MP3 COM INC, S-1/A, 1999-06-22

MP3 COM INC
S-1/A, 1999-06-22
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1999

REGISTRATION NO. 333-78545
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MP3.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 3652 33-0840026
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

10350 SCIENCE CENTER DRIVE
BUILDING 14
SAN DIEGO, CA 92121
(619) 320-2120
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

MICHAEL L. ROBERTSON
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
MP3.COM, INC.
10350 SCIENCE CENTER DRIVE
BUILDING 14
SAN DIEGO, CA 92121
(619) 320-2120
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

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FREDERICK T. MUTO, ESQ. GARY J. SINGER, ESQ.
CHRISTOPHER J. KEARNS, ESQ. KAREN K. DREYFUS, ESQ.
BLAKE T. BILSTAD, ESQ. CHRISTOPHER A. WHYTOCK, ESQ.
COOLEY GODWARD LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1100 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CA 92121-2128 NEWPORT BEACH, CA 92660-6429
(619) 550-6000 (949) 760-9600
</TABLE>

Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JUNE 22, 1999

9,000,000 Shares

[MP3 LOGO]

Common Stock
------------------

Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $9.00 and
$11.00 per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "MPPP."

At our request, the underwriters have reserved up to 1,800,000 shares of
common stock for sale at the initial public offering price to artists and
customers of MP3.com, consultants, business associates and other persons. See
"Underwriting."

The underwriters have an option to purchase a maximum of 1,350,000
additional shares to cover over-allotments of shares. See "Underwriting."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.

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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MP3.COM
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 1999.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS CHARLES SCHWAB & CO.

The date of this prospectus is , 1999.

<PAGE> 3

DESCRIPTION OF INSIDE-COVER ARTWORK

PANEL ONE

The following text appears in the center of the page against a blue background:

There's a new order in the world of music. A community where any artist can
play to an audience of millions. Its official name is MP3.com.

INSIDE TWO-PAGE GATEFOLD SPREAD

Image depicting a portion of one artist page from the MP3.com website.
Twenty-one images depicting album cover art of artists with music on the MP3.com
website.

The following text appears as subheads and smaller copy blocks:

- Over 5,000,000 visitors per month.

- Over 34,000,000 songs delivered online.

- A database of over 3,000,000 music lovers.

- Home to over 14,000 artists, with hundreds added weekly.

BACK PANEL

The MP3.com logo appears against a black background. Affixed over the logo
is a sleeve containing a music CD suitable for play on either a computer or
audio CD player. The CD sleeve is blue with the MP3.com logo and the phrase
"Music to Invest by." The following text appears on the page:

- Top acts of tomorrow as well as current major artists.

- MP3.com. Where the world comes for music.

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TABLE OF CONTENTS

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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 19
SELECTED HISTORICAL FINANCIAL DATA.... 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS............... 21
BUSINESS.............................. 29
</TABLE>

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PAGE
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MANAGEMENT............................ 43
CERTAIN TRANSACTIONS.................. 50
PRINCIPAL STOCKHOLDERS................ 51
DESCRIPTION OF CAPITAL STOCK.......... 53
SHARES ELIGIBLE FOR FUTURE SALE....... 55
UNDERWRITING.......................... 57
NOTICE TO CANADIAN RESIDENTS.......... 59
LEGAL MATTERS......................... 60
EXPERTS............................... 60
ADDITIONAL INFORMATION................ 60
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU WHEN YOU ARE CONSIDERING THE INFORMATION IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THE
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus carefully.

MP3.COM, INC.

MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and file formats that make music files smaller
to enable a growing number of artists to broadly distribute and promote their
music and to enable consumers to conveniently access this expanding music
catalog. Our website contains over 80,000 songs from over 14,000 artists, which
we believe represents one of the largest collections of digital music available
on the Internet. Consumers can search, sample and download music free of charge.

We receive revenue from online advertising, electronic commerce and offline
advertising. From inception to March 31, 1999, 89% of our revenues have been
from the sale of advertising space on our website. We also receive revenue from
the sale of CDs online and from advertisers for their sponsorship of CD
samplers, which are distributed free of charge to consumers and contain
collections of music from artists that have posted music on our website.

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

- creates an easy and convenient way for consumers to listen to, download
and purchase music;

- dramatically lowers costs for artists to promote and distribute their
music;

- enables artists to reach a large number of consumers worldwide;

- enables consumers to discover local and lesser-known artists in ways they
cannot through traditional music retailers; and

- facilitates direct communication between fans and artists.

MP3.com was incorporated in March 1998. During 1998, our operations
consisted largely of developing the infrastructure necessary to download music
on the Internet. Since the beginning of the year, our growth has been dramatic.
The number of our employees increased from eight on December 31, 1998, to 96 on
May 31, 1999. In May 1999, we added over 105 artists and 780 new songs on
average each day. During May 1999, visitors to our website viewed over 56
million webpages, listened to or downloaded over 9 million songs and conducted
over 5.1 million music searches.

We recently formed several strategic relationships that we believe will
help increase our music content, brand awareness and electronic commence
opportunities. In June 1999, Cox Interactive Media, Inc. invested $45 million in
us and formed a joint venture with us to create and operate music-related
websites. We also have a consulting arrangement with Atlas/Third Rail
Management, Inc., to conduct promotional activities like our sponsorship of the
Alanis Morissette and Tori Amos "5 1/2 weeks" Summer 1999 tour. Additionally, we
recently entered into a three year license and promotion agreement with Boutit,
Inc., also known as "No Limit Records," which represents platinum-selling
artists including Master P and Snoop Dogg.

Our principal executive offices are located at 10350 Science Center Drive,
Building 14, San Diego, California 92121. Our telephone number is (619)
320-2120. Our website is www.mp3.com. The information found on our website is
not a part of this prospectus.

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THE OFFERING

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Common stock offered......................... 9,000,000 shares
Common stock to be outstanding after the
offering................................... 62,527,855 shares
Directed shares.............................. At our request, the underwriters have
reserved up to 1,800,000 shares of common
stock offered for sale at the initial public
offering price to artists and customers of
MP3.com, consultants, business associates and
other persons. See "Underwriting."
Use of proceeds.............................. For marketing and promotional activities,
capital expenditures, concert sponsorships
and tours, facilities expansion and related
improvements, and general corporate purposes,
including working capital and potential
partnerships and acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... MPPP
</TABLE>

SHARES OUTSTANDING AFTER THE OFFERING

The number of shares of common stock to be outstanding after the offering
is based upon the actual number of shares outstanding as of June 21, 1999 and
assumes a three-for-two split in our common stock that will take effect prior to
the date of this offering. It also includes an estimated 250,000 shares to be
issued to Boutit, Inc. in a private placement concurrent with the closing of
this offering. However, it does not include 8,837,063 shares of common stock
reserved under our stock benefit plans, of which 4,169,213 shares were covered
by outstanding options at a weighted average exercise price of $0.74 per share
as of June 21, 1999. See "Capitalization," "Description of Capital Stock" and
"Management -- 1998 Equity Incentive Plan."

After the offering, our founder and affiliated and major stockholders will
continue to hold a substantial percentage of our stock. Stockholders who will
hold more than 5% of our stock after the offering include the following:

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OWNERSHIP
STOCKHOLDER POST-OFFERING
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Michael L. Robertson........................................ 41.0%
Entities affiliated with Sequoia Capital.................... 14.9%
Cox Interactive Media, Inc. ................................ 10.0%
Total stock held by executive officers, directors and major
stockholders.............................................. 73.6%
</TABLE>

For a complete discussion of how these numbers are calculated, and our
stock ownership after the offering generally, see "Principal Stockholders."

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SUMMARY FINANCIAL DATA

The following financial information should be read together with the
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.

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<CAPTION>
AT MARCH 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,327,149 $59,249,735 $141,974,735
Working capital.................................... 9,146,989 62,093,908 144,818,908
Total assets....................................... 11,245,608 65,859,194 148,584,194
Total stockholders' equity......................... 10,359,317 64,972,903 147,697,903
</TABLE>

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(1) For a description of the computation of the net loss per share and the
number of shares used in the per share calculations, see Note 1 of Notes to
Financial Statements.

(2) The Pro Forma column gives effect to:

- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of
common stock;

- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 into 1,650,000 shares of common stock;

- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 into 658,653 shares of common stock;

- the conversion of 4,182,578 shares of Series C preferred stock issued
during June 1999 into 6,273,867 shares of common stock;

- a three-for-two split in our common stock;

- the exercise of warrants to purchase 658,653 shares of common stock;

- 250,000 shares of common stock (assuming an initial public offering
price of $10.00 per share) that we will issue in a private placement
pursuant to an agreement with Boutit, Inc. entered into on May 12,
1999; and

- our donation of 100,000 shares of common stock to the MP3.com
Foundation.

See Note 6 of Notes to Financial Statements.

(3) The As Adjusted column reflects our receipt of the net proceeds from the
offering (assuming an initial public offering price of $10.00 per share),
after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Capitalization" and "Use of Proceeds."

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RISK FACTORS

You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.

RISKS RELATED TO OUR BUSINESS MODEL

OUR BUSINESS MODEL IS NOT TYPICAL OF TRADITIONAL, MORE ESTABLISHED BUSINESS
ENTERPRISES AND MAY NOT GENERATE SUFFICIENT REVENUES FOR OUR BUSINESS TO
SURVIVE.

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

- website advertising fees from third parties;

- online sales of CDs and music-related merchandise;

- promotional activity fees; and

- marketing our artist and consumer information.

It is uncertain whether a music-based website that relies on attracting
people to learn about, listen to and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. We cannot assure you that
this business model will succeed or will be sustainable as our business grows.

In order for our business to be successful, we must not only develop
services that directly generate revenue, but also provide content and services
that attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We cannot
assure you that we will be able to provide consumers with an acceptable blend of
products, services, and informational and community offerings that will attract
consumers to our website frequently. We provide many of our products and
services without charge, and we may not be able to generate sufficient revenue
to pay for these products and services. Accordingly, we are not certain that our
business model will be successful or that we can sustain revenue growth or be
profitable.

WE ARE COMPETING IN A NEW MARKET WHICH MAY NOT DEVELOP OR WHERE WE MAY FAIL TO
GAIN MARKET ACCEPTANCE FOR OUR PRODUCTS AND SERVICES.

The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services exposes us to a high degree of uncertainty and risk. We are attempting
to capitalize on a talent pool of artists not currently served by the
traditional recording industry. We cannot assure you that consumers will
continue to be interested in listening to or purchasing music from these artists
or that the traditional music industry will not successfully serve these artists
in the future. If this new market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or our products and services do
not achieve or sustain market acceptance, our business could be harmed.

We believe the future popularity of downloadable digital music will depend,
in part, on the availability of portable devices to store and replay this music.
To the extent that consumer acceptance or distribution of these portable devices
is delayed or these devices are not available at affordable prices, our market,
and thus a portion of our revenues, may not grow at a sufficient pace and our
business could be harmed.

WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.

