations, members rate artists,
songs and albums according to their preferences. This process provides Launch
with confidential, voluntary data based on musical tastes and allows members to
enrich their own content experience when interacting with the site. This
information also creates a robust community-rating base.

     We believe that active music consumers consider musical tastes to be an
important part of personal identity. Music is a shared experience and a powerful
catalyst for community formation. Our goal is to make each registered member an
active participant in the Launch community. Key elements of our community
services that are available free to registered users include:

     - ability to rate songs, albums, and artists;

     - chats with artists and other users; and the

     - ability to write and post artist or album reviews on the page dedicated
       to the artist/album.

A key benefit of our community is that user-generated content is obtained at
minimal cost to us. In addition, we believe that users who have invested
considerable amounts of time developing community ties are less likely to switch
to another site for music content.

  Launch on CD-ROM

     Because fixed media such as CD-ROM do not share the Internet's bandwidth
limitations, we can offer rich graphics, CD-quality audio and full-motion video
in Launch on CD-ROM. The interface for Launch on CD-ROM is a graphically rich
three-dimensional virtual city where users navigate to particular content by
visiting different buildings. Various buildings such as "The Hang," housing
music content, and devices such as "The Vibreaker," which contains album
reviews, have become consistent, recognized features of Launch's environment.
Advertising on the CD-ROM is principally in the form of television commercials,
product placements and interactive advertisements. The city environment permits
conspicuous yet natural advertising placements. The familiar look of billboards
within the city or, for example, candy in a theater concession stand encourages
users to click the branded icons to view the advertising. Many of the
advertisements pop up in the environment on video billboards. We track how users
spend time within the CD-ROM and which advertisements they see. Users
voluntarily send this information back to Launch, along with basic demographic
information, so that we can provide advertisers with a profile of our audience
and which advertisements they saw. Launch offers prizes and other incentives for
users who furnish this information.

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     Each issue of Launch on CD-ROM includes the following:

     - album reviews with CD-quality song samples, photographs and album
       artwork;

     - exclusive video performances by popular recording artists;

     - exclusive video interviews with recording artists presented in
       distinctive three-dimensional environments where users can choose
       interview topics;

     - direct links to the Internet for downloading additional content, chatting
       with other users, visiting launch.com or viewing an advertiser's Web site
       related to an advertisement on the CD-ROM;

     - interactive video interviews with movie actors, directors or producers;

     - video game demonstrations; and

     - television-quality advertisements.

     We published the first issue of Launch on CD-ROM in May 1995. As of
December 2000, total distribution for the CD-ROM was approximately 265,000
units. We intend to phase out CD-ROM delivery as more efficient broadband
distribution systems achieve more widespread consumer acceptance and enable us
to migrate our richest audio and video content to launch.com.

  The Warped Tour and other Concert Series

     Launch acquired The Warped Tour on August 31, 2000. This media property
provides unique integrated sponsorship opportunities to our partners by
leveraging this property with the breadth of our other properties. The Warped
Tour is a popular summer concert series where musicians, athletes and fans
interact and participate in daylong events. The Warped Tour blends a cross
section of great music from chart-topping and emerging artists with skate/surf
culture of extreme sports. In addition, the tour allows us to access exclusive
content generated during the Warped Tour. Launch maintains an on-site presence
at the concert venues as well as promotes, markets, and sells sponsorships for
the tour through existing and new online/offline partnerships. Launch also
creates and manages smaller multi-city concert series that showcase new and
emerging artists that generate additional integrated sponsorships.

     We are committed to maximizing Launch's distribution through all viable
distribution systems for digital media. The proliferation of high-speed access
to the Internet through cable or DSL modem presents new opportunities to
distribute our most compelling content, including personalization and community
features, directly to consumers without publishing a CD-ROM. Since March 1999 we
have been providing our content under an agreement with ServiceCo LLC, d.b.a
Road Runner. Under this agreement, we provide Road Runner with music related
content for its high speed, cable modem service. The content we provide appears
on co-branded pages which link back to launch.com. We believe that by leveraging
our access to content and video production expertise, Launch will have a
strategic advantage in providing true broadband content. In addition, wireless
delivery of digital media content will, when available, allow Launch to deliver
customized versions of its rich media content to users' portable devices.

CONTENT DEVELOPMENT AND SYNDICATION

     We have developed strong working relationships with most of the major and
independent record labels, including Sony Music, Warner Music, Universal Music,
EMI Music, and BMG, and with many popular artists. Our core editorial team is in
regular contact with record labels and with independent publicists who arrange
for artists to spend time filming interviews and performances for use on the
Launch properties. The Launch editorial team has extensive experience in many
facets of music journalism and also uses a diverse group of freelance writers to
contribute many of the written features in Launch. Our strategy is to employ
core groups of editors, artists, video producers and other content creators on a
full time basis and also capitalize on a talented network of freelancers as
needed. Although we create most of Launch's content, from time to time we
license content from third parties. We entered into licensing agreements with
EMI Music and Warner

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Music Group, on a non-exclusive basis, for Internet distribution rights to
stream their catalog and new release music videos on demand. These agreements
are multi-year and provide selected worldwide rights as well.

     At our headquarters in Santa Monica, California we operate a production
stage that doubles as a recording studio. We use this space to film and record
many of the artists appearing in Launch. Each session with an artist typically
results in content that we can use on both launch.com and Launch on CD-ROM. This
allows us to minimize our production costs while providing the artist with the
broadest possible exposure.

     Launch has created exclusive video interviews and video performances with a
variety of new and established artists across multiple genres, including:

<TABLE>
<S>                          <C>                          <C>
311                          Godsmack                     Sarah McLachlan
Tori Amos                    Goo Goo Dolls                Alanis Morissette
Barenaked Ladies             David Gray                   No Doubt
Ben Folds Five               Buddy Guy                    Papa Roach
Blink 182                    Incubus                      Radiohead
Blues Traveler               Natalie Imbruglia            REM
The Cardigans                Chris Isaak                  Joshua Redman
Coldplay                     Wyclef Jean                  Jill Scott
Sheryl Crow                  Jewel                        Seal
The Cure                     B.B. King                    Shaggy
D'Angelo                     Korn                         Britney Spears
Deftones                     Johny Lang                   Third Eye Blind
Eminem                       L.L. Cool J                  The Verve Pipe
Everclear                    Dave Mathews Band            Wallflowers
</TABLE>

     Our acquisition and integration of SW Networks, JBTV, National Video
Subscriptions, Inc., Tour Dates, and The Warped Tour have increased the quantity
and expanded the scope of Launch's music content and allowed us to package and
syndicate our content to third parties. We provide music news and information in
various format-specific genres, such as country, adult contemporary and urban,
to radio stations (through SW Networks which was renamed Launch Radio Networks)
and to Internet-based companies. Launch's reporting and newsgathering
infrastructure consists of over twenty-five full-time staff based at three
bureaus located in New York, Los Angeles and Nashville. Launch has significantly
increased the number of music videos offered on launch.com by encoding videos
from the NVS and JBTV libraries and adding them to the site.

ADVERTISING

     We sell advertising and sponsorships against the cumulative audience
viewing content on Launch. We sell advertisements that include placement on
launch.com, Launch on CD-ROM and The Warped Tour. Specific placement within
Launch depends on the particular advertiser's media and creative goals. We
negotiate pricing based on the size of the unique audience, the extent of the
placement and the length of the agreement. See "Risk Factors -- If we fail to
increase the size of our audience, we may not be able to attract advertisers or
strategic alliances." Launch's strategy is to focus on large, consumer brand
advertisers who seek to reach the active music consumer in a relevant
environment. Launch understands that advertisers aiming to reach young consumers
making first time brand decisions desire advertising capable of making an
emotional connection with the viewer. Launch offers advertisers the opportunity
to make such connections with their potential consumers by delivering engaging
advertising to a targeted audience or sponsoring a relevant content area.
Advertisers derive significant value from targeted users who choose to spend
time interacting with the content and the advertisement. Our research indicates
that users who view advertisements in Launch tend to remember those
advertisements more than advertisements appearing on traditional media. See
"Risk Factors -- Effectiveness and acceptance of digital media for advertising
are unproven, which discourages some advertisers from advertising on Launch."

     Launch derives a portion of its advertising revenues from banner
advertisements that are prominently displayed at the top of pages throughout
launch.com. Banner advertisements are typically sold based on a cost-

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per-thousand-impressions (CPM) basis. Targeted banners and sponsorships
typically sell for higher CPM's than run-of-site banners. From each banner
advertisement, viewers can hyperlink directly to the advertiser's Web site, thus
providing the advertiser the opportunity to directly interact with an interested
customer. Advertisers have the opportunity to purchase either run-of-site
banners or banners and sponsorships specifically targeted to a subset of Launch
members based on zip code, age, gender or musical preference. Launch charges
premium advertising rates for any level of targeting.

     Through partnerships with leading merchants, Launch also intends to offer
its users a variety of music-related products such as concert tickets and artist
merchandise. In addition, Launch intends to pursue opportunities to sell other
lifestyle products relevant to its audience. We believe that aggregating active
music consumers and understanding their tastes by leveraging our substantial
database of information about our users positions Launch to be a valuable
channel for merchants who are focused on the 12 to 34 year old demographic
group.

     Launch has derived a significant amount of its revenues to date from the
sale of advertising. Advertising orders are short term and subject to
cancellation without penalty until shortly before the advertisement runs. Launch
employs a direct sales force of twenty-five professionals. We depend upon a
limited number of advertisers in any quarterly period. The loss of a key
advertising relationship or the cancellation or deferral of even a limited
number of orders could adversely affect our quarterly financial performance. See
"Risk Factors -- We depend on a limited number of advertisers, and the loss of a
number of these advertisers could adversely affect our operating results."
Advertisers in 1998, 1999, and 2000 include the following:

<TABLE>
<S>                   <C>                   <C>                   <C>
American Express      Gillette              MCI                   Qualcomm
AT&T                  Heinz                 Merck                 Sony
Citibank              IBM                   Microsoft             Sprint
Coca-Cola             Intel                 Miller                Taco Bell
Discover Card         Jack Daniels          Motorola              Target
Dr. Pepper            Jim Beam              Nike                  Toyota
eBay                  Kellogg's             Nintendo              Universal Pictures
Ford                  Lee Jeans             Polaroid              US Navy
The GAP               Levi's                Pontiac               Visa
Gateway               Mazda                 Proctor & Gamble      Wrigley's
General Motors        McDonalds
</TABLE>

CONTENT SYNDICATION

     We generate revenue through content licensing to online and offline
clients. We syndicate our music and entertainment news to radio stations in
exchange for on-air inventory of radio advertisements. Launch sells such on-air
inventory through Media America, a third-party advertising agency. We also
syndicate this content to various online partners. We also intend to syndicate
Internet Radio, which will expand the product offering for our content
syndication.

STRATEGIC ALLIANCES

     Launch pursues strategic relationships to increase audience, build brand
recognition and enhance content and distribution opportunities. We currently
have strategic relationships in Distribution and Content, Sponsorship and
Technology. Our future success depends to a significant extent upon the success
of these alliances and the achievement of their strategic objectives.

  Distribution Agreements

     In November 2000, Launch renewed its distribution agreement with Real
Networks that brings launch.com's video and other music content to a Launch Real
Channel. In addition, LAUNCHcast has been upgraded and supports the Real
Networks format. Consumers who express a preference for music content when
downloading the Real Player G2 will receive the Launch Real Channel
automatically. The Launch Real

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Channel will also be available to existing Real Player users through the Real
Channels customization page, accessed directly from their Real Player G2 and
from Real guide. Users of Real Player G2 will have the ability to select from
these videos available on demand. The agreement has a one year term.

     In October 2000, Launch entered into a one-year distribution agreement with
Inktomi Corp. to participate in their Index Connect service. This service allows
Inktomi's top tier portals and web sites the ability to search for Launch music
content through a variety of genres and channels.

     Launch has entered into an agreement with Palm, Inc. that will allow
MyPalm(TM) mobile portal users access to Launch.com music content. Launch has
also entered into an agreement with Omnisky that will provide access by
satellite. Both agreements are part of the Company's long-term strategy to allow
access to Launch's content remotely by wireless means.

  Content, Sponsorship and Technology

     In 1999, Launch and Sony Music entered into a sponsorship and content
license agreement and a music video license. Under the sponsorship content
license, Launch grants to Sony Music a nonexclusive license to the content
generated by Launch Radio Networks and supplied by Launch to radio stations. In
return, Sony Music will pay Launch a quarterly license fee of $50,000. In
addition, this license agreement provides that Sony Music and its affiliates
will purchase advertising and promotional spots on Web sites or other media
properties owned by Launch, in a minimum aggregate amount of $800,000 in the
first year of the agreement, and $1.3 million in the second year of the
agreement. Any advertising or promotional purchases by Sony Music or certain
affiliates of Sony Music in excess of such minimum amounts shall be applied
towards the next year's minimum commitment. The initial term of this agreement
is two years, with extensions of three successive one-year terms at the option
of Sony Music.

     In 1999, we entered into licensing agreements with EMI Music and Warner
Music Group on a non-exclusive basis for Internet distribution rights to stream
their catalog and new release music videos. These agreements are multi-year and
provide selected worldwide rights as well.

     The music videos and audio channels available on launch.com use Microsoft's
Windows Media Player and Real Networks streaming media technology.

MARKETING AND BRAND AWARENESS

     Launch employs a variety of methods to increase its audience and build
brand recognition and loyalty. We believe that the most effective means of
consumer marketing is creating programs that allow a potential user the
opportunity to sample the product. As a result, Launch has used various direct
marketing techniques, such as the distribution agreements described above for
launch.com, and Internet and direct response advertisements offering no-risk
subscriptions to Launch on CD-ROM.

     In addition to direct marketing, certain of our marketing staff focuses on
other forms of brand awareness including traditional media advertising such as
print, radio and outdoor. Launch also has a dedicated public relations team
focused on generating press coverage in both trade and consumer media.

OPERATIONS AND INFRASTRUCTURE

     Launch's operating infrastructure has been designed and implemented to
support the reliable and swift delivery of millions of page views a day in
addition to supporting a large audience for our customized internet radio
application and music videos applications. Key attributes of this infrastructure
include scalability, performance and service availability.

     Web pages are generated and delivered, in response to end-users requests,
by front-end Web and applications servers, and database servers. Some of
Launch's servers run on the Microsoft Windows NT operating system and
Microsoft's IIS Web server software. Launch also utilizes Sun Enterprise class
servers, which run on Solaris operating system. In addition to a core set of
software platforms and software from Microsoft, Launch maintains a minimal
number of third party applications for services such as online chat and

                                        8
<PAGE>   11

traffic analysis. Launch utilizes DoubleClick's DART technology to deliver its
advertisements. Launch is phasing out its current content managing and
publishing system, in preference of a new XML/XSL Open-Standards-Based content
management and application delivery platform.

     Launch maintains its live production servers and networking with Alchemy
Co-location Services in Los Angeles, California. Launch's operations are
dependent upon Alchemy's ability to protect its systems against damage from
fire, hurricanes, power loss, telecommunications failure, break-ins and other
events. Alchemy provides comprehensive facilities management services including
human and technical monitoring of all production servers 24 hours per day, seven
days per week. Alchemy provides the means of connectivity for Launch's servers
to end-users via the Internet through multiple DS3 and OC12 connections. These
connections link to many different parts of the Internet via a combination of
public and private peering agreements. The facility is connected to two
independent power grids, has two independent uninterruptible power supplies
("UPS"), which are battery-powered, as well as two independent diesel generators
designed to provide power to the UPS systems within seconds of a power outage.