MP3.com was incorporated in March 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. Our limited operating history makes it difficult
to evaluate our current business and prospects. Due to our limited operating
history, it will be

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difficult to accurately predict our future revenues or results of operations.
This may result in one or more future quarters where our financial results may
fall below the expectation of analysts and investors. As a result, the trading
price of our common stock might decline. Operating results may vary depending on
a number of factors, many of which are outside our control. Before investing,
you should evaluate the risks, uncertainties, expenses and difficulties
frequently encountered by companies in early stages of development, particularly
companies in the new and rapidly evolving Internet markets.

RAPID GROWTH IN OUR OPERATIONS AND INFRASTRUCTURE IS PLACING A SIGNIFICANT
STRAIN ON OUR RESOURCES, AND FAILURE TO MANAGE THIS GROWTH EFFECTIVELY COULD
DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING THE REVENUES WE EXPECT.

We currently are experiencing a period of rapid expansion in our website
traffic, personnel, facilities and infrastructure. For example, the number of
daily visitors to our website increased approximately 73% from December 1998 to
May 1999. Our number of employees increased from eight on December 31, 1998 to
96 on May 31, 1999. We expect further significant expansion will be required to
address potential growth in our artist and consumer bases, the breadth of our
product and service offerings, and other opportunities. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. Our failure to manage growth
could disrupt our operations and ultimately prevent us from generating the
revenues we expect.

OUR CONTINUED RELIANCE ON REVENUE FROM ONLINE ADVERTISING MAY NOT PROVIDE
SUFFICIENT FINANCIAL RETURNS FOR OUR BUSINESS TO GROW OR SURVIVE.

Although our business model contemplates multiple sources of revenue, we
anticipate that in the foreseeable future we will depend substantially on
revenue from online advertising. In 1998, revenue from online advertising
accounted for 91% of our net revenues, and in the first quarter of 1999
accounted for 84% of our net revenues.

We currently depend on a small group of customers for our revenue from
online advertising. In the first quarter of 1999, two customers accounted for
approximately 14% and 13%, respectively, of net revenues, and our top ten
customers accounted for approximately 70% of net revenues. If any of these
important customers were to leave us, our business could be harmed. If we do not
increase revenue from online advertising, our business may not grow or survive.
Increasing our revenue from online advertising depends largely on our ability
to:

- conduct successful selling and marketing efforts aimed at advertisers;

- increase the size of our sales force;

- increase the size of the MP3.com audience by increasing both our artist
and consumer bases;

- increase the amount of revenues per advertisement;

- target advertisements to appropriate segments of our audience; and

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

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

IN ORDER TO PROVIDE MUSIC AND OTHER CONTENT ON OUR WEBSITE, WE RELY HEAVILY ON
THE CONTRIBUTIONS OF ARTISTS WHO, OVER TIME, MAY BE DIFFICULT TO ATTRACT AND
RETAIN.

Our success depends on having a website that offers high quality and
diverse music choices, all of which come from outside artists. Our failure to
attract and retain artists who can provide us with music and other content would
limit the overall quality and quantity of the offerings on our website and harm
our business. Because our contracts with artists are, with few exceptions,
non-exclusive and can be terminated by the artist at any time, our retention of
artists requires that we offer sufficient benefits, including artist services
and

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artist-oriented content, to encourage them to continue providing us with
content. If we are not able to maintain our ability to serve and provide
valuable tools to artists, artists may leave our website and remove their music
and other content. This could also prevent us from attracting new artists. We
may also lose artists who gain recognition on our website and then are recruited
by or attracted to the traditional music industry. The loss of artists and the
inability to attract new artists would impair our ability to generate
advertising revenue targeted to our artist community and generate CD revenues.

OUR BRAND NAME AND REVENUES COULD BE DAMAGED IF THE MUSIC PROVIDED BY
LESSER-KNOWN ARTISTS FAILS TO MEET CONSUMER EXPECTATIONS.

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

DEVELOPMENT OF NEW STANDARDS FOR THE ELECTRONIC DELIVERY OF MUSIC MAY DIMINISH
OUR BRAND IDENTITY AND DISRUPT THE WAY WE DO BUSINESS.

We currently rely on mp3 technology for both brand identity and as a
delivery method for the digital distribution of music. Mp3 is an open standard
adopted by the Moving Picture Experts Group that makes music files smaller. We
do not own or control mp3 technology. The onset of competing industry standards
for the electronic delivery of music could significantly affect the way we
operate our business as well as the public's perception of MP3.com as a company.
For example, some of the major recording studios have recently announced a plan
to develop a universal standard for the electronic delivery of music, called the
Secured Digital Music Initiative, or SDMI, and have announced their intention to
make this delivery method available by the end of 1999. In addition, major
corporations including Microsoft Corporation, IBM Corporation, AT&T Corp. and
Sony Corporation have launched efforts to establish proprietary audio formats
that will compete with the mp3 format. Some competitive formats offer security
and features that track the number of copies made. The mp3 technology we
currently use does not offer these features. These features are especially
popular among groups associated with the traditional music industry, and are
being promoted by some of our competitors. Widespread industry and consumer
acceptance of any of these audio formats could significantly harm our business
if we are unable to adapt and respond to these changing standards.

Although we are not tied exclusively to the use of mp3 technology or to any
other specific standard for the electronic delivery of music, if a proprietary,
or closed, music delivery format receives widespread industry and consumer
acceptance, we may be required to license additional technology and information
from third parties in order to adopt such a format. We cannot assure you that
this third-party technology and information will be available to us on
commercially reasonable terms, if at all. Any failure to obtain any of these
technology and information licenses or to successfully reconfigure our music
library to support these technologies could prevent us from making our music
available in the most widely accepted formats, which could make our offerings
less popular or inaccessible to both consumers and artists and thus harm our
business.

MP3 TECHNOLOGY IS CONTROVERSIAL WITHIN THE TRADITIONAL MUSIC INDUSTRY AND MAY
FACE CONTINUED OPPOSITION, WHICH MAY NEGATIVELY AFFECT THE PERCEPTION OF OUR
BUSINESS.

The traditional music industry has not embraced the development of the mp3
format to deliver music, in part because users of mp3 technology can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Although our business model for the digital distribution of
music can support more than one audio compression format and method of delivery,
and is intended to

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discourage music piracy and ensure that only legitimate music is posted on our
website, our brand identity is currently linked to the mp3 technology. As a
result, we may face opposition from a number of different music industry sources
including record companies and studios, the Recording Industry Association of
America and certain artists, due to our current brand identity and its
potentially negative associations. In addition, adverse news or events relating
to mp3 technology may lead to confusion in the public markets regarding our
company and its prospects, alienate advertisers and consumers, reduce revenues
and harm our overall financial results.

WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET AND THE
AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS, OUR BUSINESS MAY NOT SUCCEED.

Given the online nature of our business, without the continued development
and maintenance of the Internet infrastructure, we could fail to meet our
overall strategic objectives and ultimately fail to generate the website traffic
and revenues we expect. This continued development of the Internet includes
maintenance of a reliable network with the necessary speed, data capacity and
security, as well as timely development of complementary products including high
speed modems, for providing reliable Internet access and services. Because
global commerce on the Internet and the online exchange of information is new
and evolving, we cannot predict whether the Internet will prove to be a viable
commercial marketplace in the long term.

The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to continue to upload
and download mp3 and other music files, as well as to conduct commercial
transactions with us, without significant delays or aggravation that may be
associated with decreased availability of Internet bandwidth and access to our
website. Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. Even compressed in mp3
format, a typical three minute song file can occupy more than three megabytes of
storage space. This file could take as much as two minutes to download over an
xDSL or cable modem compared to 10 to 20 minutes over a conventional 56Kbps
modem.

The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased frequency
of use and increased bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. In addition, increased users or
bandwidth requirements may harm the performance of the Internet. The Internet
has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the
future. This might include outages and delays resulting from the "year 2000"
problem. See "-- Year 2000 problems could lead to malfunctions of our computer
and communications systems, and prevent us from running our business." These
outages and delays could reduce the level of Internet usage as well as the level
of traffic, and could result in the Internet becoming an inconvenient or
uneconomical source of music and music-related products and services. The
infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for the
products or services that we offer.

WE MAY HAVE DIFFICULTY COMPETING FOR OR EXECUTING BUSINESS PARTNERSHIPS AND
MAKING ACQUISITIONS THAT WE MAY NEED TO EXPAND OUR CONTENT AND DISTRIBUTION
CHANNELS, WHICH COULD IMPAIR OUR OVERALL STRATEGIC GOALS.

Our business strategy includes entering into business partnerships and may
include acquiring complementary businesses, technologies, content or products.
For example, in June 1999 we entered into a joint venture with Cox Interactive
Media to create and operate music-related websites. We cannot assure you that
this joint venture or any other business partnership will be successful. We may
be unable to complete suitable business partnerships and acquisitions on
commercially reasonable terms, if at all. We expect to face competition for
business partnership and acquisition candidates and sponsorships. This
competition could impair our ability to successfully pursue these aspects of our
business strategy.

9
<PAGE> 12

Business partnerships or acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. If we acquire a
company, we could face difficulties assimilating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. Acquisitions of additional services or technologies also
involve risks of incompatibility and lack of integration into our existing
operations. If we finance the acquisitions by incurring debt or issuing equity
securities, this could dilute our existing stockholders. Any amortization of
goodwill or other assets, or other charges resulting from the costs of
acquisitions, could adversely affect our operating results.

FINANCIAL RISKS

OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST.

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

WE EXPECT NET LOSSES IN THE FUTURE.

In 1998, we had a net loss of approximately $360,000. During the first
three months of 1999, we had a net loss of approximately $1.4 million. We expect
substantial net losses and negative cash flow for the foreseeable future. We
believe it is critical to our long term success that we continue to develop
MP3.com brand awareness and loyalty through marketing and promotion, expand our
artist and consumer networks, develop our online content and expand our other
services. We expect that our operating expenses will increase significantly
during the next several years, especially in sales and marketing. With increased
expenses, we will need to generate significant additional revenues to achieve
profitability. As a result, we may never achieve or sustain profitability and,
if we do achieve profitability in any period, we may not be able to sustain or
increase profitability on a quarterly or annual basis.

UNLESS WE OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO MEET OUR STRATEGIC
BUSINESS OBJECTIVES.

The proceeds of this offering are expected to be sufficient to meet our
cash requirements for at least the next 12 months. However, we may need to raise
additional funds in order to:

- finance unanticipated working capital requirements;

- develop or enhance existing services or products;

- fund distribution relationships;

- respond to competitive pressures; or

- acquire complementary businesses, technologies, content or products.

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

10
<PAGE> 13

RISKS RELATED TO SALES, MARKETING AND COMPETITION

UNLESS WE DEVELOP A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT CONTINUE TO GROW
AND OUR FINANCIAL RESULTS MAY SUFFER.

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

IF WE DO NOT TRANSCEND A MERE ASSOCIATION BETWEEN OUR COMPANY AND THE MP3 FORMAT
IN THE MINDS OF CONSUMERS, OUR BRAND IDENTITY AND FINANCIAL RESULTS COULD
SUFFER.

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

OUR MARKETING AND SALES EFFORTS RELY HEAVILY ON OUR ABILITY TO COLLECT
INFORMATION.

We plan to use consumer data to expand, refine and target our marketing and
sales efforts. We collect most of our data from users who report information to
us as they conduct transactions on our website. If a large proportion of users
impede our ability to collect data or if they falsify data, our marketing and
sales efforts would be less effective since advertisers generally require
detailed demographic data on their target audiences. In addition, laws relating
to privacy and the use of the Internet to collect personal information could
limit our ability to collect data and utilize our database. Failure to collect
accurate and useful data could result in a substantial reduction in advertising
revenues, which represented 84% of our total revenues in the first quarter of
1999. Because we use e-mail for direct marketing, any legislative or consumer
efforts to regulate unsolicited bulk e-mails, commonly referred to as "spam," as
well as other laws regulating the use of e-mail, could significantly impair our
sales and marketing efforts and our associated advertising revenue.

WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE WHICH COULD REDUCE
OUR REVENUES, POTENTIAL PROFITS AND OVERALL MARKET SHARE.

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

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<PAGE> 14

RISKS RELATED TO OPERATIONS

OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY INTEGRATE, OUR MANAGEMENT TEAM.

Our future performance will be substantially dependent on the continued
services of our management and our ability to retain and motivate them. The loss
of the services of any of our officers or senior managers could harm our
business. We do not have long-term employment agreements with any of our key
personnel, other than our Chief Executive Officer, and we do not maintain any
"key person" life insurance policies except on our Chief Executive Officer.

Almost all of our management team joined MP3.com in 1999. Most of these
individuals have not previously worked together and are currently being
integrated as a management team. If our senior managers are unable to work
effectively as a team, our business operations could be significantly disrupted.

WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES, AND AS A RESULT WE MAY NOT BE ABLE TO GROW AS WE EXPECT, OR MAINTAIN
THE QUALITY OF OUR SERVICES.

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

WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE, OR WE WILL BE UNABLE
TO EFFECTIVELY MEET DEMAND ON OUR WEBSITE.

In May 1999, an average of approximately 20 gigabytes of musical content
was added to our website each week and traffic to the site increased by
approximately 14% from the previous month. We must continue to add hardware and
enhance software to accommodate the increased content and use of our website. If
we are unable to increase the data storage and processing capacity of our
systems at least as fast as the growth in demand, our website may become
unstable and may fail to operate for unknown periods of time. Unscheduled
downtime could harm our business and also could discourage users of our website
and reduce future revenues.

OUR NEW FINANCIAL ACCOUNTING SYSTEM AND OTHER INTERNAL SYSTEMS MAY NOT WORK
EFFECTIVELY.

In May 1999, we began installing a new financial accounting system. We
anticipate this installation will be completed in stages through the remainder
of 1999. If the accounting system does not work effectively, we may experience
delays or failures in our accounting processes. This could adversely impact the
promptness and accuracy of our transaction processes, and our financial
accounting and reporting.

To manage the expected growth of our operations and personnel, we will need
to improve our operational and financial systems, transaction processing,
procedures and controls. Our current and planned systems, transaction
processing, procedures and controls may not be adequate to support future
operations.

OUR DATA WAREHOUSING AND WEB SERVER SYSTEMS MAY STOP WORKING OR WORK IMPROPERLY
DUE TO NATURAL DISASTERS, FAILURE OF THIRD-PARTY SERVICES AND OTHER UNEXPECTED
PROBLEMS.

Since our data warehousing, web server and network facilities are all
located in Southern California, an earthquake or other natural disaster could
affect all of our facilities simultaneously. An unexpected event such as a power
or telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at either of our two Internet service providers'
facilities could cause the loss of critical data and prevent us from offering
our services to artists and consumers. Our business interruption insurance may
not adequately

12
<PAGE> 15

compensate us for losses that may occur. In addition, we rely on third parties
to securely store our archived data, house our web server and network systems,
and connect us to the Internet. A failure by any of these third parties to
provide these services satisfactorily would impair our ability to access
archives and operate our website.

WE MAY LOSE VISITORS TO OUR WEBSITE IF OUR ONLINE SECURITY MEASURES FAIL.

If the security measures that we use to protect personal information are
ineffective, we may lose visitors to our website which could reduce our
revenues. We rely on security and authentication technology licensed from third
parties. With this technology, we perform real-time credit card authorization
and verification. We cannot predict whether new technological developments could
allow these security measures to be circumvented.

In addition, our software, databases and servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may need to spend significant resources to protect against security breaches or
to alleviate problems caused by any breaches. We cannot assure that we can
prevent all security breaches.

YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, AND PREVENT US FROM RUNNING OUR BUSINESS.

Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our goods and services. See "Management's Discussion and Analysis
of Financial Condition and Operating Results -- Year 2000 Readiness Disclosure."

RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY

GOVERNMENT REGULATION MAY REQUIRE US TO CHANGE THE WAY WE DO BUSINESS.

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

WE MAY BE LIABLE TO THIRD PARTIES FOR MUSIC, SOFTWARE AND OTHER CONTENT THAT IS
AVAILABLE ON OUR WEBSITE AND ON THE CDS WE DISTRIBUTE.

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

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

- if our artists violate their contractual obligations to others by
providing content on our website or CDs; or

- if anything on our website or CDs is deemed obscene, indecent or
defamatory.

13
<PAGE> 16

We may also be liable for anything that is accessible from our website
through links to other websites.

OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE.

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

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.

The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our common stock.

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.

Most of the net proceeds of this offering are not allocated for specific
uses. Our management has broad discretion to spend the proceeds from this
offering in ways with which stockholders may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This could have significant adverse effects on our financial condition and could
cause the price of our common stock to decline.

OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 73.6% OF
OUR COMMON STOCK AFTER THIS OFFERING.

After this offering, executive officers, directors and holders of 5% or
more of the outstanding MP3.com common stock will, in the aggregate,
beneficially own 73.6% of our outstanding common stock. These stockholders would
be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of
MP3.com and may make some transactions more difficult or impossible to complete
without the support of these stockholders.

14
<PAGE> 17

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.

Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:

- authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior stockholder approval, with rights senior to those of common stock;

- provide for a staggered board of directors, so that no more than two
directors could be replaced each year and it would take three successive
annual meetings to replace all directors;

- prohibit stockholder action by written consent; and

- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.

OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING.

Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this offering.

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.

The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since these investments will be at a substantially higher per
share price than they were for our existing stockholders. The dilution will be
$7.58 per share in the net tangible book value of the common stock from the
initial public offering price. If additional shares are sold by the underwriters
following exercise of their over-allotment option, or if outstanding options or
warrants to purchase shares of common stock are exercised, there will be further
dilution.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, assuming a public offering price of $10.00, we
will have outstanding 62,527,855 shares of common stock. All the shares sold in
this offering will be freely tradable. Of the remaining 52,277,855 shares of
common stock outstanding after this offering, 31,376,125 shares will be eligible
for sale in the public market beginning 181 days after the date of this
prospectus. The remaining 20,901,730 shares will become available at various
times thereafter upon the expiration of one-year holding periods. We also intend
to register up to 8,837,063 additional shares of our common stock after this
offering for sale pursuant to our equity plans.

YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.

This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of these terms or other comparable

15
<PAGE> 18

terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks described above and in other parts
of this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
actual results or to changes in our expectations.

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<PAGE> 19

USE OF PROCEEDS

We estimate that our net proceeds from the offering will be approximately
$82.7 million (based upon an assumed initial public offering price of $10.00 per
share) after deducting the estimated underwriting discount and commissions and
estimated offering expenses ($95.3 million if the over-allotment option is
exercised in full).

We expect to use approximately $10 million of our net proceeds for
marketing and promotional activities, $8 million for capital expenditures, $4
million for concert sponsorships and tours, and $2 million for planned
facilities expansion and related improvements. We intend to use the remaining
net proceeds for general corporate purposes, including working capital and
capital expenditures, including expansion of sales and marketing activities. The
amounts we actually expend for general corporate purposes may vary significantly
and will depend on a number of factors, including the amount of our future
revenues and the other factors described under "Risk Factors." Our management
will retain broad discretion in the allocation of the net proceeds of this
offering. A portion of the net proceeds may also be used for strategic
partnerships or to acquire or invest in complimentary businesses, technologies,
product lines, content or products. We have no current agreements or commitments
and we are not currently engaged in any negotiations with respect to any
acquisitions. Pending these uses, the net proceeds of this offering will be
invested in short term, interest-bearing, investment grade securities.

DIVIDEND POLICY

Covenants in our financing arrangements will prohibit or limit our ability
to declare or pay cash dividends. We have never declared or paid any cash
dividends on our capital stock. We currently intend to retain any future
earnings to finance the growth and development of our business and therefore do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements, general business condition and other factors
that the board of directors may deem relevant.

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<PAGE> 20

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 1999:

- On an actual basis;

- On a pro forma basis after giving effect to:

-- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of common
stock;

-- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 into 1,650,000 shares of common stock;

-- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 into 658,653 shares of common stock;

-- the conversion of 4,182,578 shares of Series C preferred stock issued
in June 1999 into 6,273,867 shares of common stock;

-- a three-for-two split in our common stock;

-- the exercise of warrants to purchase 658,653 shares of common stock;

-- 250,000 shares of common stock (assuming an initial public offering
price of $10.00 per share) we will issue in a private placement
pursuant to an agreement with a strategic partner entered into on May
12, 1999; and

-- our donation of 100,000 shares of common stock to the MP3.com
Foundation; and

- On a pro forma as adjusted basis, giving effect to our sale of the common
stock in this offering at an assumed offering price of $10.00 per share
and the application of the net proceeds as described under "Use of
Proceeds."

This information should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ------------
<S> <C> <C> <C>
Long-term debt, less current portion(1)..................... $ -- $ -- $ --
Stockholders' equity:
Preferred Stock, par value $0.001 per share; none
authorized, actual; 15,000,000 authorized pro forma and
pro forma as adjusted; none issued and outstanding
actual, pro forma, and pro forma as adjusted........... -- -- --
Convertible Preferred Stock, par value $0.001 per share;
authorized 9,500,000, actual; none authorized pro forma
and pro forma as adjusted..............................
Series A, 8,150,000 authorized and 7,150,000 issued and
outstanding, actual; none authorized and none issued
and outstanding, pro forma and pro forma as
adjusted............................................. 7,150 -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized and 31,694,999 shares issued and
outstanding, actual; 52,011,168 shares issued
outstanding pro forma (unaudited); 200,000,000 shares
authorized; and 61,011,168 shares issued and
outstanding, pro forma as adjusted(2).................. 31,695 52,011 61,011
Additional paid in capital................................ 16,351,763 71,633,183 154,349,183
Note receivable from a stockholder........................ (260,000) (260,000) (260,000)
Deferred compensation..................................... (4,008,125) (4,008,125) (4,008,125)
Accumulated deficit....................................... (1,763,166) (2,444,166) (2,444,166)
----------- ----------- ------------
Total stockholders' equity................................ 10,359,317 64,972,903 147,697,903
----------- ----------- ------------
Total capitalization.............................. $10,359,317 $64,972,903 $147,697,903
=========== =========== ============
</TABLE>

- ---------------
(1) See Note 3 of Notes to Financial Statements.