     Launch uses the services of iBeam and Akamai for bandwidth-intensive
services such as caching audio and video streaming. The Company maintains
non-exclusive relationships with these streaming companies to maintain
flexibility and access to maximum performance and cost. Launch also uses the
leading technologies for music encoding and streaming, including Microsoft's
Windows Media and Real Networks. These technologies provide relatively high
audio and video quality while also delivering the latest in digital security to
avoid music piracy.

     Launch services its subscribers to the CD-ROM through Stark Services, a
full service fulfillment company located in North Hollywood, California. As our
fulfillment vendor, Stark Services is responsible for processing orders and
managing the database of Launch on CD-ROM subscribers. They also generate
detailed fulfillment, customer service, and circulation reports that allow us to
effectively analyze our direct marketing efforts.

COMPETITION

     Competition among media companies seeking to attract the active music
consumer is intense. Traditional media companies such as television
broadcasters, magazine publishers and radio stations are constantly refining
their content and strategies to increase their audiences and capture advertising
expenditures. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:

     - publishers and distributors of traditional media, such as television,
       radio and print, including MTV, Clear Channel, CMT, Rolling Stone and
       Spin, and their Internet affiliates;

     - online services or Web sites targeted at music consumers, such as
       MP3.com, ARTISTdirect, Emusic.com, Net Radio, Echo and Napster;

     - Web retrieval and other Web "portal" companies, such as America Online,
       Real Networks, Microsoft MSN, Excite@Home Corporation, Walt Disney, Terra
       Lycos and Yahoo! Inc.; and

     - online music retailers, such as CDNow and Amazon.com.

     Launch believes that the primary competitive factors in creating a music
destination that attracts a large audience composed of our target demographic
group are the following:

     - quality and diversity of content;

     - ability to personalize content;

     - community experience; and

     - brand awareness.

                                        9
<PAGE>   12

     Increased competition could result in advertising price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business. Because we compete for advertisers with traditional advertising media,
our business could suffer if advertisers do not view digital media as effective
for advertising. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services. Many
of these potential competitors are likely to enjoy substantial competitive
advantages, including the following:

     - larger technical, production and editorial staffs;

     - greater name recognition;

     - better access to content;

     - more established Internet presence;

     - larger customer bases; and

     - substantially greater financial, marketing, technical and other
       resources.

If we fail to compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.

GOVERNMENT REGULATION

     Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The United States Congress
has enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union enacted its own privacy regulations that may result in limits on
the collection and use of certain user information. The laws governing the
Internet, however, remain largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property privacy, libel and taxation
apply to the Internet and Internet advertising.

     The growth and development of the market for Internet commerce may prompt
calls for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business over
the Internet. Furthermore, the Federal Trade Commission has investigated the
disclosure of personal identifying information obtained from individuals by
Internet companies. In the event the Federal Trade Commission or other
governmental authorities adopt or modify laws or regulations relating to the
Internet, our business, results of operations and financial condition could be
adversely affected. See "Risk Factors -- Governmental regulation of the Web
related to communication, commerce and other issues may limit the growth of our
business and decrease our market opportunity."

     Launch does not collect sales or other taxes in respect of goods sold to
users on launch.com. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies, such as Launch, which engage
in or facilitate online commerce. A number of proposals have been made at the
state and local level that would impose additional taxes on the sale of goods
and services 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.
Moreover, if any state or foreign country were to successfully assert that
Launch should collect sales or other taxes on the exchange of merchandise on its
system, our results of operations could be adversely affected.

                                        10
<PAGE>   13

     Legislation limiting the ability of states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. We cannot
assure you that this legislation will ultimately become law or that the tax
moratorium in the final version of this legislation will be ongoing. Failure to
enact or renew this legislation, once enacted, could allow various states to
impose taxes on Internet-based commerce, which could adversely affect our
business. See "Risk Factors -- Imposition of sales and other taxes on e-commerce
transactions may impair our ability to derive financial benefits from
e-commerce."

INTELLECTUAL PROPERTY

     The music and music videos featured in Launch are copyrighted works of
third parties, including record labels, artists and songwriters. Each piece of
music or music video content may have multiple copyright owners, some with
rights in the sound recording, covering the particular performance, others with
rights in the musical composition, covering the lyrics and music, and in the
case of music videos, others with rights to the visual content. Launch has
different licensing arrangements with these parties depending on how the song or
music video is used by Launch and the length of the part of the song included.
In certain cases, we use content without a formal license because we do not
believe that such a license is required; however, the laws in this area are
uncertain. Our arrangements range from formal contracts to informal agreements
based on the promotional nature of the content. In some cases, Launch pays a fee
to the licensor for use of the music or music video and in other cases the use
is free. Launch also uses other content, including images that are copyrighted
works of others. We rely on our positive working relationships with copyright
owners to obtain licenses on favorable terms. Any changes in the nature or terms
of these arrangements, including any requirement for Launch to pay significant
fees for the use of the content, could have a negative impact on the
availability of content or our business.

     Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate. We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our proprietary information. We cannot assure you that the steps
we have taken will prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States. If third
parties were to use or otherwise misappropriate our copyrighted materials,
trademarks or other proprietary rights without our consent or approval, our
competitive position could be harmed, or we could become involved in litigation
to enforce our rights. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such changes of trademarks, alteration of content or payment of
financial damages will not adversely affect our business. See "Risk
Factors -- We depend upon licensed music content that may not continue to be
available on reasonable terms."

EMPLOYEES

     As of December 31, 2000, Launch had 280 full-time employees. Our future
performance depends in significant part on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. From time to time, Launch also employs independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. None of Launch's employees are
represented by a collective bargaining unit, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.

                                        11
<PAGE>   14

EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                NAME                   AGE                           POSITION
                ----                   ---                           --------
<S>                                    <C>    <C>
David B. Goldberg....................  33     Chairman of the Board of Directors, Chief Executive
                                              Officer
Robert D. Roback.....................  33     President and Director
Jeffrey M. Mickeal...................  40     Chief Financial Officer and Secretary
Spencer A. McClung, Jr...............  34     Executive Vice President, Advertising Sales and
                                              Business Development
R. Briggs Ferguson...................  35     Executive Vice President, Product Strategy and
                                              Marketing
Alex X. Maghen.......................  33     Chief Technology Officer
</TABLE>

     David B. Goldberg has served as Launch's chairman of the board and chief
executive officer since he co-founded Launch in February 1994. Prior to that
time, from October 1991 to December 1993, Mr. Goldberg was director of marketing
strategy and new business development at Capitol Records, a major record label
in Hollywood, California. Mr. Goldberg was a consultant at Bain & Co., a major
strategy-consulting firm, from September 1989 to September 1991. Mr. Goldberg is
a member of the National Academy of Recording Arts and Sciences. Mr. Goldberg
holds an A.B. in history and government from Harvard University.

     Robert D. Roback has served as Launch's president and a director since he
co-founded Launch in February 1994. Prior to that time, from October 1992 to
February 1994, Mr. Roback was a securities attorney at Mayer, Brown & Platt, a
major international law firm in Chicago, Illinois. Mr. Roback holds a B.S. in
economics from The Wharton School of the University of Pennsylvania and is a
graduate of the University of Minnesota Law School.

     Jeffrey M. Mickeal has served as Launch's chief financial officer and
secretary since April 1995. Prior to that time, from September 1982 to March
1995, Mr. Mickeal was a senior manager at PricewaterhouseCoopers LLP in Los
Angeles, California in their entrepreneurial advisory services group. Mr.
Mickeal holds a B.A. in business/economics from the University of California,
Santa Barbara and is a Certified Public Accountant.

     Spencer A. McClung, Jr. has served as Launch's executive vice president,
advertising sales and business development, since July 2000. From July 1996 to
July 1997, he served as Launch's senior vice president, advertising and business
development, since July 1997. From January 1996 to July 1996, Mr. McClung served
as Launch's vice president, marketing. From July 1995, when he joined Launch, to
January 1996, he served as Launch's senior director, marketing. From July 1991
to July 1993, he served as a senior financial analyst at the Walt Disney
Company. From June 1989 to July 1991, he served as a financial analyst at
Trammell Crow Ventures, a real estate development company. Mr. McClung holds a
B.A. from Texas A&M University and an MBA from Harvard Business School.

     R. Briggs Ferguson joined LAUNCH in June 2000 as Executive Vice President,
Product Strategy & Marketing. Prior to that time, beginning in 1991, Mr.
Ferguson was with EMI Music, first as Director of Worldwide Business Development
and Planning with EMI Music Group and then as Senior Vice President, Marketing
with EMI Music Distribution. Before EMI, Mr. Ferguson spent three years at Bain
& Co. as a management consultant specializing in marketing and business
development. He earned a BA in Engineering Sciences and a BE in Electrical
Engineering from Dartmouth College.

     Alex X. Maghen joined LAUNCH in July 2000 as Chief Technology Officer. He
came to LAUNCH from MTVi Group, Viacom's Internet music initiative, where he
also served as Chief Technology Officer. Prior to his Chief Technology Officer
position, Mr. Maghen was Vice President, Online & Interactive technology at MTV
Networks. Mr. Maghen joined Viacom in 1995 where he served as Director of
Technology, Viacom Interactive Services, until 1996 when he became Vice
President Production & Technology, Nickelodeon Online. Mr. Maghen went to Viacom
after four years at AT&T as Director of Content Software Development for AT&T
Interactive Television products. He earned a BS in Mathematics, Computer Science
& Engineering at Drexel University and completed the Graduate Program in
Interactive Telecommunications at New York University.

                                        12
<PAGE>   15

ITEM 2. PROPERTIES

     Our principal administrative, sales, marketing and production facilities
are located at our headquarters, which consists of three buildings and
approximately 45,000 square feet of office and studio production space in Santa
Monica, California. Our leases for the Santa Monica facilities provide for
rental payments of approximately $1.3 million per year and expire from 2003
through 2006. We have the option to renew our main production facility sublease
for one additional four-year period. We also lease approximately 12,000 square
feet of office space in New York City for use as an East Coast production, sales
and marketing office. Our leases in New York City provide for rental payments of
approximately $455,000 per year and expire in 2009. We also have offices in
Chicago, Atlanta, and Nashville. These leases consist of approximately 12,000
square feet in aggregate and provide for approximately $129,000 in annualized
rent payments. We believe that our current facilities will be adequate to meet
our needs for the foreseeable future. We believe that suitable additional
facilities will be available in the future as needed on commercially reasonable
terms.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, Launch may be involved in litigation relating to claims
arising out of its operations. On January 31, 2001, WB Stellar Acquisitions, LLC
commenced an action against us in the Supreme Court of the State of New York
seeking rent and damages of $793,000 with respect to a lease for commercial
space that expired on July 31, 2000. The Company plans to vigorously defend
itself against this action as we believe we have meritorious defense, but no
assurance can be given we will prevail. There are no other proceedings, either
individually or in aggregate that are expected to have a material adverse effect
on our business, financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fiscal
quarter ended December 31, 2000.

                                        13
<PAGE>   16

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

  Market Prices for the Company's Common Stock

     The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "LAUN" since April 23, 1999. The following table sets forth for
the period April 23, 1999 through December 31, 1999 and for the year ended
December 31, 2000 range of high and low closing prices per share of Common
Stock, as reported by the NASDAQ National Market:

<TABLE>
<CAPTION>
                                                            HIGH        LOW
                                                           -------    -------
<S>                                                        <C>        <C>
1999
Second Quarter (beginning April 23, 1999)................  $30.000    $12.625
Third Quarter............................................  $18.000    $ 9.000
Fourth Quarter...........................................  $22.500    $ 9.750
2000
First Quarter............................................  $26.250    $15.391
Second Quarter...........................................  $15.813    $ 7.125
Third Quarter............................................  $ 9.125    $ 6.000
Fourth Quarter...........................................  $ 6.813    $ 1.500
</TABLE>

     On December 28, 2000 there were 1,300 holders of record of our Common
Stock.

     The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. Launch
currently intends to retain future earnings, if any, to fund the development and
growth of its business.

     The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of February 28, 2001 was approximately $15,350,000 based on
the $1.125 closing price for the Common Stock on The NASDAQ National Market on
such date. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant. The number of shares of
Common Stock of the registrant outstanding as of February 29, 2001 was
14,391,889.

  Sales of Unregistered Securities During the Year Ended December 31, 2000

     During the year ended December 31, 2000, the Company issued and sold the
following securities without registration under the Securities Act:

     On January 18, 2000 Launch acquired the Atlanta based Tourdates.com, the
premier online guide to local and national concert information. The total
purchase price of approximately $12.0 million was comprised of 626,556 shares of
the Company's common stock with a fair value of $11.6 million, a cash payment of
approximately $1.0 million, and transaction costs of approximately $400,000.
Tourdates.com gathers its tour information from a network of 10,000 bands,
leading concert agencies and promoters and more than 80 field representatives
based in 56 U.S. cities, Canada and other international locations such as London
and Warsaw. In addition, Tourdates.com's approximately 85,000 registered users
became part of launch.com's member community.

     On August 31, 2000, the Company purchased the entire membership interest in
C.C.R.L., LLC d.b.a. The Warped Tour. The Warped Tour is a popular summer
concert series where musicians, athletes and fans interact and participate in
daylong events. The purchase price of approximately $7.8 million was comprised
of 788,474 shares of the Company's common stock with a fair value of
approximately $5.5 million, cash payments of $2 million and transaction costs of
approximately $250,000. The terms of acquisition also include contingent future
purchase cash or stock payments to the sellers, aggregating $23.5 million over a
five-year period including a $15 million payment in the fifth year, based on
performance targets set for the operations of the Warped Tour.

                                        14
<PAGE>   17

     No underwriter was involved in any of the above sales of securities. All of
the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") on
the basis that they were issued under circumstances not involving a public
offering, or, in the case of certain options and warrants to purchase Common
Stock, Rule 701 of the Securities Act.

                                        15
<PAGE>   18

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected historical consolidated financial data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report and has
been derived from the consolidated financial statements of Launch, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
consolidated financial statements as of December 31, 2000 and 1999 and for each
of the years in the three-year period ended December 31, 2000 are included
elsewhere in this report.

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                        1996        1997        1998        1999        2000
                                       -------    --------    --------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>        <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Net revenues.......................  $ 1,375    $  3,137    $  5,014    $ 16,626    $ 30,829
  Loss from operations...............   (4,768)     (6,676)    (13,805)    (39,481)    (52,217)
  Loss per share from
     operations(1)...................  $ (5.50)   $  (7.89)   $ (16.36)   $  (4.15)   $  (3.67)
  Weighted average shares outstanding
     used in basic and diluted per
     share calculations..............      920         925         933       9,218      13,782
BALANCE SHEET DATA:
  Total assets.......................  $ 4,784    $  1,790    $ 13,164    $ 94,217    $ 68,951
  Long-term obligations..............       58          77         639         999       2,501
  Mandatory redeemable convertible
     preferred stock.................   10,458      11,065      36,707          --          --
  Total stockholders' equity
     (deficit).......................  $(7,006)   $(14,186)   $(27,826)   $ 86,042    $ 50,999
</TABLE>

---------------
(1) See Note 2 of Notes to Consolidated 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.