(2) Does not include 13,050,000 shares of common stock reserved under our
employee benefit plans. There were 2,757,750 options outstanding as of March
31, 1999 at a weighted average exercise price of $0.20 per share. See
"Description of Capital Stock," "Management -- 1998 Equity Incentive Plan"
and "Management -- Employee Stock Purchase Plan."

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<PAGE> 21

DILUTION

As of March 31, 1999, our pro forma net tangible book value was
approximately $65.0 million, or $1.25 per share of common stock. Pro forma net
tangible book value represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding, and
gives effect to:

- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of common
stock;

- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 into 1,650,000 shares of common stock;

- the conversion of 439,103 shares of convertible Series B preferred stock
issued during April 1999 into 658,653 shares of common stock;

- the conversion of 4,182,578 shares of Series C preferred stock issued in
June 1999 into 6,273,867 shares of common stock;

- a three-for-two split in our common stock;

- the exercise of warrants to purchase 658,653 shares of common stock;

- 250,000 shares of common stock (assuming an initial public offering price
of $10.00 per share) we will issue in a private placement pursuant to an
agreement with a strategic partner entered into on May 12, 1999; and

- our donation of 100,000 shares of common stock to the MP3.com Foundation.

After giving effect to our sale of common stock in this offering at an
assumed initial public offering price of $10.00 per share, and our receipt of
the estimated net proceeds from the sale, our pro forma net tangible book value
as of March 31, 1999 would have been approximately $148.0 million, or $2.42 per
share. This represents an immediate increase in net tangible book value of $1.17
per share to existing stockholders and an immediate dilution of $7.58 per share
to new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share before the
offering............................................... $1.25
Increase per share attributable to new investors.......... 1.17
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.42
------
Dilution per share to new investors......................... $ 7.58
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions and our estimated offering expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 52,011,168 85.2% $ 60,935,633 40.4% $ 1.17
New investors....................... 9,000,000 14.8% $ 90,000,000 59.6% 10.00
---------- ----- ------------ ------
Total..................... 61,011,168 100.0% $150,935,633 100.0%
========== ===== ============ ======
</TABLE>

The discussion and tables above assume no exercise of stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 2,757,750 shares of common stock, with a
weighted average exercise price of $0.20 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
See "Management -- 1998 Equity Incentive Plan," "Description of Capital Stock"
and Notes 4 and 6 to Notes to Financial Statements.

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<PAGE> 22

SELECTED HISTORICAL FINANCIAL DATA

In the table below, we provide you with selected historical financial data.
We have prepared this information using financial statements for the period from
March 17, 1998 (inception) to December 31, 1998 and the three-month period ended
March 31, 1999. The financial statements for the period from March 17, 1998
(inception) to December 31, 1998 have been audited by Ernst & Young LLP,
independent auditors. The financial statements for the three-month period ended
March 31, 1999 have not been audited. We have prepared this unaudited
information on substantially the same basis as the audited financial statements
and included all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the financial position and
results of operations for the period. When you read this selected historical
financial data, it is important that you read along with it the historical
financial statements and related notes as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this prospectus. Historical results are not
necessarily indicative of future results.

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $1,162,438 $ 665,785
Cost of revenues............................................ 214,958 205,303
---------- -----------
Gross profit................................................ 947,480 460,482
Operating expenses:
Sales and marketing....................................... 79,328 523,278
Product development....................................... 395,213 305,046
General and administrative................................ 142,510 458,762
Amortization of deferred compensation..................... 550,197 652,315
---------- -----------
Total operating expenses.......................... 1,167,248 1,939,401
---------- -----------
Loss from operations........................................ (219,768) (1,478,919)
Interest income (expense), net.............................. (3,810) 73,291
---------- -----------
Loss before income taxes.................................... (223,578) (1,405,628)
Provision for income taxes.................................. 133,960 --
---------- -----------
Net loss.................................................... $ (357,538) $(1,405,628)
========== ===========
Net loss per share(1):
Basic and diluted......................................... $ (0.01) $ (0.05)
========== ===========
Weighted average shares -- basic and diluted.............. 26,182,785 27,537,067
========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
1998 MARCH 31, 1999
------------ --------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 39,509 $ 9,327,149
Working capital............................................. 132,469 9,146,989
Total assets................................................ 463,355 11,245,608
Total stockholders' equity.................................. 194,706 10,359,317
</TABLE>

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

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<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS

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

OVERVIEW

We were incorporated on March 17, 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. On December 31, 1998, we had only eight
employees. This increased to 54 employees on March 31, 1999 and to 96 employees
on May 31, 1999. Given our short operating history and our limited operations in
1998, we believe that comparisons between any period in 1999 and the comparable
period in 1998 would not be meaningful; therefore, these comparisons are not
discussed below.

RESULTS OF OPERATIONS

Net Revenues

From inception to March 31, 1999, net revenues have consisted primarily of
the sale of online advertisements (89% of net revenues) on our website, and to a
lesser extent, the online sale of CDs and music-related merchandise (11% of net
revenues). Net revenues were $1,162,000 during 1998 and $666,000 in the quarter
ended March 31, 1999. The level of net revenues in the first quarter of 1999
reflected increased banner and sponsorship advertisements on our website.

Revenue from online advertising. From inception to March 31, 1999, banner
and sponsorship advertisements on our website have accounted for 75% of our
online advertising revenue. The duration of our banner advertising commitments
has ranged from one month to one year. Sponsorship advertising contracts involve
more integration with our website, including the placement of buttons that
provide users with direct links to the advertiser's website. Advertising revenue
was $1,061,000 (91% of net revenues) during 1998 and $560,000 (84% of net
revenues) in the first quarter 1999. The increase in the level of advertising
revenue in the first quarter of 1999 was primarily due to the expansion of our
customer base, increased awareness regarding MP3.com and the mp3 technology, and
development and expansion of our music content. As we develop and introduce new
online programs, products and services, we anticipate that revenue from banner
advertising and sponsorship advertising will decrease as a percentage of net
revenues.

We recognize revenue on the sale of banner advertisement contracts as the
impression is delivered or displayed. We recognize revenue on the sale of
sponsorship advertisement contracts over the period in which the advertisement
is displayed. In each case, revenue is only recognized if we have no remaining
significant obligations and the collection of the receivable is probable. Our
obligations typically include guarantees of a minimum number of "impressions,"
or times that an advertisement appears in pages viewed by users of our website.
In these circumstances, we recognize revenues at the lesser of the ratio of
impressions delivered over the guaranteed impressions or the straight-line basis
over the term of the agreement. To the extent minimum guaranteed impressions are
not met, we defer recognition of the corresponding revenues until the remaining
guaranteed impressions are delivered.

Revenue from online sales of CDs and other music-related merchandise. We
also derive revenue from the online sale of our compilation and DAM CDs and, to
a lesser extent, other music-related merchandise. Revenue from the online sale
of CDs and music-related merchandise was $101,000 (9% of net revenues) during
1998 and $106,000 (16% of net revenues) in the first quarter of 1999. Revenue
from online sales of CDs and music-related merchandise increased primarily due
to increased musical content available on our website and increased brand
awareness. In the future, if the number of visitors to our website continues to
grow and the quantity and quality of the musical content available continues to
increase, we expect that

21
<PAGE> 24

revenue from the online sale of CDs will constitute an increasing portion of
total net revenues. This revenue is recognized upon shipment.

Revenue from No Limit Agreement. On May 12 1999, we entered into a three
year agreement with Boutit, Inc., which also does business under the name "No
Limit Records." Under this agreement, we obtained rights to a number of No Limit
master recordings. Some of the artists represented by No Limit include Master P
and Snoop Dogg, along with other respected platinum-selling artists. No Limit
artists also may participate in our chatrooms, display MP3.com signs at concert
performances, hold concerts with artists that have posted music on our website
and cooperate with us on other promotional activities. We will record all
revenues generated under the agreement and will recognize royalty expense (to be
included in cost of sales) representing the royalties payable to No Limit. The
royalty percentage due to No Limit will vary depending on the source of revenue
subject to the royalty obligation. No Limit will also become a stockholder of
MP3.com at the closing of this offering. Pursuant to our agreement, we will
issue 250,000 shares of our common stock (assuming an initial public offering
price of $10.00 per share) in a private placement concurrent with the closing of
this offering. We expect to amortize a $2.5 million charge over the term of the
agreement to reflect this issuance.

Cost of Revenues

Cost of revenues primarily represents website operations costs, CD and
merchandise fulfillment operations and artist royalties. Website operations
costs include Internet connectivity charges, networking costs and equipment
depreciation. CD and merchandise fulfillment operations costs primarily consist
of labor related costs, equipment depreciation, CD blanks, merchandise, shipping
and the allocation of a portion of our facilities costs. In the future, cost of
net revenue also may include content acquisition cost.

Cost of revenues was $215,000 (19% of net revenues) during 1998 and
$205,000 (31% of net revenues) in the first quarter of 1999. The level of cost
of revenues increased, as a percentage of net revenue, due primarily to
increased depreciation expense ($9,000 or 1% of net revenues) associated with
increased investment in website and fulfillment-related equipment, as well as an
increase, as a percentage of net revenues, in CD and other music related
merchandise sales (which typically have lower associated gross margins) from 9%
to 16%. We anticipate that future gross margins will fluctuate depending on
changes in our revenue mix and the timing of our investments in website and
fulfillment operations.

Sales and Marketing

Sales and marketing expense consists primarily of direct marketing
expenses, promotional activities, salaries and commissions, costs related to
website editorial content and the allocation of a portion of our facilities
cost.

Sales and marketing expense was $79,000 (7% of net revenues) during 1998
and $523,000 (79% of net revenues) in the first quarter of 1999. The increase in
sales and marketing expense, both in absolute dollar amounts and as a percentage
of net revenue, was primarily due to new marketing programs ($180,000 or 27% of
net revenues), substantial increases in sales and marketing payroll and related
expenses ($182,000 or 27% of net revenues) and the costs associated with the
increase in our size. We anticipate that overall sales and marketing expense
will increase significantly in the foreseeable future; however, sales and
marketing expense as a percentage of net revenues may fluctuate depending on the
timing of new marketing programs and addition of sales and marketing personnel.

In April 1999, we entered into an artist promotion consulting agreement
with Atlas/Third Rail Management, Inc., a Los Angeles-based creative talent
agency. The contract has a term of three years. Under the agreement, Atlas/Third
Rail will use its reasonable efforts to facilitate artist promotions. One such
promotion involves our sponsorship of Alanis Morissette and Tori Amos' "5 1/2
Weeks" summer 1999 tour. Under the promotion agreement, we granted Atlas/Third
Rail warrants to purchase 658,653 shares of our common stock exercisable at
$0.33 per share. As a result of the grant, we recorded deferred marketing costs
of $2,191,000. We will account for these warrants based on the fair value
provisions of FAS 123 and will amortize their value to sales and marketing
expense as follows: approximately $365,000 in the second quarter

22
<PAGE> 25

of 1999 (when the 5 1/2 Weeks tour was announced) and approximately $1,826,000
in the third quarter of 1999 (when the 5 1/2 Weeks tour is scheduled to occur).
See "Business -- Sales and Marketing" and Note 6 of Notes to Financial
Statements.