                                        16
<PAGE>   19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion should be read in conjunction with Launch's
financial statements and the notes thereto and the other financial information
appearing elsewhere in this report. In addition to historical information, the
following discussion and other parts of this report contain forward-looking
information that involves risks and uncertainties. Launch's actual results could
differ materially from those anticipated by such forward-looking information due
to factors discussed under "Risk Factors," "Business" and elsewhere in this
10-K.

OVERVIEW

     Launch is a media company that offers a compelling online music discovery
experience for consumers and provides a valuable marketing platform for record
labels, artists, advertisers and merchants. We create engaging music content
focused on both new and established artists, spanning almost all musical genres.
We currently deliver our content on the Internet at www.launch.com and on the
monthly Launch on CD-ROM. As broadband access to the Internet achieves greater
consumer acceptance and enables us to add our richest audio and video content to
launch.com, we intend to phase out delivery of Launch on CD-ROM.

     Launch commenced operations in February 1994 as 2Way Media, Inc. and
changed our name to Launch Media, Inc. in March 1998. As of December 31, 2000,
launch.com had approximately 5.6 million registered users. Double Click, Inc.,
our third-party ad server, reported that, in December 2000, launch.com reached
approximately 5.1 million unique visitors. A unique visitor is defined as an
unduplicated web site user within a given time period. As of December 2000,
Launch on CD-ROM had a distribution of approximately 265,000 units. In December
2000, we also streamed more than 5.7 million music videos on launch.com.

     Launch has incurred significant net losses and negative cash flows from
operations since its inception, and as of December 31, 2000, had an accumulated
deficit of approximately $115.7 million. Launch intends to continue to make
significant financial investments in marketing and promotions, content
development, technology and infrastructure development. As a result, we believe
that we will incur operating losses and negative cash flows from operations
during the next year.

     To date, Launch's revenues have been derived primarily from the sale of
advertising, including online and offline sponsorships, content licensing, and
to a lesser extent, from annual subscriptions relating to Launch on CD-ROM.
Launch derives revenue from advertising sales against the total audience viewing
content on both launch.com and Launch on CD-ROM. Launch expects that future
growth, if any, in advertising revenue will largely depend upon increasing the
launch.com audience.

     Advertising revenues for sponsorships across the Launch media properties
are recognized ratably over the sponsorship term, which are typically one to
twelve months. Revenues from advertisements for Launch on CD-ROM are recognized
upon the release date of the issue in which the advertisement appears. With
respect to launch.com, revenues from advertisements are recognized ratably in
the period in which the advertisement is displayed, provided that no significant
Launch obligations remain.

     Content licensing primarily relates to the Launch Radio Networks' content
syndication. Launch obtains on-air radio advertising inventory in exchange for
music and entertainment news content. Launch sells this inventory for cash and
recognizes revenue when the radio stations broadcast the advertisement. Other
content licensing revenues includes online and content syndication.

     We derive subscription revenues from annual subscription fees for Launch on
CD-ROM. Advance payments for Launch on CD-ROM subscriptions are recorded as
deferred revenue and recognized as revenue ratably over the term of the
subscription.

     Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for advertising
space on other Web sites. Revenues and expenses from barter transactions are
recorded at the lower of estimated fair value of the advertisements received or
delivered based on advertising rates currently in effect. Barter revenues are
recognized when the advertisements are run on the Launch media properties.
Barter expenses are recognized when Launch's advertisements are run on the

                                        17
<PAGE>   20

reciprocal Web sites or other advertising medium, which is typically in the same
period as when the advertisements are run on the Launch media properties. In
2000, revenues recognized from barter transactions represented 11% of total net
revenues.

     We have entered into various license arrangements, strategic alliances and
business acquisitions in order to build our audience, provide music-specific
content, generate additional online traffic, increase registered members and
establish additional sources of revenue. These acquisitions, arrangements and
alliances have resulted in a variety of non-cash charges that will affect our
operating results over the next several fiscal periods.

SIGNIFICANT EVENTS

  Tourdates.com

     On January 18, 2000 Launch acquired the Atlanta based Tourdates.com, the
premier online guide to local and national concert information. The
predominantly stock transaction was valued at approximately $11.6 million.
Tourdates.com gathers its tour information from a network of 10,000 bands,
leading concert agencies and promoters and more than 80 field representatives
based in 56 U.S. cities, Canada and other international locations such as London
and Warsaw. In addition, Tourdates.com's approximately 85,000 registered users
became part of launch.com's member community.

  The Warped Tour

     On August 31, 2000, the Company purchased the entire membership interest in
C.C.R.L., LLC d.b.a. The Warped Tour. The Warped Tour is a popular summer
concert series where musicians, athletes and fans interact and participate in
daylong events.

     The purchase price of approximately $7.8 million was comprised of 788,474
shares of the Company's common stock with an estimated fair value of $5.5
million, cash payments of $2.0 million and transaction costs of approximately
$250,000. The terms of acquisition also include contingent future purchase cash
or stock payments to the sellers, aggregating $23.5 million over a five-year
period including a $15 million payment in the fifth year, based on performance
targets set for the operations of the Warped Tour.

  Online Music Group

     In December 2000, the Company decided to discontinue the Online Music Group
due to the reduced demand for banner only advertising and focused our marketing
and customer acquisition efforts on launch.com.

                                        18
<PAGE>   21

RESULTS OF OPERATIONS

     The following table sets forth the results of operations for Launch
expressed as a percentage of net revenues:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              --------------------------
                                                               1998      1999      2000
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA
Net revenues:
  Advertising...............................................    58.0%     52.8%     67.5%
  Content licensing.........................................     0.0      32.6      25.6
  Subscription and other....................................    42.0      14.6       6.9
                                                              ------    ------    ------
          Total net revenues................................   100.0     100.0     100.0
Operating expenses:
  Cost of revenues..........................................    91.0      25.5      25.3
  Sales and marketing.......................................   163.0     131.6      94.0
  Content and product development...........................    76.2     104.4      63.7
  General and administrative................................    38.6      28.1      29.7
  Depreciation and amortization.............................     6.5      47.9      56.7
                                                              ------    ------    ------
Loss from operations........................................  (275.3)   (237.5)   (169.4)
Interest income, net........................................     7.8      12.0       5.3
                                                              ------    ------    ------
Loss before provision for income taxes......................  (267.5)   (225.5)   (164.1)
Provision for income taxes..................................     0.1       0.1       0.0
                                                              ------    ------    ------
Net loss....................................................  (267.6)%  (225.6)%  (164.1)%
                                                              ======    ======    ======
</TABLE>

COMPARISONS OF YEARS ENDED DECEMBER 31, 2000 AND 1999

  Total Net Revenues

     Total net revenues increased 85.4% from $16.6 million in 1999 to $30.8
million in 2000. The increase in net revenues was primarily attributable to an
increase in advertising revenues and content licensing.

     Advertising Revenues. Advertising revenues increased 136.9% from $8.8
million, or 52.8% of total net revenues in 1999, to $20.8 million, or 67.5% of
total net revenues in 2000. The increase in advertising revenue can be
attributed to an increased number of advertisers and sponsors on Launch's media
properties and revenue from large corporate sponsorships. Throughout 2000,
Launch continued to expand its advertising sales force, in particular focusing
its sales efforts on sponsorships or advertisements that covered all of Launch's
media properties. Launch expects advertising revenue to continue to represent a
significant portion of its total net revenues for the foreseeable future.
Included in advertising revenues are revenues recognized from barter
transactions of $3.4 million for the year ended December 31, 2000, compared to
$1.2 million for the year ended December 31, 1999.

     Content Licensing. Content licensing revenues increased 45.5% from $5.4
million, or 32.6% of total net revenues in 1999, to $7.8 million, or 25.6% of
total net revenues in 2000. Content licensing revenue is primarily generated
from Launch Radio Networks (LRN) by providing news and information to radio
stations in exchange for advertising radio spots. These radio spots are sold
through a third-party advertising agency and recognized as revenue when the
radio station broadcasts the advertisement. Content licensing revenues from LRN
depend on both the number of music and music related spots we are able to create
and on the radio markets demand for news and information. While LRN revenue
comprises the majority of our content licensing, we expect LRN revenues to
decrease as a percentage of total content licensing as we continue to expand our
other content syndication.

     Subscription and Other. Subscription and other revenues decreased 11.6%
from $2.4 million, or 14.6% of total net revenues in 1999 to $2.1 million, or
6.9% of total net revenues in 2000. The decline in subscription and other
revenue can be attributed to the Launch on CD-ROM. During the third quarter of
2000, Launch

                                        19
<PAGE>   22

began to transition the distribution to a controlled circulation model. As a
result, Launch anticipates that subscription revenues from Launch on CD-ROM will
discontinue as of March 31, 2001.

  Operating Expenses

     Cost of Revenues. Cost of revenues consist primarily of CD-ROM
manufacturing, packaging and distribution costs, Online Music Group ("OMG")
inventory costs, content licensing, site-hosting, bandwidth and online
advertisement serving costs. Cost of revenue increased 84.2% from $4.2 million,
or 25.5% of total net revenues in 1999, to $7.8 million or 25.3% of total net
revenues in 2000. The increase in cost of revenues can be attributed to OMG
costs and increased serving and bandwidth costs. In December 2000, the Company
decided to discontinue the Online Music Group due to the reduced demand for
banner only advertising and focused our marketing and customer acquisition
efforts on launch.com. Even with the elimination of the OMG inventory costs, we
expect cost of revenues to continue to increase in absolute dollars and stay
relatively constant as a percentage of net revenues.

     Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of customer acquisition and marketing costs, promotional costs and the
cost of the direct marketing and advertising sales force. Sales and marketing
expenses increased 31.7% from $21.9 million, or 131.6% of total net revenues in
1999 to $29.0 million, or 94.0% of total net revenues in 2000. The increase in
sales and marketing expenses occurred primarily due to the cost of acquiring new
registered users on launch.com, including distribution agreements and
promotions, advertising for Launch on other web sites, the hiring of additional
sales and marketing personnel and increased sponsorships of music events. We
expect sales and marketing expenses to increase as we leverage existing
distribution agreements to increase the audience on launch.com.

     Content and Product Development Expenses. Content and product development
expenses consist of editorial, which includes video production and editorial
writers, art production and software, technology and Web development costs.
Content and product development expenses increased 13.1% from $17.4 million, or
104.4% of total net revenues in 1999 to $19.6 million, or 63.7% of total net
revenues in 2000. Content and product development expenses in 1999 include a
one-time charge of $5 million relating to warrants which were issued to two
major record labels for nonexclusive Internet music video distribution rights to
stream catalog and new release music videos. Content and product development
expenses increased due to costs of further development and enhancement of the
launch.com Web site, including product development costs, significant additions
to personnel, and software license costs. We believe that significant
investments in content and product development are required to remain
competitive and to retain our registered users. Therefore, we expect that
content and product development expenses will continue to increase in absolute
dollars, although continue to decrease as a percentage of total net revenues.

     General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance and accounting, human resources, legal, facilities, investor
relations, and fees for professional services. General and administrative
expenses increased 96.0% from $4.7 million, or 28.1% of total net revenues in
1999, to $9.1 million, or 29.7% of total net revenues in 2000. The increase in
general and administrative expenses for the year ended December 31, 2000 was
primarily attributable to increases in salary and related expenses, facility
expenses, bad debts, insurance, and investor relation costs. Launch anticipates
that general and administrative expenses will continue to increase in absolute
dollars, but decrease as a percentage of total net revenue.

  Depreciation and Amortization

     Depreciation and amortization was $17.5 million for the year ended December
31, 2000 as compared to $8.0 million for the year ended December 31, 1999.
Launch's depreciation and amortization expenses primarily consisted of
amortization of excess purchase prices over net tangible assets acquired arising
from its acquisitions. Also included in depreciation and amortization are costs
associated with purchases of equipment and facility enhancements.

                                        20
<PAGE>   23

  Interest Income, Net

     Interest income, net consists of interest earned on cash and cash
equivalents and short-term investments, offset by interest expense on
borrowings. Net interest income decreased from $2.0 million in 1999 to $1.6
million in 2000. The decrease in net interest income in 2000 is a result of the
decrease in the average amount of short-term investments in 2000 in comparison
to 1999.

  Income Taxes

     Launch's income taxes consist of minimum state franchise taxes. At December
31, 2000 Launch had approximately $101.6 million and $47.8 million of federal
and state net operating loss carryforwards, respectively, available to offset
future taxable income. Launch's federal and state net operating loss
carryforwards expire beginning in 2009 and 2001, respectively. Due to the change
in Launch's ownership interests in connection with the IPO and prior private
placements, future utilization of the net operating loss carryforwards may be
subject to certain annual limitations.

  Unearned Compensation

     In connection with the grant of stock options to employees in 1998, Launch
recorded unearned compensation of $1.4 million representing the difference
between the deemed value of Launch's common stock for accounting purposes and
the exercise price of such options at the date of grant. Such amount, net of
amortization, is presented as a reduction of stockholders' equity and amortized
over the four-year vesting period of the options. Amortization of unearned
compensation was $443,000 and $223,000 in 1999 and 2000, respectively.

COMPARISONS OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998

  Total Net Revenues

     Total net revenues increased 231.6% from $5.0 million in 1998 to $16.6
million in 1999. The increase in net revenues was primarily attributable to an
increase in advertising revenues and content licensing.

     Advertising Revenues. Advertising revenues increased 202.2% from $2.9
million, or 58.0% of total net revenues in 1998, to $8.8 million, or 52.8% of
total net revenues in 1999. The increase in advertising revenue can be
attributed to an increased number of advertisers and sponsors on Launch's media
properties and revenue from Sony and Intel's advertising sponsorships.
Throughout 1999, Launch continued to expand its advertising sales force, in
particular focusing its sales efforts on sponsorships or advertisements that
covered all of Launch's media properties. The inventory of impressions available
on our web site increased, as a result of the fourth quarter growth of Online
Music Group. Launch expects advertising revenue to continue to represent a
significant portion of its total net revenues for the foreseeable future.
Included in advertising revenues are revenues recognized from barter
transactions of $1.2 million for the year ended December 31, 1999, compared to
$1.3 million for the year ended December 31, 1998.

     Content Licensing. Content licensing revenues for the year ended December
31, 1999 were $5.4 million, or 32.6% of total net revenues. Content licensing
revenue is primarily generated from Launch Radio Networks (LRN) by providing
news and information to radio stations in exchange for advertising radio spots.
These radio spots are sold through a third-party advertising agency and
recognized as revenue when the radio station broadcasts the advertisement.
Content licensing revenues in prior years were immaterial and were captured in
subscriptions and other revenues. Content licensing revenues from LRN depend on
both the number of music and music related spots we are able to create and on
the radio markets demand for news and information. While LRN revenue comprises
the majority of our content licensing, we expect LRN revenues to decrease as a
percentage of total content licensing as we continue to expand our content
syndication.

     Subscription and Other. Subscription and other increased 14.9% from $2.1
million, or 42.0% of total net revenues in 1998 to $2.4 million, or 14.6% of
total net revenues in 1999. Of the total $2.4 million in 1999, $1.1 million, or
6.8% of total net revenues, were generated from subscriptions and $650,000
related to a development agreement with Intel. Subscription revenue was $1.5
million in 1998. At December 31, 1999,

                                        21
<PAGE>   24

Launch had deferred revenues of $1,197,000 consisting primarily of prepaid
advertising on Launch's media properties.

  Operating Expenses

     Cost of Revenues. Cost of revenues consists primarily of CD-ROM costs, OMG
inventory costs, content licensing, site hosting, bandwidth, production costs
for advertising projects and advertisement serving costs. Cost of revenue
decreased 7.1% from $4.6 million, or 90.9% of total net revenues in 1998, to
$4.2 million or 25.5% of total net revenues in 1999. The decrease in cost of
revenues can be attributed to less costs incurred in 1999 relating to
advertising production projects which were partially offset by increases in the
cost of site hosting, advertisement server costs and content licenses.

     Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of customer acquisition and marketing costs, promotional costs and the
cost of the direct marketing and advertising sales force. Sales and marketing
expenses increased 167.6% from $8.2 million, or 163.0% of total net revenues in
1998 to $21.9 million, or 131.6% of total net revenues in 1999. The increase in
sales and marketing expenses occurred primarily due to the cost of acquiring new
registered users on launch.com, including distribution agreements and
promotions, advertising for Launch on other web sites, the hiring of additional
sales and marketing personnel and increased sponsorships of music events. In
addition, we undertook a significant outdoor advertising campaign beginning in
August 1999 in order to promote the Launch brand and increase the audience on
Launch's media properties. We expect sales and marketing expenses to increase as
we pursue additional marketing campaigns and enter into new distribution
agreements to increase the audience on launch.com, expand marketing of the
Launch brand and hire additional sales and marketing personnel.

     Content and Product Development Expenses. Content and product development
expenses consist of editorial, which includes video production and editorial
writers, art production and software, technology, cost of warrants and Web
development costs. Content and product development expenses increased 354.2%
from $3.8 million, or 76.2% of total net revenues in 1999 to $17.4 million, or
104.4% of total net revenues in 1999. Content and product development expenses
increased due to a one-time charge of $5 million relating to warrants, costs of
development and enhancement of the launch.com Web site, including product
development costs, significant additions to personnel, and software license
costs. We believe that significant investments in content and product
development are required to remain competitive and to retain our registered
users. Therefore, we expect that content and product development expenses will
continue to increase in absolute dollars, although decreasing as a percentage of
total net revenues, for the foreseeable future.

     In the fourth quarter of 1999, the Company issued fully vested,
non-forfeitable warrants to purchase 402,000 shares of common stock at an
exercise price of $11.97 to $18.35 per share to two major record labels for
nonexclusive Internet music video distribution rights to stream catalog and new
release music videos. Because the warrants are fully vested, are not subject to
forfeiture and do not require any minimum performance requirements, the Company
recognized approximately $5.0 million of expense based upon the fair value of
the warrants on the date issued.

     General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance and accounting, human resources, legal, facilities, investor
relations, and fees for professional services. General and administrative
expenses increased 141.3% from $1.9 million, or 38.6% of total net revenues in
1998, to $4.7 million, or 28.1% of total net revenues in 1999. The increase in
general and administrative expenses for the year ended December 31, 1999 was
primarily attributable to salary and related expenses for additional personnel
and increased facilities costs. Launch anticipates hiring additional personnel,
expanding facilities and incurring additional costs related to being a public
company, including costs related to investor relations programs and professional
services fees. Accordingly Launch anticipates that general and administrative
expenses will continue to increase in absolute dollars, but decrease as a
percentage of total net revenue.

                                        22
<PAGE>   25

  Depreciation and Amortization

     Depreciation and amortization was $8.0 million for the year ended December
31, 1999 as compared to $0.3 million for the year ended December 31, 1998.
Launch's depreciation and amortization expenses consisted primarily of
amortization of excess purchase prices over net tangible assets acquired arising
from its acquisitions in 1999 of Musicvideos.com and SW Networks. Also included
in depreciation and amortization are costs associated with purchases of
equipment and facility enhancements. We expect depreciation and amortization to
increase as we acquire additional companies and invest in technology and
facility assets.

  Interest Income, Net

     Interest income, net consists of interest earned on cash and cash
equivalents and short-term investments, offset by interest expense on
borrowings. Net interest income increased from $389,000 in 1998 to $2.0 million
in 1999. The increase in net interest income in 1999 is a result of investing
net proceeds from the Company's IPO.

  Income Taxes

     Launch's income taxes consist of minimum state franchise taxes.

  Preferred Stock and Accretion

     As a result of the Initial Public Offering, all 5,918,230 shares of
preferred stock were converted to common stock, on a share for share basis. All
series of preferred stock were redeemable, at the option of the holders,
beginning on February 27, 2003. The shares were redeemable at the original
issuance price plus 6% per annum from February 27, 1998 through the redemption
date for Series A, B, and D stock and from March 29, 1996 through the redemption
date for Series C stock. The carrying amount of the preferred stock was being
increased by periodic accretions so that the amount reflected in the balance
sheet would equal the mandatory redemption amount at the redemption date.
Accretions were $1.9 million and $766,000 in 1998 and 1999, respectively.

  Unearned Compensation

     In connection with the grant of stock options to employees in 1998, Launch
recorded unearned compensation of $1.4 million representing the difference
between the deemed value of Launch's common stock for accounting purposes and
the exercise price of such options at the date of grant. Such amount, net of
amortization, is presented as a reduction of stockholders' equity and amortized
over the four-year vesting period of the options. Amortization of unearned
compensation was $193,000 and $443,000 in 1998 and 1999 respectively.

LIQUIDITY AND CAPITAL RESOURCES

     Since its inception, Launch has financed its operations primarily through a
public issuance of common stock, private placements of preferred stock and, to a
lesser extent, from the revenues generated by operations. As of December 31,
2000, Launch had approximately $16.7 million in cash and cash equivalents and
marketable securities, which are primarily, short term securities.

     Net cash used in operating activities increased to $25.3 million for the
year ended December 31, 2000, from $24.7 million for 1999. The increase in net
cash used in operating activities is substantially attributable to the costs
associated with the growth of Launch's media business.

     Net cash provided by investing activities was $23.4 million for the year
ended December 31, 2000, as compared to $58.2 million used in 1999. The increase
in net cash provided by investing activities resulted primarily from the net
maturities of debt securities in 2000, of which the majority was used to fund
and expand the Company's operating activities, rather than reinvested in
additional securities. Investments of cash is predominantly invested in
instruments that are highly liquid, are high quality investment grade, and have
maturities of less than one year with the intent to make such funds readily
available for operating purposes.
                                        23
<PAGE>   26

Partially offsetting the cash provided from maturities of securities were
increases in purchases of property and equipment of $9.3 million and cash used
in acquisitions of businesses of $3.8 million.

     Net cash provided by financing activities decreased to $2.5 million for the
year ended December 31, 2000, from $82.0 million for 1999. The decrease is due
principally to the one-time sale of common stock through our IPO in 1999.

     Launch has a capital lease line of credit for $2.0 million. The Company's
net borrowings under this line of credit were approximately $1.4 million and
$1.7 million for the year ended December 31, 1999 and 2000, respectively. This
facility bears interest at the bank's prime rate (9.0% at December 31, 2000).
The Company also secured an additional line of credit in 2000 for $3.0 million
to finance capital expenditures. The line of credit accrues interest at 15% per
annum and requires monthly interest and principal payments. At December 31,
2000, $2.6 million was outstanding under this line. The equipment purchased
collateralizes both lease lines.

     Launch has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, which is consistent with
the growth in Launch's operations and staffing, and anticipates that this will
continue into the next year. In addition, the Company has incurred recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans include (i) substantially
reducing operating and overhead costs and accelerating our move to profitability
by increasing our net revenues through increasing the Launch audience and
increasing advertising revenue per advertiser, (ii) raising additional funds
through public or private debt or equity placement, (iii) licensing our content
and technology, and/or (iv) merging with a strategic partner. There can be no
assurance that the Company will be successful in these plans. Moreover, the
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

RECENT ACCOUNTING PRONOUNCEMENTS

     In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for the year beginning January 1, 2001,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires a company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management does not
believe that the adoption of SFAS No. 133 will have a significant impact on the
Company's consolidated financial position, results of operations or cash flows.

SEASONALITY

     Launch believes that advertising sales in traditional media generally are
lower in the first and third quarters of each year and that advertising
expenditures fluctuate significantly with economic cycles. Depending on the
extent to which the Internet is accepted as an advertising medium, seasonality
and cyclicality in the level of Internet advertising expenditures could become
more pronounced. The foregoing factors could have a material adverse affect on
the Company's business, financial conditions, results of operations and cash
flows.

RISK FACTORS

     This form 10-K contains forward-looking statements relating to future
events or our future financial performance. You are cautioned that such events
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.

     You should consider carefully the following risk factors and all other
information contained in this report before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Additional risks
and uncertainties that are not yet identified or that we currently think are
immaterial may also materially

                                        24
<PAGE>   27

adversely affect our business and financial condition in the future. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.

We Have a History of Losses and Because We Anticipate that Our Operating
Expenses Will Grow More Quickly than Our Revenues, at Least in the Short Term,
We Expect Increased Losses. As a Result of Our Anticipated Losses and Our Cash
Position, Our Auditors Have Qualified Their Opinion on Our Financial Statements
to Note that There is Substantial Doubt Regarding Our Ability to Continue as a
Going Concern

     We incurred net losses of $13.4 million in 1998, $37.5 million in 1999 and
$50.6 million in 2000. As of December 31, 2000, our accumulated deficit was
$115.7 million. We have not achieved profitability and expect to incur operating
losses in 2001 as well. Our existing financial resources may not be adequate to
fund our operations over the next twelve months unless we obtain additional
financing or significantly increase our revenues or reduce our expenses. We
cannot assure you that we will be able to obtain such financing, increase our
revenues or reduce our expenses to the extent required to continue operations
without significantly curtailing our business activities. Further, even if we
are successful in addressing our capital needs, such actions may adversely
impact stockholder value. We will need to generate significant revenues to
achieve and maintain profitability, and we cannot assure you that we will be
able to do so. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or an annual basis in the
future. If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, our financial performance will likely be
adversely affected. See "Selected Financial Data" for more detailed information
regarding our historical operating results.

We May Need Additional Financing to Achieve Our Business Objectives, and Such
Financing May Not Be Available Because of the Condition of Our Business or the
Uncertain Nature of the Financial Markets

     If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of such stockholders. 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. This limitation could adversely affect our business.

     We may need to raise additional funds in order to do the following:

     - fund our ongoing operations;

     - fund more rapid expansion;

     - develop new or enhance existing services or products;

     - fund distribution relationships;

     - respond to competitive pressures; or

     - acquire complementary products, businesses or technologies.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
our working capital and capital expenditures.

Our Operating Results are Volatile and May Cause Our Stock Price to Fluctuate

     Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. Accordingly, you should not rely on quarter-to-quarter comparisons
of our results of operations as an indication of future performance. It is
possible that in some future periods our operating results will be below the
expectations of public market analysts and

                                        25
<PAGE>   28

investors. In this event, the price of our common stock will likely decline.
Factors that may cause our revenues and operating results to fluctuate include
the following:

     - our ability to attract and retain advertisers;

     - our ability to increase the registered membership of launch.com and the
       new web sites, services or products introduced by us or by our
       competitors;

     - the timing and uncertainty of sales cycles;

     - mix of online advertisements sold;

     - seasonal declines in advertising sales, which typically occur in the
       first and third calendar quarters, which will be partially be offset with
       the increased revenues from The Warped Tour in the third quarter;

     - the level of Web and online services usage;

     - our ability to successfully integrate operations and technologies from
       acquisitions or other business combinations;

     - technical difficulties or system downtime affecting the Internet
       generally or the operation of launch.com; and

     - general economic conditions, as well as economic conditions specific to
       digital media and the music industry.

     To attract and retain a larger audience, we plan to increase our
expenditures for sales and marketing, content development, and technology and
infrastructure development. Many of these expenditures are planned or committed
in advance in anticipation of future revenues. Because advertising orders are
typically short term and subject to cancellation without penalty until shortly
before the advertisement runs, our quarterly operating results are difficult to
forecast. If our revenues in a particular quarter are lower than we anticipate,
we may be unable to reduce spending in that quarter. As a result, any shortfall
in revenues would likely adversely affect our quarterly operating results.

Because We Depend Principally Upon Advertising Revenues, if We Do Not Increase
Advertising Sales, Our Business May Not Grow or Survive

     Our revenues for the foreseeable future will depend substantially on sales
of advertising. In 1999 and 2000 advertising sales accounted for 52.8% and 67.5%
of our net revenues, respectively. If we do not increase advertising revenues,
our business may not grow or survive. Increasing our advertising revenues
depends upon many factors, including our ability to do the following:

     - conduct successful selling and marketing efforts aimed at advertisers;

     - increase the size of the launch.com audience;

     - increase the amount of revenues per advertisement;

     - aggregate our target demographic group of 12 to 34 year old active music
       consumers, and, in particular, the Generation Y segment of this group;

     - increase awareness of the Launch brand among advertisers;

     - target advertisements to appropriate segments of our audience;

     - make Launch available through evolving broadband distribution channels;
       and

     - accurately measure the size and demographic characteristics of our
       audience.

     Our failure to achieve one or more of these objectives could adversely
affect our business.

                                        26
<PAGE>   29

     Advertising revenues are difficult to forecast, especially because the
market for advertising on digital media has emerged relatively recently. We have
historically entered into barter transactions with advertisers that we do not
believe would pay cash for such advertisements. We expect to substantially
reduce both the dollar volume and frequency of such transactions in future
periods. In each quarterly period, we derive a significant portion of our
revenues from sales of advertising to a limited number of customers.
Accordingly, the loss of a key advertising relationship or the cancellation or
deferral of even a limited number of orders could adversely affect our quarterly
performance.

If We Fail to Increase the Size of Our Audience, We May Not Be Able to Attract
Advertisers or Strategic Partners

     Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. In addition, we
may be at a relative disadvantage to other digital media companies with larger
audiences that may be able to leverage their audiences to access more
advertisers and significant strategic alliances. To attract and retain our
audience, we must do the following:

     - continue to offer compelling music content;

     - encourage our users to become part of our community;

     - conduct effective marketing campaigns to acquire new members;

     - develop new and maintain existing distribution relationships with other
       Web sites;

     - update and enhance the features of launch.com;

     - increase awareness of the Launch brand;

     - make Launch available through broadband distribution channels as they
       achieve widespread consumer acceptance; and

     - offer targeted, relevant products and services.

     Our failure to achieve one or more of these objectives could adversely
affect our business, and we cannot assure you that we will be successful in
these efforts.

     A significant element of our strategy is to build a loyal community of
registered members on launch.com because we believe community features help
retain actively engaged users. The concept of developing such a community on the
Web is unproven, and if it is not successful, then it may be more difficult to
increase the size of our audience.