In June 1999, we established the MP3.com Foundation. Our board of directors
authorized the initial contribution to this foundation of 100,000 shares of
common stock. The deemed fair value of the contribution was $681,000. We will
charge the contribution to expense during the second quarter of 1999.

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

Product Development

Product development expense consists primarily of compensation for our
product development staff, depreciation of computer equipment used for
development, supplies and the allocation of facilities costs associated with
maintaining our website. We expense product development costs as they are
incurred.

Product development expense was $395,000 (34% of net revenues) during 1998
and $305,000 (46% of net revenues) in the first quarter of 1999. The increase in
the level of product development expense, as a percentage of net revenue, was
primarily due to increased payroll and related expenses (from 29% to 34% of net
revenues) associated with hiring more employees and expensed computer supplies
(from 0% to 4% of net revenues). We anticipate that overall product development
expenses will increase in the foreseeable future; however, product development
expenses as a percentage of net revenues may fluctuate depending on the level of
future net revenues and the timing of investments in product development and
hiring.

General and Administrative

General and administrative expense consists primarily of salaries for
finance, legal and other administrative personnel, fees for outside consultants,
depreciation, an allocation of facilities related costs, insurance, legal and
accounting fees, and other overhead.

General and administrative expense was $143,000 (12% of net revenues)
during 1998 and $459,000 (69% of net revenues) in the first quarter of 1999. The
increase in general and administrative expense, both in absolute dollar amount
and as a percentage of net revenue, was primarily a result of increased finance
and administrative payroll and related expenses (from 0% to 10% of net
revenues), recruiting and relocation expenses (from 0% to 3% of net revenues)
related to hiring our management team, increased legal and accounting expenses
(from 4% to 26% of net revenues), increased depreciation expense (from 0% to 2%
of net revenues) and costs associated with the increase in our size. We
anticipate that overall general and administrative expense will increase in the
foreseeable future; however, general and administrative expense as a percentage
of net revenues may fluctuate depending on the level of future net revenues and
the timing of additional investments in general and administrative
infrastructure.

Amortization of Deferred Compensation

During 1998 and the quarter ended March 31, 1999, we recorded aggregate
deferred compensation of $728,000 and $4,482,000, respectively, for the grant of
stock options which were granted at exercise prices less than the deemed fair
value on the grant date. We also expect to record additional deferred
compensation of no less than $11.0 million in the second quarter of 1999 to
reflect additional option grants at exercise prices less than the deemed fair
value of common stock on the grant date. The deferred compensation is being
amortized over the vesting period of the options, which is generally four years.
Of the total deferred compensation, $550,000 was amortized during 1998 and
$652,000 was amortized in the first quarter of 1999. See Note 4 of Notes to
Financial Statements.

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<PAGE> 26

Interest Income (Expense), Net

Net interest expense of $4,000 during 1998 resulted from interest incurred
on a capital lease, partially offset by interest income earned on cash balances.
Net interest income in the first quarter of 1999 of $73,000 was a result of an
increase in cash associated with approximately $10.9 million in net proceeds
from the Series A convertible preferred stock issuance, offset by interest
expense of approximately $8,000 related to a capital lease obligation.

Provision For Income Taxes

Despite the loss before income taxes of $224,000 in 1998, we recorded a
provision for income taxes of $134,000. The tax provision of $134,000 resulted
from the amortization of deferred compensation, described above, which is not
deductible for income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

To date, our operations have been financed from internally generated cash,
the sale of convertible preferred stock in 1999 and, to a lesser extent, capital
equipment lease arrangements.

As of March 31, 1999, approximately $9,327,000 in cash and cash equivalents
was available. Additionally, a $3,000,000 line of credit with Imperial Bank with
a sublimit of $1,500,000 for equipment financing was available to fund our
operations. Borrowings under the line of credit accrue interest at the bank's
prime rate plus 1% (8.75% as of March 31, 1999), expires in February 2000, and
is secured by most of our assets. We are required to comply with debt covenants,
the most restrictive of which is a liquidity ratio. As of March 31, 1999, we
have complied with all debt covenants. As of March 31, 1999, there were no
amounts outstanding under the line of credit and no amounts were borrowed during
the first quarter of 1999. On April 30, 1999, we borrowed $1,234,000 under the
bank's equipment sublimit facility. This indebtedness requires monthly payments
of interest only through August 1999, at which time the outstanding principal
amount will be converted into a three year fully-amortizing term loan with the
bank. See Note 6 of Notes to Financial Statements.

Operating Activities

Net cash provided by operating activities during 1998 was approximately
$157,000 and consisted primarily of the following:

- net loss of approximately $358,000;

- amortization of deferred compensation of $550,000;

- an increase in accounts and unbilled receivables of approximately
$289,000; and

- an increase in accounts payable and accrued expenses of approximately
$130,000.

Net cash used in operating activities for first quarter of 1999 was
approximately $438,000. The uses of cash from operating activities consisted
primarily of the following:

- net loss of approximately $1,406,000;

- amortization of deferred compensation of $652,000;

- an increase in accounts receivable of approximately $107,000;

- an increase in prepaid expenses and other current assets of approximately
$243,000;

- an increase in accounts payable and accrued expenses of approximately
$558,000; and

- an increase in deferred revenue of approximately $68,000.

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<PAGE> 27

Investing Activities

Cash used in investing activities during 1998 and the first quarter of 1999
was approximately $43,000 and $1,184,000, respectively, and consisted primarily
of property and equipment expenditures.

Financing Activities

Cash used in financing activities during 1998 was approximately $90,000,
and consisted of payments of notes payable and capital lease obligations. Net
cash provided by financing activities for the first quarter of 1999 was
approximately $10,909,000, and consisted primarily of the proceeds from the sale
of Series A preferred stock.

We have no material financial commitments other than obligations under our
credit facilities and operating leases. We expect to substantially increase
expenditures for applications including:

- computer equipment and furniture and fixtures associated with new
employees and facility expansion;

- website computer equipment and additional website maintenance personnel;

- product fulfillment equipment, infrastructure and new employees;

- bandwidth and networking equipment and infrastructure;

- additional sales and marketing employees;

- equipment and additional employees related to product development;

- increased promotion and branding efforts; and

- development and acquisition of content.

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

We are currently negotiating a five year lease for approximately 61,000
square feet of office and production space, and anticipate moving into this new
facility during the second half of 1999. We are also exploring the possible
lease of additional facilities, although we do not anticipate occupying these
facilities until the first half of 2000.

To the extent our net revenues increase in the future, we anticipate
significant increases in our working capital requirements to finance higher
relative levels of associated accounts receivable, unbilled receivables and
other assets, offset by increases in accounts payable and other liabilities.
However, we do not expect the increases in accounts payable and other
liabilities will offset the increases in accounts receivable, unbilled
receivables and other assets.

In June 1999, we sold 4,182,578 shares of Series C preferred stock (which
will be converted into 6,273,867 shares of common stock at the close of this
offering) to Cox Interactive Media, for a total purchase price of approximately
$45 million. We also entered into a joint venture with Cox Interactive Media to
create and operate music-related websites. We will contribute approximately $14
million to the joint venture over the next year.

We believe that our cash and cash equivalent balances, funds available
under our existing line of credit, proceeds from the Cox Interactive Media
investment, net of our financing commitment to the joint venture, and net
proceeds from this proposed offering will be sufficient to satisfy our cash
requirements for at least the next 12 months. We intend to invest our cash in
excess of current operating requirements in short-term, interest-bearing,
investment-grade securities.

We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products, content,
businesses or technologies. If additional funds are raised through the sale of
equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced, our stockholders may experience additional
dilution and these securities may have rights, preferences or privileges senior
to

25
<PAGE> 28

those of our stockholders. There can be no assurance that additional financing
will be available or on terms favorable to us. 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
products or services or otherwise respond to competitive pressures could be
significantly limited. Our business may be harmed by these limitations.

INTEREST RATE RISK

We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in certificates of deposit.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of interest sensitive financial instruments
at December 31, 1998 or March 31, 1999.

YEAR 2000 READINESS DISCLOSURE

Since our business and, consequently, our hardware, telecommunication and
software systems are new, we believe most of these systems are already year 2000
compliant and we do not expect internal year 2000 problems to materially affect
us. Nevertheless, because our business relies heavily on the Internet and on
computer and telecommunication systems, including those of our suppliers,
customers and other third parties, the year 2000 problem could seriously harm
us. Therefore, we established a year 2000 readiness team to assess the effect
that the year 2000 problem may have on us and to develop a year 2000 readiness
plan.

We have started assessing the corporate systems and operations that we
believe could be affected by the year 2000 problem. We have focused our year
2000 review on three areas:

- information technology infrastructure;

- non-information technology systems; and

- third-party compliance.

Information Technology Infrastructure

Because our consumer and business systems are essential to our business,
our year 2000 team has assessed and evaluated our information technology
systems, including our computers, hardware, and software systems. As the team
has identified critical computer, hardware, or software information technology
systems that require replacement, upgrade, or modification, we have made the
required replacement, upgrade, or modification immediately. We use the following
information technology for our internal infrastructure:

- website and Internet ordering systems;

- main enterprise software systems, including those used for music
delivery, production, shipping, and accounting;

- individual workstations, including personal computers; and

- networking related hardware and software systems.

We currently believe that all of our critical information technology
systems are year 2000 compliant. In addition, we are in the process of
implementing a new accounting system which is certified year 2000 compliant by
the vendor. We expect this system to be in place by the end of 1999. We have
conducted and continue to conduct year 2000 compliance testing of our individual
workstations and networking related

26
<PAGE> 29

hardware and software systems. To date, we have not discovered any material year
2000 problems in these internal systems.

Non-Information Technology Systems

Some non-information technology systems used in our business, including air
conditioning, fire sprinkler and telephone systems, our facility's security
system, the security system for our facility's campus, and other equipment, may
contain software that is vulnerable to year 2000 problems. The year 2000 problem
could cause failures in these systems which could disrupt our operations. We are
currently assessing the year 2000 readiness of many of these systems and
equipment and expect to have identified and corrected year 2000 problems in our
critical non-information technology systems by September 1999.

Third-Party Compliance

Our material third party business relationships include:

- customers who place orders for products using the Internet;

- our Internet service providers; and

- vendors and suppliers who provide the goods that we offer to our
customers.

We are unable to predict, and have not attempted to assess, the year 2000
readiness of our customers or the systems they use to interact with us. Since we
take all of our product orders and offer most of our artist services over the
Internet, our operations would be harmed if a significant number of our
customers were unable to use the Internet and place orders due to year 2000
problems.

We have assessed the year 2000 readiness of our Internet service providers
and the systems they use to interact with us and determined that they have
implemented strategies for becoming year 2000 compliant. Our Internet service
providers expect to be year 2000 compliant prior to December 31, 1999. Since our
business is reliant on the ability of our Internet service providers to direct
customers to our website, our operations would be materially and adversely
affected if those providers were unable to provide their services.

Year 2000 disruptions in the systems or equipment used by our suppliers
could result in our customers being unable to obtain products in a timely
manner. We have not started to collect information regarding year 2000 readiness
from these companies. We plan on collecting this information in the third
quarter of this year.