     We also depend on establishing and maintaining distribution relationships
with high-traffic Web sites to increase our audience. There is intense
competition for placements on these sites, and we may not be able to enter into
such relationships on commercially reasonable terms or at all. Even if we enter
into distribution relationships with these Web sites, they themselves may not
attract significant numbers of users. Therefore, launch.com may not obtain
additional users from these relationships. Moreover, we have paid in the past,
and may pay in the future, significant fees to establish these relationships.

     We also intend to increase our financial expenditures on marketing the
Launch brand because we believe brand awareness will be critical to increasing
our audience, especially because there are few barriers to entry for Internet
businesses. If we do not increase our revenues as a result of our branding and
other marketing efforts or if we otherwise fail to promote our brand
successfully, our business could be adversely affected.

Sales Cycles Vary for Advertising and May Cause Our Operating Results to
Fluctuate

     Our dependence on advertising subjects us to additional risks because the
sales cycles for these sales vary significantly. The time between the date of
initial contact with a potential advertiser or sponsor and receipt of a purchase
order from the advertiser may range from as little as nine weeks to up to nine
months. During these sales cycles, we may expend substantial funds and
management resources but not obtain advertising revenues.
                                        27
<PAGE>   30

Therefore, if these sales are delayed or do not otherwise occur, our operating
results for a particular period may be adversely affected.

     Advertising sales are subject to delays over which we have little or no
control, including the following:

     - advertisers' budgetary constraints;

     - internal acceptance reviews by advertisers and their agencies;

     - the timing of completion of advertisements by advertisers; and

     - the possibility of cancellation or delay of projects by advertisers or
       sponsors.

We Have a Limited Operating History that Makes an Evaluation of Our Business
Difficult

     We incorporated in February 1994 and published the first issue of Launch on
CD-ROM in May 1995. We first made launch.com available over the Internet in
October 1997. Because we have a limited operating history, you must consider the
risks and difficulties frequently encountered by early-stage companies such as
Launch in new and rapidly evolving markets, including the market for advertising
on the Internet and other digital media. Prior to 1999, Launch on CD-ROM had
accounted for the majority of Launch's audience. Accordingly, Launch had derived
its revenues principally from advertising sales against the Launch on CD-ROM
audience and, to a lesser extent, from subscriptions for Launch on CD-ROM.
Future growth in our business will depend substantially upon our ability to
increase the size of the launch.com audience, to increase advertising sales
against that audience and to meet the challenges described in the risk factors
below.

Failure to Continue to Develop Compelling Content that Attracts Our Target
Audience Could Cause Our Audience Size to Decrease or Change the Demographics of
Our Audience

     Our future success depends on our ability to continue to develop content
that is interesting and engaging to our target audience. If our audience
determines that our content does not reflect its tastes, then our audience size
could decrease or the demographic characteristics of our audience could change.
Either of these results would adversely affect our ability to attract
advertisers. Our ability to develop compelling content depends on several
factors, including the following:

     - quality of our editorial staff;

     - technical expertise of our production staff;

     - access to recording artists; and

     - access to content controlled by record labels, publishers and artists.

     Further, consumer tastes change, particularly those of Generation Y, and we
may be unable to react to those changes effectively or in a timely manner.

Limitations on the Availability or Increases in the Price of Music Content
Developed by Third Parties Could Adversely Affect Our Business

     Because much of our content, including recording artist interviews, audio
and video performances and music, are provided to us by record labels and
artists at minimal or no charge, we depend on our good relations with record
labels and artists to offer compelling content. We cannot assure you that they
will continue to make their content available to us on reasonable terms or at
all. If record labels, music publishers or artists charge significant fees for
their content or discontinue their relationships with us, then our content
offering could be adversely affected.

     A significant portion of the music content available on Launch is licensed
from publishers, record labels and artists. We frequently either do not have
written contracts or have short-term contracts with copyright owners, and,
accordingly, our access to copyrighted content depends upon the willingness of
such parties to continue to make their content available. Further, the parties
who license material to us may face increasing costs to develop or acquire that
material as a result of evolving laws regarding intellectual property, and these
                                        28
<PAGE>   31

licensors may pass any such additional costs on to us. If the fees for music
content increase substantially or if significant music content becomes
unavailable, our ability to offer music content could be materially limited. We
currently use certain content without a formal license because we do not believe
that such a license is required under existing law. However, this area of law
remains uncertain and may not be resolved for a number of years. When this area
of law is resolved, we may be required to obtain formal licenses for such
content. Such licenses may not be available on reasonable terms, if at all. Any
limit on our content offering could adversely affect our business.

We Need New Distribution Technologies to Increase Accessibility of or Our
Content, and Failure of Such Technologies to Achieve Consumer Acceptance Could
Limit Our Growth

     To experience the full extent of our high-quality audio and full-motion
video content, consumers must access such content either from a CD-ROM, DVD-ROM
or over a high-bandwidth connection, such as cable or digital subscriber line
modem or satellite data broadcast. If such broadband distribution networks do
not achieve widespread consumer acceptance, we may be unable to effectively
distribute our audio and video content in its most compelling format. We cannot
assure you that broadband distribution networks will ever achieve consumer
acceptance, and if they do not, our growth may be limited.

We Depend on a Limited Number of Advertisers, and the Loss of a Number of These
Advertisers Could Adversely Affect Our Operating Results

     Historically, a limited number of advertisers have accounted for a
significant percentage of our revenues in each period. We anticipate that our
results of operations in any given period will continue to depend to a
significant extent upon revenues from a small number of advertisers. In
addition, particularly because few advertisers are contractually obligated to
purchase any advertising in the future, we anticipate that the mix of
advertisers in each fiscal period will continue to vary. In order to increase
our revenues, we will need to attract additional significant advertisers on an
ongoing basis. Our failure to sell a sufficient number of advertisements or to
engage a sufficient number of advertisers during a particular period could
adversely affect our results of operations.

We Must Maintain and Establish Strategic Alliances to Increase Our Audience and
Enhance Our Business

     In an attempt to increase audience, build brand recognition and enhance
content, distribution and commerce opportunities, we have entered into strategic
alliances with various media and Internet-related companies such as Sony Music,
Inc., America Online, Inc., Microsoft Corporation and Intel Corporation. Our
failure to maintain or renew our existing strategic alliances or to establish
and capitalize on new strategic alliances could have an adverse affect on our
business. Our future success depends to a significant extent upon the success of
such alliances. Occasionally, we enter into agreements with strategic partners
that may prohibit us from entering into similar arrangements with competitors of
our strategic partners. Such exclusivity provisions may limit our ability to
enter into favorable arrangements with complementary businesses and thereby
limit our growth. We cannot assure you that we will achieve the strategic
objectives of these alliances, that any party to a strategic alliance agreement
with Launch will perform its obligations as agreed upon or that such agreements
will be specifically enforceable by Launch. In addition, some of our strategic
alliances are short term in nature and may be terminated by either party on
short notice.

Competition from Traditional and Online Media and Other Companies Focused on
Music Could Reduce Our Advertising Sales or Market Share

     Competition among media companies seeking to attract the active music
consumer is intense. Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which could adversely
affect our business. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising
revenues. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because

                                        29
<PAGE>   32

there are so few barriers to entry on the Web. We compete for members, users and
advertisers with the following types of companies:

     - publishers and distributors of traditional media, such as television,
       radio and print, including MTV, Clear Channel, CMT, Rolling Stone and
       Spin, and their Internet affiliates;

     - online services or and Web sites targeted at music consumers, such as
       MP3.com, ARTISTdirect, MTVi, emusic.com and musicmaker.com;

     - Web retrieval and other Web "portal" companies, such as Excite@Home,
       Inc., Infoseek Corporation, Lycos, Inc. and Yahoo, Inc.; and

     - online music retailers, such as CDNow, Inc. and Amazon.com, Inc.

     Because we compete for advertisers with traditional advertising media, our
business could be adversely affected if advertisers do not view digital media as
effective for advertising. Competition is likely to increase significantly as
new companies enter the market and current competitors expand their services.

     Many of these potential competitors are likely to enjoy substantial
competitive advantages, including the following:

     - larger audiences;

     - larger technical, production and editorial staffs;

     - greater name recognition;

     - better access to content;

     - more established Internet presence;

     - larger advertiser bases; and

     - substantially greater financial, marketing, technical and other
       resources.

     If we do not compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.

The Loss of Our Chief Executive Officer, Our President or Other Key Personnel
Could Adversely Affect Our Business Because These Officers Are Important to Our
Continued Growth

     Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly
David B. Goldberg, Launch's chief executive officer, and Robert D. Roback,
Launch's president. The loss of either of these individuals or certain other key
employees would likely have an adverse effect on our business. We have an
employment agreement with only one of our executive officers, and we do not
anticipate that other executive officers or key personnel will enter into
employment agreements. We expect that we will need to hire additional personnel
in all areas during 2000. Competition for personnel throughout our industry is
intense. We may be unable to retain our current key employees or attract,
integrate or retain other highly qualified employees in the future. We have in
the past experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
If we do not succeed in attracting new personnel or retaining and motivating our
current personnel, our business could be adversely affected.

Growth in Our Operations, Particularly Our Sales, Marketing, Financial and
Administrative Organizations, is Placing a Strain on Our Resources, and Failure
to Manage Growth Effectively Could Harm Our Business

     We have experienced and are currently experiencing a period of significant
growth in our operations. This growth has placed, and our anticipated future
growth in our operations will continue to place, a significant strain on our
resources. As part of this growth, we will have to implement new operational
systems and procedures and controls to expand, train and manage our employee
base and to maintain close coordination among our technical, accounting,
finance, marketing, sales and production staffs. We will also need to
                                        30
<PAGE>   33

continue to attract, retain and integrate personnel in all aspects of our
operations. To the extent we acquire new businesses, we will also need to
integrate new operations, technologies and personnel. Failure to manage our
growth effectively could adversely affect our business.

Acceptance and Effectiveness of Digital Media for Advertising Are Unproven,
Which May Discourage Some Advertisers from Advertising on Launch

     Our future is highly dependent on an increase in the use of the Internet
and other forms of digital media for advertising. If the Internet advertising
market fails to develop or develops more slowly than we expect, then our
business could be adversely affected. Moreover, the market for advertising on
other forms of digital media, such as broadband distribution, is even less
developed than Internet advertising, and if that market does not develop, then
our growth may be limited.

     The Internet advertising market is new and rapidly evolving, and we cannot
yet gauge the effectiveness of advertising on the Internet as compared to
traditional media. As a result, demand for Internet advertising is uncertain.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Such customers may find advertising on the
Internet to be undesirable or less effective for promoting their products and
services relative to traditional advertising media.

     Different pricing models are used to sell Internet advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
uncertainty makes it difficult to project our future advertising rates and
revenues. Any failure to adapt to pricing models that develop or respond to
competitive pressures could adversely affect our advertising revenues. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption of
this software could adversely affect the commercial viability of Internet
advertising.

Tracking and Measurement Standards for Advertising Are Evolving and Create
Uncertainty About the Viability of Our Business Model

     There are currently no standards for the measurement of the effectiveness
of advertising on the Internet and other digital media, and the industry may
need to develop standard measurements. The absence or insufficiency of these
standards could adversely impact our ability to attract and retain advertisers.
We cannot assure you that such standard measurements will develop. In addition,
currently available software programs that track Internet usage and other
tracking methodologies are rapidly evolving. We cannot assure you that the
development of such software or other methodologies will keep pace with our
information needs, particularly to support the growing needs of our internal
business requirements and advertising clients. For instance, DoubleClick, Inc.,
our third party ad server, reported that there were 9.9 million unique visitors
in September 2000 to launch.com properties. Our advertisers may rely on this
data or other similar data to determine whether to advertise on Launch, and
adverse data from this or other sources in any particular period may cause
advertisers not to advertise on Launch.

     It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on Launch or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.

We May Have Liability for Negligence, Defamation or Other Matters for Content
Posted on Launch.com or to Consumers for Products Sold Through Launch.com

     Because users of our Web site may distribute our content to others, third
parties might sue us for defamation, negligence, copyright or trademark
infringement or other matters. These types of claims have
                                        31
<PAGE>   34

been brought, sometimes successfully, against online services in the past.
Others could also sue us for the content that is accessible from our Web sites
through links to other Web sites or through content and materials that may be
posted by launch.com members. Such claims might include, among others, that by
directly or indirectly hosting the personal Web sites of third parties, we are
liable for copyright or trademark infringement or other wrongful actions by such
third parties through such Web sites. It is also possible that if any
third-party content information provided on launch.com contains errors, third
parties could make claims against us for losses incurred in reliance on such
information.

     We may also enter into agreements that entitle us to receive a share of
revenue from the purchase of goods and services through direct links from our
Web sites to their Web sites. Such arrangements may subject us to additional
claims, including potential liabilities to consumers of such products and
services, based on the access we provide to such products or services, even if
we do not provide such products or services ourselves. While our agreements with
these parties may provide that we will be indemnified against such liabilities,
such indemnification, if available, may not be adequate. Our insurance may not
adequately protect us against these types of claims and, even if such claims do
not result in liability, we could incur significant costs in investigating and
defending against such claims.

We Expect to Make Acquisitions that May Dilute Our Stockholders' Interests in
Launch or Result in Amortization of Significant Amounts of Intangible Assets

     As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. Such acquisitions could cause our
operating results or the price of our common stock to decline. We may acquire
businesses, products or technologies in the future. Because business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of intangible assets
acquired. In the event of such future acquisitions or business combinations, we
could do the following:

     - issue equity securities that would dilute current stockholders'
       percentage ownership in us;

     - incur substantial debt; or

     - assume contingent liabilities.

We May Be Unable to Effectively Integrate Businesses We Acquire in the Future,
and Any Such Failure Could Diminish the Value of an Acquired Business or Cause
Disruptions in Our Ongoing Operations

     Acquisitions and business combinations entail numerous operational risks,
including the following:

     - difficulties in the assimilation of acquired operations, technologies or
       products;

     - diversion of management's attention from other business concerns;

     - risks of entering markets in which we have no or limited experience; and

     - potential loss of key employees of acquired organizations.

     We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could damage our business.

     We may not be able to effectively integrate the operations of acquired
businesses with our ongoing operations. Such failure could harm our business by
diverting management and other resources. Further, the personnel of acquired
businesses may elect not to continue with Launch after completion of any
acquisition, which could diminish the value of any acquisition. In that regard,
we cannot assure you that the personnel of acquired businesses will continue as
employees of Launch.

                                        32
<PAGE>   35

We Need to Adapt to Rapid Technological Change in Software and Distribution
Systems to Remain Competitive

     Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of digital media, and in particular, the Internet, and intense
competition in our industry exacerbate these market characteristics. To achieve
our goals, we need to effectively integrate the various software programs and
tools required to enhance and improve our product offerings and manage our
business. Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our products and services. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. In addition, new enhancements must meet the
requirements of our current and prospective users and must achieve significant
market acceptance. We could also incur substantial costs if we need to modify
our service or infrastructures or adapt our technology to respond to these
changes.

Governmental Regulation of the Web Related to Communication, Commerce, Sales Tax
and Other Issues May Limit the Growth of Our Business and Decrease Our Market
Opportunity

     There are currently few laws or regulations that specifically regulate
communications or commerce on the Web. Laws and regulations may be adopted in
the future, however, that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting certain types of
information and content over the Web. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers and online services providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. Any imposition
of access fees could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Web. Any new laws or regulations relating to the Web could
adversely affect our business.

     Launch generally does not collect sales or other taxes in respect of goods
sold to users on launch.com. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as Launch,
which engage in or facilitate online commerce. A number of proposals have been
made at the state and local level that would impose additional taxes on the sale
of goods and services 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.
Moreover, if any state or foreign country were to successfully assert that
Launch should collect sales or other taxes on the exchange of merchandise on its
system, our results of operations could be adversely affected. Legislation
limiting the ability of states to impose taxes on Internet-based transactions
has been proposed in the U.S. Congress. We cannot assure you that this
legislation will ultimately become law or that the tax moratorium in the final
version of this legislation will be ongoing. Failure to enact or renew this
legislation, once enacted, could allow various states to impose taxes on
Internet-based commerce, which could adversely affect our business.

We Rely on Third Parties for Our Web Site Hosting Facilities and Internet
Connectivity. If these Systems Fail, They Could Disrupt or Delay User Traffic,
Which Could Impair Our Business

     Substantially all of our launch.com communications and computer hardware
are located at Alchemy's facilities in Los Angeles, California. In addition, we
utilize the audio and video streaming services of iBEAM Broadcasting and Akamai.
iBEAM Broadcasting and Akamai have proprietary networks which delivers streaming
audio and video over the Internet. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and cause interruptions in our services. Computer viruses, electronic
break-ins or other similar disruptive problems could result in reductions or
termination of our services by our customers or otherwise adversely affect our
Web site. Our business could be adversely affected if our systems were affected
by any of these occurrences. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or interruptions
in our systems. We do not presently have any backup systems or a formal disaster
recovery plan.
                                        33
<PAGE>   36

     Our Web site must be able to accommodate a high volume of traffic and
deliver frequently updated information. Our Web site has experienced in the past
and may in the future experience slower response times or decreased traffic for
a variety of reasons. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet network infrastructure may not
be able to support continued growth. Any of these problems could adversely
affect our business.

Because Our Users Provide Us with Private Information, We May Be Subject to
Liability if this Information Were Misused

     Our privacy policy provides that we will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is displayed to users of
our personalized services when they initially register and is easily accessible
on launch.com. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. We
also rely on a third-party provider for our e-commerce services. If we
experience service problems with our e-commerce transactions, we could also be
subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. It could also include claims for other misuses of personal information,
such as for unauthorized marketing purposes. These claims could result in
litigation. In addition, the Federal Trade Commission, the European Union and
certain state and local authorities have been investigating certain Internet
companies regarding their use of personal information. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if these authorities choose to investigate our privacy practices.

     Like most Web sites, we typically place certain information commonly
referred to as cookies on a user's hard drive without the user's knowledge or
consent. We use cookies for a variety of reasons, including enabling us to limit
the frequency with which a user is shown a particular advertisement. Certain
currently available Internet browsers allow users to modify their browser
settings to remove cookies at anytime or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. Any reduction or limitation in the use of cookies could limit the
effectiveness of this technology.

We May Expend Significant Resources to Protect Our Intellectual Property Rights
or to Defend Claims of Infringement by Third Parties, and if We Are Not
Successful We May Lose Rights to Use Significant Material or Be Required to Pay
Significant Fees

     Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights, are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate.
Launch has trademark applications pending in several jurisdictions, but we
cannot guarantee that we will be able to register our trademarks in all
jurisdictions in which we intend to do business. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
proprietary information. We cannot assure you that the steps we have taken will
prevent misappropriation of our proprietary rights, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. If third parties were to
use or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in litigation to enforce our
rights.

     In addition, we rely on a third party to provide services enabling our
e-commerce transactions. We could become subject to infringement actions by
third parties based upon our use of intellectual property provided by our
third-party provider. There is no provision for indemnification of Launch by the
third-party provider. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial
                                        34
<PAGE>   37

resources and technical and management personnel. Further, if our efforts to
enforce our intellectual property rights are unsuccessful or if claims by third
parties against Launch are successful, we may be required to change our
trademarks, alter the content and pay financial damages. We cannot assure you
that such change of trademarks; alteration of content or payment of financial
damages will not adversely affect our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We maintain investment portfolio holdings of various issuers, types and
maturities whose values are dependent upon short-term interest rates. We
generally classify these securities as available for sale, and consequently
record them on the balance sheet at fair value with unrealized gains and losses
being recorded as a separate part of stockholders' equity. We do not currently
hedge these interest rate exposures.

     Given Launch's current profile of interest rate exposures and the
maturities of its investment holdings, we believe that an unfavorable change in
interest rates would not have a significant negative impact on our investment
portfolio or statement of operations through December 31, 2000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is submitted in response to Part IV
hereof. See Index to Consolidated Financial Statements.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

     Not applicable.

                                        35
<PAGE>   38

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning the executive officers of the Company is contained
in Item 1. of Part I of this Form 10-K. The information required in response to
this item is incorporated by reference to the Registrant's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION

     The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

     (a) 1. Financial statements:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................   F-1
Consolidated Balance Sheets at December 31, 2000 and 1999...   F-2
Consolidated Statements of Operations and Comprehensive Loss
  for each of the three years in the period ended December
  31, 2000..................................................   F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
  for each of the three years in the period ended December
  31, 2000..................................................   F-4
Consolidated Statements of Cash Flows for each of the three
  years in the period ended December 31, 2000...............   F-5
Notes to Consolidated Financial Statements..................   F-6
</TABLE>

     (a) 2. Financial Statement Schedules:

<TABLE>
<S>                                                           <C>
Report of Independent Accountants on Financial Statement
  Schedule..................................................  F-18
Schedule II -- Valuation and Qualifying Accounts............  F-19
</TABLE>

     Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.

                                        36
<PAGE>   39

     (a) 3. Exhibits:

     The following exhibits are filed as part of this Annual Report on Form
10-K:

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                      DESCRIPTION OF DOCUMENT
    -------                      -----------------------
    <C>        <S>
     3.1(2)    Second Amended and Restated Certificate of Incorporation of
               Launch (formerly 2Way Media, Inc.).
     3.2(2)    Amended and Restated Bylaws of Launch
    10.1(1)    1994 Stock Option Plan
    10.2(2)    1998 Stock Option Plan
    10.3(2)    1999 Employee Stock Option Plan
    10.4(1)    Form of Indemnity Agreement
    10.5(4)    Strategic Alliance Agreement between Launch and NBC
               Multimedia, Inc. dated February 26, 1998.
    10.6(4)    NBC-In Content Provider Agreement between Launch and NBC
               Multimedia, Inc. dated February 26, 1998.
    10.10(1)   Standard Industrial/Commercial Multi-Tenant Lease-Modified
               Net between Pennsylvania Group Ltd. and The Welk Group, Inc.
               dated August 1, 1997.
    10.11(1)   American Industrial Real Estate Association Standard
               Sublease between The Welk Group, Inc. and Launch dated April
               14, 1998.
    10.12(1)   Standard Form of Office Lease between Cityspire Centre
               L.L.C. and Intershoe, Inc. dated January 22, 1997.
    10.13(1)   Sublease Agreement between Intershoe, Inc. and Launch dated
               October 1998
    10.14(5)   American Industrial Real Estate Association Standard Lease
               between 2800 Olympic Boulevard Partners, L.P. and Launch
               dated October 8, 1999.
    10.15(5)   Standard Industrial/Commercial Multi-Tenant Lease between
               Ellen and David Adams and Launch dated January 11, 2000.
    10.16(5)   Standard Form of Loft Lease between 19th Street Associates
               and Launch dated February 17, 2000.
    10.17(2)   Employment Agreement between Launch and Jeffrey M. Mickeal
               dated April 10, 1995.
    10.18      Continued Employment Agreement between Launch and Spencer A.
               McClung, Jr. dated July 7, 2000.
    21.1       Subsidiaries of the Registrant.
    23.1       Consent of PricewaterhouseCoopers LLP, Independent
               Accountants.
</TABLE>

---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
    SB-2 (File No. 333-72433) on February 16, 1999.

(2) Incorporated by reference to Amendment No. 1 to the Registrant's
    Registration Statement on Form SB-2 (File No. 333-72433) on March 31, 1999.

(3) Incorporated by reference to Amendment No. 2 to the Registrant's
    Registration Statement on Form SB-2 (File No. 333-72433) on April 2, 1999.

(4) Incorporated by reference to Amendment No. 3 to the Registrant's
    Registration Statement on Form SB-2 (File No. 333-72433) on April 21, 1999.

(5) Filed as an exhibit to Registrant's Form 10-K for year ended December 31,
    1999, and incorporated herein by reference.

     (b) Reports on Form 8-K:

     The Company filed a report on Form 8-K on November 14, 2000 relating to the
acquisition of CCRL, LLC.

                                        37
<PAGE>   40

                                   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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                          LAUNCH MEDIA, INC.

March 29, 2001                            By:     /s/ DAVID B. GOLDBERG
                                            ------------------------------------
                                                     David B. Goldberg
                                                  Chief Executive Officer

     Pursuant to the requirements of the Securities Act of 1934, this Report on
10-K has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <C>                              <S>
                /s/ DAVID B. GOLDBERG                    Chief Executive Officer and    March 29, 2001
-----------------------------------------------------   Director (Principal Executive
                  David B. Goldberg                               Officer)

                /s/ ROBERT D. ROBACK                       President and Director       March 29, 2001
-----------------------------------------------------
                  Robert D. Roback

               /s/ JEFFREY M. MICKEAL                    Chief Financial Officer and    March 29, 2001
-----------------------------------------------------  Secretary (Principal Financial
                 Jeffrey M. Mickeal                        and Accounting Officer)

                 /s/ THOMAS C. HOEGH                              Director              March 29, 2001
-----------------------------------------------------
                   Thomas C. Hoegh

                /s/ JAMES M. KOSHLAND                             Director              March 29, 2001
-----------------------------------------------------
                  James M. Koshland

                /s/ RICHARD D. SNYDER                             Director              March 29, 2001
-----------------------------------------------------
                  Richard D. Snyder

               /s/ WARREN LITTLEFIELD                             Director              March 29, 2001
-----------------------------------------------------
                 Warren Littlefield
</TABLE>

                                        38
<PAGE>   41

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Launch Media, Inc.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficiency) and cash flows present fairly, in all material
respects, the consolidated financial position of Launch Media, Inc. and
subsidiaries (the "Company") at December 31, 1999 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/  PRICEWATERHOUSECOOPERS LLP

Woodland Hills, California
January 24, 2001

                                       F-1
<PAGE>   42

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 2000
                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                               1999        2000
                                                              -------    ---------
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $   878    $   1,438
  Marketable securities.....................................   56,891       15,219
  Accounts receivable, net..................................    4,027        5,759
  Notes receivable..........................................      298        2,729
  Prepaid and other current assets..........................    2,069          613
                                                              -------    ---------
          Total current assets..............................   64,163       25,758
Property and equipment, net.................................    8,303       17,315
Intangible and other assets.................................   21,751       25,878
                                                              -------    ---------
          Total assets......................................  $94,217    $  68,951
                                                              =======    =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 2,766    $   4,669
  Accrued expenses..........................................    2,357        8,421
  Deferred revenue..........................................    1,197          356
  Capital lease obligations, current portion................      856        2,005
                                                              -------    ---------
          Total current liabilities.........................    7,176       15,451
Capital lease obligations, net of current portion...........      999        2,501
                                                              -------    ---------
          Total liabilities.................................    8,175       17,952
                                                              -------    ---------
Commitments and contingencies
Stockholders' equity:
  Common stock, $.001 par value, shares authorized 75,000;
     shares issued and outstanding, 12,850 (1999) and 14,392
     (2000).................................................       13           15
  Additional paid-in capital................................  151,103      166,980
  Other comprehensive income................................      684           --
  Unearned compensation.....................................     (647)        (306)
  Accumulated deficit.......................................  (65,111)    (115,690)
                                                              -------    ---------
          Total stockholders' equity........................   86,042       50,999
                                                              -------    ---------
          Total liabilities and stockholders' equity........  $94,217    $  68,951
                                                              =======    =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-2
<PAGE>   43

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS
                 (IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net revenues:
  Advertising...............................................  $  2,906   $  8,782   $ 20,800
  Content licensing.........................................        --      5,421      7,888
  Subscription and other....................................     2,108      2,423      2,141
                                                              --------   --------   --------
                                                                 5,014     16,626     30,829
Operating expenses:
  Cost of revenues..........................................     4,560      4,235      7,799
  Sales and marketing.......................................     8,175     21,874     28,989
  Content and product development (includes $5,000 cost of
     warrants in 1999)......................................     3,822     17,360     19,629
  General and administrative................................     1,937      4,667      9,145
  Depreciation and amortization.............................       325      7,971     17,484
                                                              --------   --------   --------
  Loss from operations......................................   (13,805)   (39,481)   (52,217)
Interest income, net........................................       389      1,988      1,647
                                                              --------   --------   --------
  Loss before provision for income taxes....................   (13,416)   (37,493)   (50,570)
Provision for income taxes..................................         3         12          9
                                                              --------   --------   --------
  Net loss..................................................   (13,419)   (37,505)   (50,579)
Accretion of mandatory redeemable convertible preferred
  stock.....................................................    (1,851)      (766)        --
                                                              --------   --------   --------
  Net loss attributable to common stockholders..............  $(15,270)  $(38,271)  $(50,579)
                                                              ========   ========   ========
Basic and diluted net loss per common share.................  $ (16.36)  $  (4.15)  $  (3.67)
                                                              ========   ========   ========
Weighted average shares outstanding used in per share
  calculation...............................................       933      9,218     13,782
                                                              ========   ========   ========
Comprehensive loss:
Net loss....................................................  $(13,419)  $(37,505)  $(50,579)
Unrealized gain on securities available for sale............        --        684         --
                                                              --------   --------   --------
Comprehensive loss..........................................  $(13,419)  $(36,821)  $(50,579)
                                                              ========   ========   ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-3
<PAGE>   44