Most Reasonable Worst Case Scenario

It is possible that year 2000 problems could disrupt one or more of the
following systems:

- customers' access to the Internet and their ability to place orders using
our website (we believe this is more likely for international customers
than domestic customers);

- artists' uploading of music content to our website;

- the fulfillment of customer orders; and

- credit card transactions.

In the first case, there is no alternative technology available which would
allow us to continue to run our business. In the last three cases, there is a
less efficient higher cost alternative which would allow us to continue to run
our business. However, any of these alternatives would result in increased
costs, reduced revenues or service delays, which would increase our operating
losses. Extended disruptions may impact both short term and long term customer
and supplier relationships and further impact our future profitability.

Costs

Our year 2000 assessment, remediation and testing activities have been
conducted by internal personnel, and we have not tracked the amount of employee
time expended on these tasks. Accordingly, we are unable to determine the cost
of employee time devoted to year 2000 matters. We estimate that the cost of our
year

27
<PAGE> 30

2000 readiness efforts, including any necessary modifications, upgrading or
replacement of computer equipment or software, will not exceed $100,000. We have
funded and plan to continue funding these activities principally through cash
flow.

Contingency Plan

In addition to the less efficient higher cost alternatives discussed above,
we are currently developing contingency plans to be implemented if we encounter
year 2000 problems. We expect to complete these plans in September 1999.
However, notwithstanding these plans and the other efforts of our year 2000
team, we cannot assure you that we will be year 2000 ready, or that year 2000
problems will not adversely affect our business, financial condition and results
of operations.

28
<PAGE> 31

BUSINESS

OVERVIEW

We receive revenue from online advertising, electronic commerce and offline
advertising. From inception to March 31, 1999, 89% of our revenues has been from
the sale of advertising space on our website. In addition, we sell CDs online,
both fully-packaged albums created by artists sold through our Digital Automatic
Music system, which we call "DAM CDs," and albums we compile featuring the work
of multiple artists, which we call "compilation CDs". We also receive revenue
from advertisers for their sponsorship of CD samplers, which are distributed
free of charge to consumers and contain collections of music.

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

INDUSTRY BACKGROUND

Recorded Music Industry

Music is one of the most popular forms of entertainment in the world. Music
is also a big business. According to the International Federation of the
Phonographic Industry, worldwide sales of recorded music were $38.7 billion in
1998, 34% of which were in the U.S. Over 70 million consumers in the United
States purchased three or more pieces of pre-recorded music in the past six
months according to a 1999 study by Soundata, Inc.

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

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

- Few artists can sell enough music to cover the high distribution and
promotion costs. These costs include producing CDs and tapes, inventory
and retail chain management, as well as television, print and radio
promotions and public relations efforts.

- The majority of artists can only reach limited audiences due to finite
shelf space at retailers and limited airtime on radio and television
stations, thus limiting the choices available to consumers.

- In order to protect the record companies' investment, artists must
generally commit to multi-year, multi-album contracts. These contracts
typically give the record company rights to and control of the artist's
music.

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

Because of these limitations, the number of artists served by the existing
music distribution system is small compared to the universe of musicians with
commercial aspirations. According to a recent Gallup poll, over 25% of the U.S.
population over the age of twelve, or 53 million people, are active
music-makers. In addition, according to the National Association of Music
Merchants, approximately 62% of U.S. households

29
<PAGE> 32

contain an amateur musician. These musicians represent a broad spectrum of
artists including hobbyists, amateurs, semi-professional and professional
musicians.

The Internet

The Internet has emerged as a global platform that allows millions of
people to share information, communicate and conduct business. International
Data Corporation estimates that the number of Internet users worldwide will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
The Internet has become an attractive medium for advertising and direct
marketing because the Internet allows for the collection of key demographic data
from consumers. Advertisers can better target specific groups based on customer
tastes and buying patterns on the Internet. Moreover, a sharp increase is
expected in online advertising and direct marketing over the Internet. For
example, Jupiter Communications estimates that the dollar volume of online
advertising will increase from $1.9 billion in 1998 to $7.7 billion in 2002 and
that online direct marketing will increase from $190 million in 1998 to $1.3
billion in 2002.

As users have come to realize the convenience of faster Internet
connections, many have upgraded from a 28.8 Kbps modem to a cable, xDSL or ISDN
modem. According to Jupiter Communications, the number of subscribers using
cable, xDSL or ISDN modems is projected to increase from one million in 1998 to
10.5 million in 2002.

Digital Music

In recent years, consumers have increasingly used their computers to play
music. Dataquest estimates that in 1998, 30% of U.S. households had multimedia
PCs with a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers
can now play CDs on their computers with the ease and fidelity formerly
associated only with stereo systems.

However, music files can be very large. For example, a three minute song
can occupy more than thirty megabytes of storage. Storing and transferring audio
files can be expensive and slow. To address this problem, compression formats
have been developed. One of the first widely accepted standards for the
compression of music was mp3, adopted by the Moving Picture Experts Group. The
mp3 standard offers at least 10:1 compression and audio integrity at near-CD
quality. Mp3 playback is currently available on most operating environments
including Microsoft Windows 95, Windows 98, Windows NT and MacOS, most major
versions of UNIX and many other operating environments. Free copies of mp3
playback software are widely available on the Internet. Forrester Research, Inc.
estimates that there are over 50 million mp3-capable users today.

Capitalizing on the growing popularity of mp3, Diamond Multimedia Systems,
Inc. introduced the Rio, the first commercially available mp3 portable player,
in November 1998. Over 250,000 units have been sold to date. Several other
manufacturers, including Creative Labs, Thompson Multimedia's RCA division, LG
Electronics and Samsung, have recently released or announced plans to sell
portable mp3 players.

The development of compression formats like mp3 has made it practical to
transmit music over the Internet. However, until recently there have been few
legitimate sources of downloadable music on the Internet.

THE MP3.COM SOLUTION

We are pioneering a revolutionary approach to the promotion and
distribution of music. This approach provides advantages to both artists and
consumers:

Value to Artists

Distribution and Promotional Power. We offer our artists a distribution
model that allows them to upload and promote their music through their own
MP3.com webpage for no charge, control pricing of their music and achieve
superior economics through revenue sharing on sales of their DAM CDs. Under our
revenue sharing arrangement artists typically earn a 50% royalty on sales of
their DAM CDs, compared to

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the 10% royalty we believe is typically earned by artists for sale of CDs under
traditional music industry contracts. We believe this high level of artist
control from origination to final distribution is extremely appealing to artists
underserved by the traditional record industry. Artists can have a
fully-packaged CD available for sale to consumers within as little as 48 hours
of registration by using mp3 technology to digitize their music. There are no
set-up or monthly fees. To use our services, artists provide at least one full
length promotional song for consumers to download or "Instant Play" (stream)
free of charge. In addition, we empower artists by allowing them to post
additional songs on our website at their own discretion and to control the
promotion of their music by specifying music genres and geographical
classifications, adding or deleting music selections at any time and selecting
price points for their CDs. Artists can also achieve "point-to-point"
communications, enabling them to interact with and present music, messages and
other content to their fans.

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

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

Value to Consumers

Extensive Music Selection and Compelling Value. We offer consumers one of
the largest databases of musical content available on the Internet through our
expanding collection of artists. Consumers can listen to real-time or streaming
audio or download thousands of songs posted on our website by artists to their
PCs for no charge and purchase our DAM CDs at prices ranging from $5.99 to
$10.00. We offer consumers a broad selection of music available 24 hours a day
from the convenience of their home, school or office. Our music collection spans
approximately 270 categorized genres, including pop, rock, classical, country,
alternative, children's, easy listening, electronic, hip hop, rap, blues, jazz
and international. In addition, consumers can access songs from artists from all
50 states and approximately 96 foreign countries.

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

Communications with Artists and Other Fans. We allow fans to contact
artists directly via e-mail and to communicate with one another through message
boards. In addition, artists can use their webpage to communicate directly with
their fans, advising them of concerts and new releases. Message boards allow
fans

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with common interests and preferences to be connected. Newcomers to our website
can receive general guidance from more experienced visitors in our "General mp3
Questions" forum. Some of our other forums focus on music-related software and
hardware technology and industry news.

ACCOMPLISHMENTS TO DATE

We have created a broad-based music community including over 14,000 artists
and 120 independent labels that have posted more than 80,000 songs on MP3.com.
Since we began offering services, we have digitally delivered more than 34
million songs to consumers visiting our site. In May 1999:

- we added over 105 new artists and 780 new songs on average each day;

- visitors to our website viewed over 56 million webpages, listened to or
downloaded over 9 million songs and conducted over 5.1 million music
searches;

- we estimate that more than 290,000 consumers on average visited our
website and listened to approximately 300,000 songs a day; and

- we sold on average over 275 DAM CDs per day.

We believe that large numbers of artists and consumers are drawn to MP3.com
because they have historically been underserved by the traditional music
industry. We expect to continue introducing new products and services designed
to meet their entertainment, electronic commerce, communications and information
needs. However, the growth rate of mp3 technology, or of the popularity of
listening to and downloading music from the Internet, does not mean that our
business will grow at a similar rate. Similarly, we cannot assume that our
business will grow as much as, and to the extent that, use of the Internet
becomes more widespread.

STRATEGY

Our corporate mission is to be the leading online music company for artists
and consumers. Key elements of our strategy include:

Diversify Revenue Streams Across Advertising, Electronic Commerce and
Direct Marketing. Our strategy is to harvest the breadth and uniqueness of our
music community and our services to generate multiple commercially feasible
revenue streams. Our primary focus to date has been on building an
advertising-based model that offers advertisers the opportunity to target
specific music fans regionally and globally through different types of
advertisements and sponsorship options. We also have sold products like DAM CDs,
compilation CDs and T-shirts from our website and intend to expand our
e-commerce initiatives to offer customized CDs, collectable products and other
music-related merchandise. Our content presentation will continue to focus on
genre and geography, which enables the collection of valuable consumer data. We
believe our unique ability to deliver large, demographically and geographically
profiled audiences will be a valuable asset in developing a variety of direct
marketing, data mining and advertising services.

Create the Largest Global Community of Artists by Providing Valuable and
Unique Services. A key component of our strategy is to continue to expand our
community of artists so that we offer the largest group of global artists
online. As part of this effort, we intend to offer new promotional services such
as auto-e-mail notification of new music postings or other material on MP3.com,
regional calendars allowing artists to post online performance dates and links
to ticketing agencies allowing artists to distribute tickets to their venues
using online ticketing. We believe these specialized services, combined with
compelling economics, will increase the loyalty among artists that currently
post music on our website and allow us to continue to increase the number of new
artists using our website, including those artists signed to exclusive contracts
with record companies, who often have been precluded by those record companies
from posting music on our website. We believe that offering one of the largest
global artist communities is key to increasing the number of consumers on our
website and thus increasing our advertising and electronic commerce
opportunities.

Create a Unique and Robust Music-Based Experience for the Consumer. Our
strategy focuses on creating an unmatched experience for consumers by offering
one of the largest collections of music available

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online, a rich browsing experience with multiple genre and geographical search
classifications and a cost and time efficient way to purchase music. We also
plan to expand local, regional, national and international coverage and increase
editorials, personalized news and advertising and customized CD sales. As
bandwidth availability continues to improve, we expect to deliver live concert
series and an increasing array of interactive multimedia experiences. We believe
our ability to create a personal, engaging experience will be critical in
retaining our customer base and increasing our audience in the future.