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                             COMMON STOCK     ADDITIONAL       OTHER
                                            ---------------    PAID-IN     COMPREHENSIVE     UNEARNED     ACCUMULATED
                                            SHARES   AMOUNT    CAPITAL        INCOME       COMPENSATION     DEFICIT      TOTAL
                                            ------   ------   ----------   -------------   ------------   -----------   --------
<S>                                         <C>      <C>      <C>          <C>             <C>            <C>           <C>
BALANCE, JANUARY 1, 1997..................     933    $ 1            --           --              --       $ (14,187)   $(14,186)
Stock options exercised...................       1     --      $      2           --              --              --           2
Unearned compensation related to stock
  options granted.........................      --     --         1,401           --         $(1,401)             --          --
Compensation related to stock options
  vested..................................      --     --            --           --             193              --         193
Issuance of warrants to purchase common
  stock...................................      --     --         1,435           --              --              --       1,435
Accretion of redeemable convertible
  preferred stock.........................      --     --        (1,852)          --              --              --      (1,852)
Net loss..................................      --     --            --           --              --         (13,419)    (13,419)
                                            ------    ---      --------        -----         -------       ---------    --------
BALANCE, DECEMBER 31, 1998................     934      1           986           --          (1,208)        (27,606)    (27,827)
Public stock offering, net of $1,128
  issuance costs..........................   4,010      4        80,912           --              --              --      80,916
Conversion of notes payable to common
  stock...................................      86     --         1,888           --              --              --       1,888
Accretion of redeemable convertible
  preferred stock.........................      --     --          (766)          --              --              --        (766)
Conversion of convertible preferred
  stock...................................   5,918      6        37,466           --              --              --      37,472
Compensation related to stock options
  vested..................................      --     --            --           --             443              --         443
Cost of warrants issued...................      --     --         4,964           --              --              --       4,964
Unrealized gain on securities available
  for sale................................      --     --            --        $ 684              --              --         684
Stock options exercised...................     189     --           304           --              --              --         304
Stock options forfeited...................      --     --          (118)          --             118              --          --
Issuance of stock under employee stock
  purchase plan...........................      32     --           298           --              --              --         298
Issuance of common stock for
  acquisitions............................   1,681      2        25,169           --              --              --      25,171
Net loss..................................      --     --            --           --              --         (37,505)    (37,505)
                                            ------    ---      --------        -----         -------       ---------    --------
BALANCE, DECEMBER 31, 1999................  12,850     13       151,103          684            (647)        (65,111)     86,042
Compensation related to stock options
  vested..................................      --     --            --           --             223              --         223
Gain on sale of securities................      --     --            --         (489)             --              --        (489)
Write-down of securities available for
  sale....................................      --     --            --         (195)             --              --        (195)
Treasury stock purchased..................      --     --          (834)          --              --              --        (834)
Stock options exercised...................      63     --           145           --              --              --         145
Stock options forfeited...................      --     --          (118)          --             118              --          --
Issuance of stock under employee stock
  purchase plan...........................      64     --           573           --              --              --         573
Issuance of common stock for
  acquisitions............................   1,415      2        16,111           --              --              --      16,113
Net loss..................................      --     --            --           --              --         (50,579)    (50,579)
                                            ------    ---      --------        -----         -------       ---------    --------
BALANCE, DECEMBER 31, 2000................  14,392    $15      $166,980        $  --         $  (306)      $(115,690)   $ 50,999
                                            ======    ===      ========        =====         =======       =========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-4
<PAGE>   45

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1998        1999         2000
                                                              --------    ---------    --------
<S>                                                           <C>         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(13,419)   $ (37,505)   $(50,579)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................       325        7,971      17,484
    Gain on sales of securities available for sale..........        --           --        (489)
    Write-down of securities available for sale.............        --           --         671
    Non-cash charges for issuance of equity securities......     1,650        6,722         462
    Allowance for sales returns and bad debts...............      (163)        (309)        620
    Amortization of deferred compensation...................       193          443         223
    Changes in operating assets and liabilities:
      Accounts receivable...................................      (373)      (2,951)     (1,587)
      Prepaid and other current assets......................      (281)      (1,827)      1,667
      Accounts payable......................................       459          572       1,204
      Accrued expenses......................................       563        1,445       5,864
      Deferred revenue......................................       219          714        (841)
                                                              --------    ---------    --------
        Net cash used in operating activities...............   (10,827)     (24,725)    (25,301)
                                                              --------    ---------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (1,570)      (3,417)    (12,760)
  Purchases of securities...................................   (44,653)    (282,160)    (51,871)
  Maturities of securities..................................    39,660      228,066      95,556
  Proceeds from notes receivables...........................        --          305         533
  Notes receivable..........................................        --         (144)     (2,964)
  Acquisition of businesses.................................        --         (800)     (4,614)
  Increase in other assets..................................      (288)         (28)       (514)
                                                              --------    ---------    --------
        Net cash provided by (used in) investing
          activities........................................    (6,851)     (58,178)     23,366
                                                              --------    ---------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments under capital lease obligations..................      (203)        (970)     (1,445)
  Proceeds from capital lease obligations...................       740        1,500       4,056
  Proceeds from issuance of convertible preferred stock.....    18,230           --          --
  Proceeds from issuance of common stock....................        --       80,916          --
  Purchase of treasury stock................................        --           --        (834)
  Proceeds from employee stock purchase plan................        --          298         573
  Proceeds from exercise of stock options...................         2          302         145
                                                              --------    ---------    --------
        Net cash provided by financing activities...........    18,769       82,046       2,495
                                                              --------    ---------    --------
        Increase (decrease) in cash and equivalents.........     1,091         (857)        560
    Cash and cash equivalents, beginning of the year........       644        1,735         878
                                                              --------    ---------    --------
    Cash and cash equivalents, end of the year..............  $  1,735    $     878    $  1,438
                                                              ========    =========    ========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid during the year for:
    Interest................................................  $     55    $     163    $    362
    Taxes...................................................  $      4    $      12    $      9
SUPPLEMENTARY DISCLOSURE OF NON-CASH TRANSACTIONS:
  Equipment acquired under capital leases...................  $  1,090    $   1,195    $    544
  Conversion of notes payable to common stock...............        --    $   1,888          --
  Issuance of warrants under license agreements.............        --    $   4,964          --
  Issuance of common stock for acquisitions.................        --    $  25,171    $ 16,112
  Issuance of Series D stock and warrants...................  $  8,430           --          --
  Treasury stock issued under employee stock purchase
    plan....................................................        --           --    $    834
  Conversion of preferred stock to common stock.............        --    $  37,472          --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-5
<PAGE>   46

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

 1. NATURE OF OPERATIONS:

     Launch Media, Inc. was incorporated in Delaware in February 1994 and is a
digital media company dedicated to creating the premier Internet music site,
www.launch.com, by providing music fans the broadest array of music and
music-related content. Launch Media, Inc. and its subsidiaries are collectively
referred to as the "Company" or "Launch". The Company currently operates in one
reportable industry segment. Leveraging the inherent advantages of digital
media, the Company offers a compelling music discovery experience from new and
established artists for consumers and provides a valuable marketing platform for
record labels, artists, advertisers and merchants. The music content is
delivered on the Internet at www.launch.com and on Launch on CD-ROM. Both
launch.com and Launch on CD-ROM are advertiser supported and include original
content that takes advantage of the personal computer's interactive multimedia
technology. Launch also creates and manages smaller multi-city concert series
that showcase new and emerging artists that generate additional integrated
sponsorships, however, through December 31, 2000, such activities have not
represented a significant portion of our business.

     On April 23, 1999 the Company effected an initial public offering of
3,500,000 shares of its common stock at a price of $22 per share. On May 19,
1999, the underwriters exercised their over-allotment option to purchase an
additional 510,000 shares of common stock. The net proceeds to the Company,
after deducting underwriting discounts and commissions and offering expenses,
were approximately $80.9 million.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Basis of Presentation and Management's Plans

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred recurring losses from operations that raise substantial
doubt about its ability to continue as a going concern. Management's plans
include (i) substantially reducing operating and overhead costs and accelerating
our move to profitability by increasing our net revenues through increasing the
Launch audience and increasing advertising revenue per advertiser, (ii) raising
additional funds through public or private debt or equity placement, (iii)
licensing our content and technology, and/or (iv) merging with a strategic
partner. There can be no assurance that the Company will be successful in these
plans. Moreover, the financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

  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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

  Principles of Consolidation

     The consolidated financial statements include the accounts of Launch Media,
Inc. and its wholly-owned subsidiaries. All inter-company accounts and
transactions have been eliminated in the consolidated financial statements.

                                       F-6
<PAGE>   47
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

  Revenue Recognition

     The Company's revenues have been derived primarily from the sale of
advertising and sponsorships, syndicating content to radio stations and other
Internet sites, and annual subscriptions relating to Launch on CD-ROM. Revenues
for sponsorships across the Launch media properties are recognized ratably over
the sponsorship term which ranges from one to twelve months. Revenues from
advertisements for Launch on CD-ROM are recognized upon the release date of the
issue in which the advertisement appears. With respect to launch.com, revenues
from advertisements are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Launch obligations
remain.

     Content licensing revenue includes revenue resulting from Launch obtaining
on-air radio advertising inventory in exchange for music news content. Launch
sells this inventory for cash and recognizes revenue when the radio stations
broadcast the advertisement. Revenue from syndication of Launch content is
recognized ratably over the contract term, which is typically one year.

     Advance payments for Launch on CD-ROM subscriptions are deferred and
recognized over the term of the related subscription, typically 12 months.
Advance payments for sponsorships are deferred and recognized over the term of
the sponsorship.

     Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for advertising
space on other Web sites. Revenues and expenses from barter transactions are
recorded at the lower of estimated fair value of the advertisements received or
delivered based on advertising rates currently in effect. Barter revenues are
recognized when the advertisements are run on the Launch media properties.
Barter expenses are recognized when Launch's advertisements are run on the
reciprocal Web sites or other advertising medium, which is typically in the same
period as when the advertisements are run on the Launch media properties.

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts in various financial institutions and, at times, these
deposits may be in excess of the federally insured limit.

  Marketable Securities

     The Company invests excess cash in commercial paper, corporate notes and
bonds, U.S. Government securities and money market funds. The investments are
stated at cost, as it is the intent of the Company to hold these securities
until maturity. Investments in corporate notes and bonds, and U.S. Government
securities are stated at amortized cost, which approximates fair market value.

     The Company has also made investments in equity securities and are
classified as available-for-sale. Available for sale securities are carried at
fair value, with unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary on available for sale securities are included in other
income. The cost basis for realized gains and losses on available for sale
securities is determined on a specific identification basis.

  Property and Equipment

     Property and equipment are stated at cost. Depreciation is being applied on
the straight-line method over five years. Leasehold improvements and equipment
under capital leases are amortized over the shorter of the estimated useful life
or the life of the lease.

                                       F-7
<PAGE>   48
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     Maintenance and repairs are charged to expense as incurred while renewals
and improvements are capitalized.

  Intangible and other Long-termed Assets

     The Company evaluates the recoverability of its long-lived assets whenever
events or changes in circumstances result in the carrying amount of the assets
exceeding the sum of the expected future undiscounted cash flows associated with
such assets. The measurement of the impairment losses to be recognized is based
on the difference between the fair values and the carrying amounts of the
assets. To date, no such impairment has been recorded.

  Fair Value of Financial Instruments

     The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair market value because of the short-term
maturity of these instruments. The carrying amount of the long-term capital
lease obligations is also assumed to approximate fair value.

  Web Site

     The Company capitalizes the costs incurred to build web site infrastructure
and applications. Cost incurred for subsequent updates and operations are
expensed as incurred.

  Concentration of Credit Risk and Major Customers

     The Company sells sponsorships and advertising to major advertising
agencies representing their clients and directly to large, well established,
companies.

     The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. Estimated credit losses and returns have
been provided for in the financial statements and, to date, have generally been
within management's expectations.

     For the year ended December 31, 1999 sales to one advertiser were 13% of
total net revenues. For the year ended December 31, 1998 and 2000 sales to any
one advertiser did not exceed 10% of total net revenues. As of December 31, 1999
amounts due from one advertiser represented 18% and due from one advertising
agency represented 32% of accounts receivable, respectively.

  Advertising

     Advertising costs are expensed as incurred.

  Income Taxes

     The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

                                       F-8
<PAGE>   49
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

  Stock Based Compensation

     The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference, if any, on the date of grant, between the fair
value of the Company's common stock and the grant price. The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS No.
123 and Emerging Issues Task Force 96-18.

  Computation of Net Loss Per Share

     In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed using the weighted average number of shares
outstanding during the period and diluted earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the Mandatory
Redeemable Convertible Preferred Stock (using the if-converted method) and
shares issuable upon exercise of outstanding stock options and warrants, using
the treasury stock method. Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.

     Diluted net loss per share for 1998, 1999 and 2000, does not include the
effect of options and warrants to purchase 1,113, 1,805, and 3,187 shares of
common stock, respectively, as the effect of their inclusion is anti-dilutive
during each period.

  Reclassifications

     Certain reclassifications have been made to the 1998 and 1999 amounts to
conform to the 2000 presentation. These reclassifications did not change the
previously reported net loss or the total assets of the Company.

  Recent Accounting Pronouncements

     In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for the year beginning January 1, 2001,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires a company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management does not
believe that the adoption of SFAS No. 133 will have a significant impact on the
Company's consolidated financial position, results of operations or cash flows.

 3. BUSINESS ACQUISITIONS:

  Tour Dates

     On January 14th, 2000, the Company acquired all of the outstanding shares
of Musiccom, Inc., d.b.a. Tourdates.com. Tourdates.com is a premier online guide
to local and national concert information. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed based on estimated fair values on the acquisition date.

                                       F-9
<PAGE>   50
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The total purchase price of approximately $12,000 was comprised of 627
shares of the Company's common stock with a fair value of approximately $10.6
million, a cash payment of approximately $1,000 and assumed liabilities and
transaction costs of approximately $400. The excess purchased price over net
tangible assets acquired was approximately $12,000 and is being amortized over
an estimated average useful life of approximately 3 years.

  Warped Tour

     On August 31, 2000, the Company purchased the entire membership interest in
C.C.R.L., LLC d.b.a. The Warped Tour. The Warped Tour is a popular summer
concert series where musicians, athletes and fans interact and participate in
daylong events. The acquisition was accounted for under the purchase method of
accounting and accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated fair values on the
acquisition date.

     The purchase price of approximately $7,800 was comprised of 788 shares of
the Company's common stock with a fair value of $5,500, cash payments of $2,000
and transaction costs of approximately $250. The excess purchase price over net
tangible assets acquired and liabilities assumed was $7,500, and is being
amortized over an estimated useful life of 5 years. The terms of the acquisition
also include contingent future purchase payments to the sellers, paid in either
cash or stock or combination thereof at the discretion of the Company, over a
five-year period based on annual and cumulative performance targets set for the
operations of The Warped Tour as follows:

<TABLE>
<CAPTION>
                                                     MAXIMUM CONTINGENT
                  DUE JANUARY 2,                     PURCHASE PAYMENTS
                  --------------                     ------------------
<S>                                                  <C>
2001...............................................       $ 1,500
2002...............................................         1,500
2003...............................................         1,500
2004...............................................         2,000
2005...............................................        17,000
                                                          -------
                                                          $23,500
                                                          =======
</TABLE>

     Based upon the actual performance targets met of The Warped Tour in 2000
(prior to closing of this transaction), the 2001 contingent purchase payment of
$1,450, which was accrued as of December 31, 2000, was considered earned and
paid in cash subsequent to year end.

  Unaudited Pro Forma Results of Operations

     The unaudited pro forma results of operations for the years ended December
31, 1999 and 2000 assuming the completion of the Company's acquisitions of Tour
Dates and The Warped Tour as of January 1, 1999:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1999        2000
                                                         --------    --------
<S>                                                      <C>         <C>
Net revenue............................................  $ 23,599    $ 37,822
                                                         ========    ========
Net loss...............................................  $(41,954)   $(50,976)
                                                         ========    ========
Basic and diluted loss per share.......................  $  (3.93)   $  (3.35)
                                                         ========    ========
Pro forma weighted average common shares used in per
  share calculation....................................    10,663      15,197
                                                         ========    ========
</TABLE>

                                       F-10
<PAGE>   51
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

 4. MARKETABLE SECURITIES:

     Marketable securities consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1999       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Debt Securities held to maturity:
  U.S. Government securities.............................  $15,926    $ 6,574
  Commercial paper.......................................   25,425      5,029
  Corporate bonds........................................   13,856      3,566
                                                           -------    -------
                                                            55,207     15,169
Equity securities available for sale.....................    1,684         50
                                                           -------    -------
                                                           $56,891    $15,219
                                                           =======    =======
</TABLE>

     At December 31, 2000, the Company recognized a loss in the statement of
operations of approximately $671 for a decline in value of its equity securities
available for sale that was determined to be other than temporary.