Build Brand Awareness. We plan to increase brand awareness through a
combination of online and offline advertising and promotional activities. We
have historically benefited from word-of-mouth and growing public awareness of
the mp3 format. Recently, we have promoted brand awareness through several
innovative and cost effective channels, including advocacy events, strategic
promotional agreements with established popular artists and our free CD sampler
program. We intend to achieve greater offline awareness by targeting radio,
television and magazine advertising, book publishing and new promotional
arrangements with established music talent and concert series. In addition, we
plan to build brand awareness in specific key demographic sectors through our
targeted free CD samplers in magazines, college tours, and syndicated radio. We
are also continuing to increase our online presence through banner advertising,
events, contests and e-mail promotions.

Expand Our International Presence. We believe we can increase the number of
our international artists and consumers through our use of the Internet.
Currently, artists from countries outside the U.S. represent approximately 40%
of our online artist community. Moreover, approximately 23% of our DAM CD
customers during May 1999 were from foreign countries. We believe our
multi-level geographical indexing capability, global reach and rankings are
significant attractions for our users. We intend to increase our international
presence by expanding local content and merchandising to selected international
regions. In addition, we also plan to offer foreign language content. We intend
to focus these efforts on Europe and Japan, in particular.

Support New Technology Formats and Standards. We intend to support a
variety of leading audio compression formats. We currently offer music in both
the mp3 and RealAudio formats. To date, we have primarily utilized the mp3
format due to its high audio quality and status as a widely accepted open
standard. However, we believe our music library can be reconfigured to support
multiple compression formats. Our intention is to support standards that achieve
acceptance by the Internet community.

THE MP3.COM WEBSITE

The MP3.com website offers a variety of attractive benefits to artists and
consumers. We enhance our website frequently to address expressed needs of our
artists and consumers, and strive to continue to improve the user experience.
The following table describes some of the features of our website:

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<TABLE>
<CAPTION>
FEATURES FOR ARTISTS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Simple Sign-Up Online sign-up process. Typically less than 48 hours from
Procedure sign-up to sales.
- - Free Artist Webpage Customizable webpage that can be modified at any time.
Artists can add music, reviews, pictures, links, lyrics,
stories, biographies and more.
- - DAM CD Production and Artists can create a customized CD, set the price,
Distribution distribute globally and receive 50% of gross sales, with no
set-up or monthly fees.
- - Artist Message Board Forum for artists to share experiences, get advice and make
connections.
- - Dedicated Artist Provides technical support for artists.
Services Group
- - Ongoing Artists can track a variety statistics on visitors to their
Data-Intensive webpage.
Feedback
</TABLE>

<TABLE>
<CAPTION>
FEATURES FOR CONSUMERS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - My MP3 Database of MP3.com music customized for each fan based on
their listening habits.
- - Browsing by Genre Fans can browse 80,000+ songs by 14,000+ artists in 270
genres with spotlighted artists in each genre.
- - Top 40 Lists Daily and weekly listing of the best music as determined by
our own ranking system.
- - Geographical Listing Fans can find artists from around the world or in their home
town.
- - Alphabetical Listing Browse artists from "A 13th Guest" to "Zyrah's Orange."
- - Specially Featured Stories and news about a selected artist each day.
Artists
- - Spotlight Artist of Artist featured in a particular genre each day.
the Day
- - Song of the Day One song from a particular artist each day.
- - Hot New mp3s Highlights new favorites.
- - Popularity Rankings Fans can find the most popular music in each genre or
region.
- - Searching Fans can search by artist name, song title, keywords genre
or style.
- - News Forums News and editorials relating to the online music world.
- - Review Section Interactive song review area.
- - Michael's Minute Leading column on industry trends written by Michael
Robertson, our Chairman and CEO.
- - Hardware and Software Lists and forums on technical information designed to help
fans get the most out of their online music experience. We
also provide links to purchase hardware and software
products.
- - MP3 for Beginners Newcomers to the site can learn about mp3 usage and online
music through instructions and community chat forums.
- - Electronic Commerce Fans can purchase T-shirts, DAM CDs and compilation CDs.
- - E-Mail Artists Fans can e-mail messages to their favorite artists directly.
- - Song Recommender Visitors can e-mail song and artist recommendations to their
friends.
- - Artists I Like Artists recommend other artists within the MP3.com community
to their fans.
</TABLE>

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PRODUCTS AND SERVICES

The following lists our current and future products and services:

<TABLE>
<S> <C>
-------------------------------------------------------------------------------------------------------
ADVERTISING ELECTRONIC COMMERCE
- ----------------------------------------------------------------------------------------------------------
ONLINE

Website advertising: banners, portals, DAM CDs
buttons Compilation CDs
Website sponsorships Collectible CDs*
E-mail marketing* T-shirts
Books and other music-related
merchandise*
Concert broadcasts on our website*
- ----------------------------------------------------------------------------------------------------------

OFFLINE
Sponsorship of CD samplers
Concert sponsorships*
- ---------------------------------------------------
</TABLE>

* = in development and expected to be released prior to the end of 1999

Online Advertising

For the three months ended March 31, 1999, 84% of our revenues were derived
from a portfolio of online advertising services. These services allow our
advertisers to maximize visibility for their products by placing them in
specifically targeted MP3.com categories, like Artist Sign-Up, specific music
genres, or specific geographic locations. Advertisements may currently be
purchased in two primary ways:

Banners, Portals and Buttons. Banners, portals and buttons are graphic
elements on a webpage. Banners are displayed at the top and bottom of each
MP3.com webpage. A banner is the largest graphic advertising product available
and can be displayed on any MP3.com webpage. For a premium rate, banners can
also be displayed in specific areas. Portals are generally smaller than banners
and appear on the right-hand side of webpages in selected categories. Buttons
are generally smaller than both banners and portals and appear on the left-hand
side of webpages in selected categories. Prices of each of these advertisements
are based on target audience and desirability of location. Pricing of banners,
portals and buttons are generally based on a Cost Per Thousand Impressions, or
CPM, basis. "Impressions" are the number of times an advertisement appears in
pages viewed by users of our website.

Website Sponsorships. A sponsorship is an advertising plan that enables
sponsors' products to be associated with a specific MP3.com category, music
genre or geographic region. Premium sponsorships begin on our home page and
continue throughout the selected category. Category sponsorships begin on the
first page of the selected category and appear on all category-related pages.
Listing sponsorships allow advertisers to purchase preferred placement in
product listings. Prices of sponsorships are based on target audience and
desirability of location.

Significant Online Advertising Relationships. In February 1999, we entered
into a one year sponsorship agreement with Tickets.com, Inc. Under this
agreement, we include a Tickets.com webpage advertisement on several pages on
our website. Tickets.com pays us a monthly fee under this agreement in exchange
for the display of the Tickets.com advertisement to our website visitors a
minimum number of times each month. Tickets.com has the right to renew this
agreement for a second year.

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In February 1999, we also entered into a one year sponsorship agreement
with Xing Technology, Inc. Under this agreement, Xing pays us a monthly fee to
list a software product on several pages on our website. In addition, Xing pays
us a monthly fee under this agreement in exchange for the display of Xing banner
advertisements to our website visitors a minimum number of times each month.

In May 1999 we entered into a 26-month advertising insertion order with
Bill Gross' Idealab!. Under this agreement, Idealab! pays us for the display of
Idealab! banner advertisements to our website visitors.

Electronic Commerce

DAM CDs. DAM CDs are fully-packaged albums created by artists who post
music on our website. Prices are determined by the artists and are between $5.99
and $10.00 per CD. Each CD contains multiple songs that are selected by the
artists. The music contained on each CD is in both mp3 and standard audio CD
format, which means it can be listened to on a computer with mp3 player
software, a portable mp3 player or a standard CD player. In addition, DAM CDs
can contain multimedia features such as artist-provided graphics, song lyrics,
biographical information as well as an embedded mp3 player. We produce and
package DAM CDs ourselves and mail them to our customers within one to two days,
depending on when the order is placed.

Compilation CDs. Compilation CDs are albums we compile featuring the work
of multiple artists from our website. As with DAM CDs, the music contained on
each CD is in both mp3 and standard audio CD format. We produce and package the
CDs ourselves and mail them to our customers within one to two days.

Other Merchandise. We currently sell T-shirts on our website.

Offline Advertising

Sponsorship of CD Samplers. CD samplers are distributed free of charge to
consumers and contain paid advertising. Each CD sampler contains a large
selection of the most popular songs from our expanding roster of over 14,000
artists. In the future, the CD sampler may include video entertainment,
multimedia video game samples and interactive contests. The CD sampler allows
advertisers to target specific consumers by selectively placing advertisements,
game samples and video clips within the genres of the CD sampler. Different
versions of the CD sampler can be created to appeal to specific target
audiences. In May 1999, an initial version of the CD sampler was distributed
through our website.

Future Products in Development

E-Mail Marketing. We intend to use our database to offer advertisers the
chance to send e-mail marketing messages to targeted audiences. Advertisers can
choose to market their products to potential customers using various criteria
our database tracks, including preferred artist or music genre, geographic
location, or any of the customized preferences users have entered into their
user profile.

Collectible CDs. We plan to pursue selected opportunities to obtain digital
distribution rights to music collections that we feel will be of interest to our
customers.

Books and Other Merchandise. We plan to offer mp3- and music-related books
and apparel and artist merchandise on our website.

Concert Broadcasts on Our Website. We plan to broadcast live concerts on
our website featuring nationally-recognized and regional artists. We may charge
customers a fee to view these concert broadcasts on a "pay per view" basis.

Concert Sponsorships. We are organizing a series of concerts and festivals
featuring headliner bands and regional bands that have posted music on our
website. These promotional events will highlight our artists and mp3-related
exhibitions and technologies. We intend to sell sponsorships to these events.

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SALES AND MARKETING

We sell advertising and sponsorships through our internal, direct
advertising sales department. On May 31, 1999, our sales force consisted of nine
people located in our San Diego, California office. For our electronic commerce
products, we depend on our website to attract consumers and encourage purchases.
We expect to hire additional sales personnel as demand increases.

Since our inception, our management team has focused on marketing and
public relations efforts. We believe much of the public awareness of MP3.com has
been generated by attendance at trade shows, industry forums and other events.
We have benefitted from frequent and high visibility media exposure both
nationally and locally. We have also used a combination of online and offline
advertising to generate awareness of our company and our website. One element of
our marketing efforts has been an Internet advertising banner campaign to
attract new users to our website. Our Internet advertising has been supplemented
with traditional media advertising such as print, radio and television. We also
have a public relations team that is focused on generating awareness of MP3.com
both within the music industry and among the general public.

We intend to generate additional brand awareness from specific promotional
activities and new products and services such as:

- Concert Tours. We are organizing a series of concerts and festivals
featuring headliner bands and regional MP3.com bands. These events will
highlight our artists and mp3-related exhibitions and technologies. To
offset the cost of organizing these events, we may sell tickets or charge
admission.