 5. ACCOUNTS RECEIVABLES:

     Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ----------------
                                                              1999      2000
                                                             ------    ------
<S>                                                          <C>       <C>
Trade receivables..........................................  $3,806    $6,125
Other receivables..........................................     234       207
                                                             ------    ------
                                                              4,040     6,332
Less allowance for doubtful accounts.......................     (13)     (573)
                                                             ------    ------
                                                             $4,027    $5,759
                                                             ======    ======
</TABLE>

 6. NOTES RECEIVABLE:

     Notes receivable consist of loans to officers and other key employees.
These loans are due at March 31, 2001, bear interest at 8% per annum and are
collateralized by 734 shares of the Company's common stock held by the makers of
the respective notes.

                                       F-11
<PAGE>   52
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

 7. PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1999       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Audio and video equipment................................  $ 3,181    $ 4,516
Computers and software...................................    4,953     11,358
Media assets.............................................      900      1,243
Office equipment and furniture...........................      210        446
Leasehold improvements...................................    1,343      5,669
                                                           -------    -------
                                                            10,587     23,232
Accumulated depreciation and amortization
  (including $493 (1999) and $1,217 (2000)
  for equipment under capital leases)....................   (2,284)    (5,917)
                                                           -------    -------
                                                           $ 8,303    $17,315
                                                           =======    =======
</TABLE>

     Depreciation expense was approximately $321, $1,695, and $3,751 in 1998,
1999 and 2000, respectively. Equipment under capital lease was $1,999 and $5,390
at December 31, 1999 and 2000, respectively.

 8. INTANGIBLE AND OTHER ASSETS:

     Intangible and other assets consist of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1999       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Intangible assets, net...................................  $18,018    $25,173
Deposits.................................................      191        705
Long-term bond held to maturity..........................    3,079         --
Deferred charge, net.....................................      463         --
                                                           -------    -------
                                                           $21,751    $25,878
                                                           =======    =======
</TABLE>

     Amortization expense of intangible assets was approximately $6,276 and
$13,733 in 1999 and 2000, respectively.

 9. ACCRUED EXPENSES:

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ----------------
                                                              1999      2000
                                                             ------    ------
<S>                                                          <C>       <C>
Advertising................................................  $  878    $2,826
Acquisition purchase payment...............................      --     1,450
Payroll....................................................      --     1,297
Royalties..................................................     300       835
Vacation...................................................     296       544
Employee stock purchase plan...............................     136       105
Professional services......................................     305        88
Other......................................................     442     1,276
                                                             ------    ------
                                                             $2,357    $8,421
                                                             ======    ======
</TABLE>

                                       F-12
<PAGE>   53
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

10. OBLIGATION UNDER CAPITAL LEASES:

     The Company has a capital lease line of credit for $2.0 million. The
Company's net borrowings under this line of credit were approximately $1.4
million and $1.7 million as of December 31, 1999 and 2000, respectively. This
facility bears interest at the bank's prime rate (9.0% at December 31, 2000).
The leased assets collateralize any borrowings under this line of credit.

     During the year ended December 31, 2000, the Company acquired an additional
line of credit for $3.0 million to finance capital expenditures. This line of
credit accrues interest at 15% per annum. At December 31, 2000, $2.6 million was
outstanding under this line of credit. Acquired assets collateralize any
borrowings under this facility.

11. COMMITMENTS AND CONTINGENCIES:

     The Company is committed to minimum rental payments under capital leases
and non-cancelable facility operating leases as follows:

<TABLE>
<CAPTION>
                                                          CAPITAL    OPERATING
                YEAR ENDING DECEMBER 31,                  LEASES      LEASES
                ------------------------                  -------    ---------
<S>                                                       <C>        <C>
2001....................................................  $ 2,200     $1,584
2002....................................................    1,722      1,681
2003....................................................    1,225      1,237
2004....................................................      267        906
2005....................................................       --        665
2006 and thereafter.....................................       --      1,127
                                                          -------     ------
          Total minimum lease payments..................    5,414     $7,200
                                                                      ======
Less amount representing interest.......................     (908)
                                                          -------
Present value of capital lease payments.................    4,506
Less current portion....................................   (2,005)
                                                          -------
Non-current portion.....................................  $ 2,501
                                                          =======
</TABLE>

     The Company has an option to renew its primary facility operating lease for
an additional four-year term. Rent expense was approximately $512, $976 and
$1,985 for 1998, 1999 and 2000, respectively.

  Legal:

     From time to time, Launch may be involved in litigation relating to claims
arising out of its operations. On January 31, 2001, WB Stellar Acquisitions, LLC
commenced an action against the Company in the Supreme Court of the State of New
York seeking rent and damages of $793,000 with respect to a lease for commercial
space that expired on July 31, 2000. The Company intends to defend the action
vigorously believing that it has meritorious defenses. As the Company is unable
to predict the outcome of this action, no expense has been recorded for the
possible adverse resolution of this action.

  Employment Contract:

     During fiscal 2000, the Company entered into a Continued Employment
Agreement (the "Agreement") with one of its officers. In the event a change of
control, as defined by the Agreement, occurs within 12 months of this Agreement
(i) a bonus payment of $500,000 is due to officer, (ii) the Company will loan
the officer $1 million and if the officer remains an employee throughout the
following one-year period, the Company will forgive the loan and any accrued
interest, 50% after six months and 50% after twelve months. In the event that

                                       F-13
<PAGE>   54
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

a change of control does not occur within 12 months following the date of this
Agreement, the Company will loan the officer the sum of $1.5 million, of which
$1 million must be used for the purpose of purchasing Company stock in market
transactions.

12. STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN:

  Options:

     Under the Company's 1994 and 1998 Stock Option Plans (the "Plans"), the
Company has been authorized to grant options to purchase a maximum of 3,525
shares of common stock.

     The Company's Plans provide for the issuance of both non-statutory and
incentive stock options to employees, officers, directors and consultants of the
Company. Incentive stock options may be granted at no less than 100% of the fair
market value of the Company's common stock on the date of grant as determined by
the Board of Directors (110% if granted to an employee who owns 10% or more of
the common stock). Options granted under the Plans vest ratably over a four-year
period, except that new employees shall vest 25% of their shares after 12 months
of employment. Options are exercisable for a period no longer then 10 years from
date of grant. In the event option holders cease to be employed by the Company,
all unvested options are forfeited.

     The following table summarizes the stock option activity for the years
ended December 31,

<TABLE>
<CAPTION>
                                             1998                  1999                  2000
                                      ------------------    ------------------    ------------------
                                                WEIGHTED              WEIGHTED              WEIGHTED
                                                AVERAGE               AVERAGE               AVERAGE
                                                EXERCISE              EXERCISE              EXERCISE
                                      SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                      ------    --------    ------    --------    ------    --------
<S>                                   <C>       <C>         <C>       <C>         <C>       <C>
Outstanding at beginning of year....   244       $1.25        532      $ 1.25       858      $ 8.99
Granted -- price equals fair
  value.............................    --       $1.25        622      $13.05     1,823      $11.58
Granted -- price less than fair
  value.............................   327       $2.35         --          --        --          --
Exercised...........................    (1)      $1.30       (189)     $ 1.59       (63)     $ 2.26
Cancelled...........................   (38)      $1.35       (107)     $10.39      (377)     $13.88
                                       ---                   ----                 -----
Outstanding at year-end.............   532       $1.90        858      $ 8.99     2,241      $10.47
                                       ===                   ====                 =====
Options exercisable at year-end.....                                                553
                                                                                  =====
Options available for future
  grant.............................                                                909
                                                                                  =====
</TABLE>

     The weighted average fair value of options granted during 1998, 1999 and
2000 was $4.88, $7.27 and $8.30 respectively.

     At December 31, 2000, the Company had reserved a total of 3,130 shares of
common stock for issuance to its stock option holders.

     In connection with its option grants in 1998, the Company recorded unearned
deferred compensation of approximately $1,400 for the year ended December 31,
1998. The amount is being amortized over the vesting period of four years from
date of grant and approximately $193, $443 and $223 was expensed during the
years ended December 31, 1998, 1999, and 2000, respectively.

                                       F-14
<PAGE>   55
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

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

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                  ------------------------------------   ----------------------
                                 WEIGHTED
                                  AVERAGE     WEIGHTED                 WEIGHTED
                                 REMAINING    AVERAGE                  AVERAGE
   RANGE OF         NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
EXERCISE PRICE    OUTSTANDING      LIFE        PRICE     OUTSTANDING    PRICE
---------------   -----------   -----------   --------   -----------   --------
<S>               <C>           <C>           <C>        <C>           <C>
$1.25 - $ 3.31..       323         7.84        $ 2.41        157        $ 2.03
$5.94 - $ 7.63..       792         9.50        $ 7.45         46        $ 7.63
$9.00 - $14.75..       318         8.40        $10.62        120        $10.26
$17.00 - $22.00..      808         8.94        $16.56        230        $17.19
                     -----                                  ----
                     2,241         8.91        $10.53        553        $10.92
                     =====                                  ====
</TABLE>

     The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." If compensation expense for the stock options had been determined
using "fair value" at the grant date for awards in 1998, 1999 and 2000,
consistent with the provisions of Statement of Financial Accounting Standards
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                         1998       1999       2000
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Net loss
  As reported.........................................  $13,419    $37,505    $50,579
  Pro forma...........................................  $13,475    $38,476    $54,054
Basic net loss per common share
  As reported.........................................  $ 16.36    $  4.15    $  3.67
  Pro forma...........................................  $ 16.42    $  4.26    $  3.92
</TABLE>

     The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model following the IPO and the minimum
value method prior to the IPO with the following assumptions (i) risk-free
interest rate of 6% (ii) expected option life of 5 years, (iii) forfeiture rate
of zero, (iv) expected volatility of 0%, 81% and 87%, for 1998, 1999 and 2000,
respectively, and (v) no expected dividends.

  Warrants

     In 1999, the Company issued fully vested, non-forfeitable warrants to
purchase 402 shares of common stock at an exercise price of $11.97 to $18.35 per
share to major record labels for Internet music video distribution rights to
stream catalog and new release music videos. Because the warrants are fully
vested, are not subject to forfeiture and do not require any minimum performance
requirements, the Company recognized approximately $5.0 million of expense based
upon the fair value of the warrants on the date issued.

     The Company issued warrants in 1997 and 1998 to purchase an aggregate of
544 shares of common stock at an exercise price of $1.25 per share, which expire
on September 8, 2002.

                                       F-15
<PAGE>   56
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

  Employee Stock Purchase Plan

     In April 1999, the Company's Board of Directors adopted the Employee Stock
Purchase Plan (the "Plan"), which provides for the issuance of a maximum of 300
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 the Company's
common stock on every October 31 and April 30. The price of the common stock
purchased under the 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 32 and 64 shares purchased under the Plan
during the year ended December 31, 1999 and 2000, respectively.

13. BARTER REVENUE:

     Revenues and expenses recognized from barter transactions were
approximately $1,345, $1,216 and $3,436 in 1998, 1999, and 2000, respectively.

14. ADVERTISING EXPENSE:

     Advertising costs expensed were approximately $3,144, $14,501 and $15,643
in 1998, 1999, and 2000, respectively.

15. INCOME TAXES:

     The provision for income taxes for 1998, 1999 and 2000 represents minimum
state franchise taxes.

     Deferred tax assets and liabilities at December 31, 1999 and 2000,
consisted of the following:

<TABLE>
<CAPTION>
                                                            1999       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards.......................  $23,239    $40,643
  Allowances.............................................        5        229
  Accrued vacation.......................................      119        218
                                                           -------    -------
          Total deferred tax assets......................   23,363     41,090
Valuation allowance......................................  (23,034)   (40,428)
                                                           -------    -------
          Net deferred tax assets........................      329        662
Deferred tax liability:
  Fixed assets...........................................     (329)      (662)
                                                           -------    -------
          Net deferred taxes.............................  $    --    $    --
                                                           =======    =======
</TABLE>

     The Company has net operating loss carryforwards as of December 31, 2000
available to offset future taxable income, if any, for federal and California
state income tax purposes of approximately $101,600 and $47,800, which begin to
expire in 2009 and 2001, respectively. Utilization of the net operating loss
carry-forwards may be subject to an annual limitation due to a change in
ownership as defined under Section 382 of the Internal Revenue Code. Due to the
net operating losses incurred to date, the Company has provided a full valuation
allowance against its net deferred tax assets.

                                       F-16
<PAGE>   57
                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

16. RELATED PARTY TRANSACTIONS:

     Advertising revenues for 1998, 1999 and 2000 include approximately $219,
$2,235, and $2,101, respectively, in revenues received from a corporate
shareholder of the Company. At December 31, 1999 and 2000, approximately $24 and
$192, respectively, of those amounts are included in accounts receivable. In
addition, deferred revenue related to this corporate shareholder's advertising
as of December 31, 1999 and 2000 was $617 and $28, respectively.

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                              ------------------------------------------------------
                                              MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                                2000         2000          2000             2000
                                              ---------    --------    -------------    ------------
<S>                                           <C>          <C>         <C>              <C>
Net revenues................................  $  6,434     $  7,821      $  8,552         $  8,022
Net loss....................................   (11,894)     (12,239)      (13,050)         (13,396)
Net loss per common share...................  $  (0.89)    $  (0.91)     $  (0.94)        $  (0.93)
</TABLE>

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                               ------------------------------------------------------
                                               MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                                 1999         1999          1999             1999
                                               ---------    --------    -------------    ------------
<S>                                            <C>          <C>         <C>              <C>
Net revenues.................................   $ 1,248     $ 3,482        $ 5,277         $  6,619
Net loss.....................................    (5,357)     (8,730)        (9,287)         (14,897)
Net loss per common share....................   $ (4.32)    $ (0.87)       $ (0.73)        $  (1.17)
</TABLE>

                                       F-17
<PAGE>   58

       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
Launch Media, Inc.

     Our audits of the consolidated financial statements of Launch Media, Inc.
and subsidiaries referred to in our report dated January 24, 2001, also included
an audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Woodland Hills, California
January 24, 2001

                                       F-18
<PAGE>   59

                      LAUNCH MEDIA, INC. AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   BALANCE AT    CHARGED TO                   BALANCE
                                                   BEGINNING      COST AND                   AT END OF
                   DESCRIPTION                      OF YEAR       EXPENSES     DEDUCTIONS      YEAR
                   -----------                     ----------    ----------    ----------    ---------
<S>                                                <C>           <C>           <C>           <C>
SALE RETURN AND ALLOWANCES
1998.............................................   $   485        $1,291       $(1,454)      $   322
1999.............................................   $   322        $  205       $  (514)      $    13
2000.............................................   $    13        $  680       $  (120)      $   573
DEFERRED TAX VALUATION ALLOWANCE
1998.............................................   $ 5,303        $   --       $ 5,275       $10,578
1999.............................................   $10,578        $   --       $12,456       $23,034
2000.............................................   $23,034        $   --       $17,394       $40,428
</TABLE>

                                       F-19