- mp3 Summit: In June 1999, we held our second mp3 Summit for industry
participants to showcase new trends for the online delivery of music.

- mp3 Book: Our chairman, Michael Robertson, is producing a book to educate
the general public about the benefits of digital music. The book is
expected to be published in the second half of 1999.

- Affiliate Program. We plan to enter into relationships with other
websites to place links on their sites to our website. This strategy is
intended to drive Internet traffic to MP3.com, generate electronic
commerce revenue, increase the appeal of MP3.com to advertisers and
improve the service we offer to artists by expanding the audience that
hears their music.

RELATIONSHIP WITH COX INTERACTIVE MEDIA

In June 1999 we sold 4,182,578 shares of Series C preferred stock (which
will be converted into 6,273,867 shares of common stock at the close of this
offering) to Cox Interactive Media, Inc. for a total purchase price of
approximately $45 million. Cox Interactive Media is a subsidiary of Cox
Enterprises, Inc., a media company whose business includes newspapers,
television, cable television and radio. Cox Interactive Media operates a network
of websites including 25 city sites. We also entered into a joint venture with
Cox Interactive Media. Cox Interactive Media and we are initially required to
contribute to the joint venture $30 million cash ($16,050,000 by Cox Interactive
Media and $13,950,000 by us) over time as required by the management committee
of the joint venture.

Under the joint venture, Cox Interactive Media and MP3.com will jointly
create and operate a number of music-related websites. In addition, we will
license to the joint venture various intellectual property rights. There will
also be advertising and electronic commerce revenue sharing arrangements between
the joint venture and MP3.com. The joint venture is owned 46.5% by us and 53.5%
by Cox Interactive Media, and we will split profits and losses of the joint
venture with Cox Interactive Media according to those percentages. We cannot
assure you that the business model of the joint venture will be successful, or
that the venture will generate revenues for MP3.com.

As part of our relationship with Cox Interactive Media, David E. Easterly,
a director of Cox Interactive Media, became a member of our board of directors
and will be a Class III director. Under the terms of our agreement with Cox
Interactive Media, we are obligated to nominate a representative from Cox
Interactive Media to serve for two additional three-year terms following
expiration of the initial term of Mr. Easterly, so

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long as Cox Interactive Media maintains a specified minimum share ownership and
the joint venture continues.

OTHER SIGNIFICANT RELATIONSHIPS

We have signed a three year consulting arrangement with Atlas/Third Rail
Management, Inc., an artist management group. Under the agreement, Atlas/Third
Rail will use its reasonable efforts to facilitate artist promotions. The first
promotion arranged by Atlas/Third Rail involves our sponsorship of Alanis
Morissette and Tori Amos' "5 1/2 Weeks" Summer 1999 tour. We expect to take
advantage of our relationship with Atlas/Third Rail to attract more well-known
artists to MP3.com. Through that relationship, we expect to expose these artists
to our products and services and the benefits of digital music distribution.

We have also entered into a three year agreement with Boutit, Inc., which
does business under the name "No Limit Records." Under this agreement, we
obtained rights to a number of No Limit master recordings. Some of the artists
represented by No Limit include Master P and Snoop Dogg, along with other
respected platinum-selling artists. No Limit artists also may participate in our
chatrooms, display MP3.com signs at concert performances, hold concerts with
artists that have posted music on our website and cooperate with us on other
promotional activities. We will record all revenues generated under the
agreement and will recognize royalty expense (to be included in cost of sales)
representing the royalties payable to No Limit. The royalty percentage due to No
Limit will vary depending on the source of revenue subject to the royalty
obligation. No Limit will also become one of our stockholders at the closing of
this offering.

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

An interactive ASCAP "radio channel" is expected to be created on our
website. Programmed by ASCAP in collaboration with people who listen to music on
this channel, it will feature the music works of ASCAP artists and writers.
Also, we will nationally co-host music showcases and educational workshops both
on- and off-line.

RELATIONSHIPS WITH ARTISTS

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

TECHNOLOGY INFRASTRUCTURE

Data Mining and Warehousing Activities

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

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Infrastructure

Our technology infrastructure is based on an architecture designed to be
secure, reliable and expandable. Our software is a combination of proprietary
applications, third party database software and open operating systems that
support acquisition of content, management of that content, publication of our
website, downloads of music and media files, production of CDs, registration and
tracking of users, and reporting of information for both internal and external
use. We use software from Sun Microsystems, Inc., Microsoft Corporation, RedHat
Software, Inc., VERITAS Software Corporation, VeriSign, Inc., Real Media, Inc.
and The Apache Group. We run our software on platforms from leading companies
such as Intel Corporation, Sun Microsystems, Inc., Cisco Systems, Inc. and
Storage Technology Corporation.

During May 1999, our website delivered over 56 million webpages and 9
million songs and conducted over 5.1 million music searches. We have designed
our infrastructure to allow each component to be independently scaled, usually
by purchasing additional readily-available hardware and software components, to
meet or exceed future capacity requirements.

Data Center & Hosting Facilities

Our network infrastructure and our website, e-commerce and database servers
are hosted in two data centers on two different networks in two different
cities. Our website servers are hosted at AT&T CERFnet in San Diego, CA and at
Exodus Communications in Irvine, CA. Both CERFnet and Exodus maintain suitable
environmental conditions and redundant power sources and network connectivity.
Our electronic commerce and database servers are located at our corporate
headquarters in San Diego, California.

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

OPERATIONS, FULFILLMENT AND CUSTOMER SUPPORT

Our operations are centered around a just-in-time fulfillment process which
ties together all of the proprietary and third-party software tools in our
system and allows us to avoid carrying inventory. We are currently capable of
producing approximately 1,200 DAM CDs per day, and our system is expandable to
accommodate higher volume. Additionally, we have developed database and
reporting systems that analyze the transaction information occurring in the
fulfillment center and provide flexible output reports for finance and
accounting purposes.

Orders for DAM CDs and other merchandise are received via our website,
queued up in our database and shipped in the order received. Once the order is
accepted, the fulfillment center sends a confirming e-mail to the customer and
the job is transmitted to the production facility. Fulfillment center personnel
assemble, package and ship the order to the customer, generally within one to
two days of the original order. Upon completion of the order, the fulfillment
center sends out an additional e-mail informing the customer of its status and
tracking number when applicable.

We are continually enhancing and refining our fulfillment system to handle
the increasing demand for DAM CDs. As a result of recent improvements, we can
now package CDs in jewel cases with color cover graphics that artists design.

Customer support personnel are also available six days a week during normal
business hours to respond to customer inquiries and requests presented via
e-mail or on our website.

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<PAGE> 42

COMPETITION

- Providers of online music content such as EMusic.com Inc. (formerly
GoodNoise Corporation), Launch Media, Inc. and various private companies
such as Musicmaker.com and Tunes.com, some of which also offer artist
services that are competitive with ours.

- Companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation, and RealNetworks, Inc. Some of these companies also offer
customers the ability to download music from their websites.

- Online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos,
Inc. and Yahoo!, Inc. Some of these companies have taken significant
steps into the market for online music distribution. For example,
Amazon.com has announced its launch of a digital-download area on its
website, allowing free song downloads. In addition, America Online
recently announced its acquisition of two Internet music companies,
Spinner Networks, Inc. and Nullsoft, Inc., and stated its intent to offer
downloadable music in leading formats.

- Traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc. and
Universal Music Group, a unit of The Seagram Company Ltd. Most of these
companies have recently entered the online commercial community and are
currently backing the SDMI security format.

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

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

- quantity and variety of digital recorded music content;

- ability of consumers to search and sample music according to their
preferences;

- ease of downloading music;

- fidelity and quality of sound of the music; and

- ability to promote its website, both online and through traditional
marketing, concerts and business partnerships.

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

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

GOVERNMENT REGULATION

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<PAGE> 43

have attempted to regulate activities on the Internet. The following are some of
the evolving areas of law that are relevant to our business:

- Privacy Law. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to use the information in
our databases to generate revenues.

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

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

- Sales and Use Tax. We do not currently collect sales, use or other taxes
on the sale of goods and services on our website other than on sales in
California. However, states or foreign jurisdictions may seek to impose
tax collection obligations on companies like us that engage in online
commerce. If they do, these obligations could limit the growth of
electronic commerce in general and limit our ability to profit from the
sale of goods and services over the Internet.

Because of this rapidly evolving and uncertain regulatory environment, we
cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.

INTELLECTUAL PROPERTY

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

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

- if our artists violate their contractual obligations to others by
providing content on our website or CDs; or

- if anything on our website or CDs is deemed obscene, indecent or
defamatory.

We may also be liable for anything that is accessible from our website
through links to other websites.

We attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their content and by taking related measures to review
content on our website and on our CDs. For example, we require our artists to
confirm that their content does not infringe on any third-party copyrights, is
not defamatory or obscene, and that they have the right to provide their content
and have obtained all third-party consents necessary to do so. Artists also
agree to indemnify us against liability we might sustain due to the content they
provide. The traditional music industry has not embraced the mp3 format for the
delivery of music, in large part because users of the mp3 format can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Our in-house musicologists listen to a significant amount of
the music submitted to us for posting on our website. If we have good reason to
suspect non-compliance with copyright or trademark laws, we employ a system of
verifying compliance through independent investigation and cross-checking of
license rights with our in-house musicologists.

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

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<PAGE> 44

In addition, third parties have claimed and may claim in the future that we
violate their intellectual property rights. For example, Sightsound.com, Inc.
has asserted that many online music providers, including MP3.com, violate patent
rights that it allegedly owns covering the sale of music over the Internet
through digital downloads. We do not believe our past or current method of
operations conflicts with any of Sightsound.com's patent rights. However, to the
extent that such patent rights are valid and enforceable and cover our
activities, we may be required to pay damages, obtain a license to
Sightsound.com's patents or use non-infringing methods to accomplish our
activities with regard to digital downloads. It is possible that a license from
Sightsound.com would not be available on commercially acceptable terms, or at
all, or that we would be unable to provide digital downloads in a non-infringing
manner. If successful, Sightsound's claim, or claims by others that we violate
their intellectual property rights, could seriously harm our business by forcing
us to cease using important intellectual property or requiring us to pay
monetary damages. Even if unsuccessful, these claims could harm our business by
damaging our reputation, requiring us to incur legal costs and diverting
management's attention away from our business.

FACILITIES

Our principal administrative, marketing and product development facilities
are located in approximately 14,900 square feet of office space in San Diego,
California. The lease for this space expires in February 2001 and provides for a
single one-year renewal option. We will need to lease additional space within
the near future, and we have and will continue to search for appropriate
locations and facilities.

EMPLOYEES

On May 31, 1999, we had 96 employees, including 52 in sales and marketing,
29 in product development, and 15 in general administration. We consider our
relations with our employees to be good. We have never had a work stoppage, and
no employees are represented under collective bargaining agreements. We believe
that our future success will depend in part on our continued ability to attract,
integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key technical personnel.
Competition for qualified personnel in our industry and geographical location is
intense, and we cannot assure you that we will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct our business in the future.

LEGAL PROCEEDINGS

We are not presently involved in any material legal proceedings.

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<PAGE> 45

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information about our directors, executive
officers and key employees as of June 21, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Michael L. Robertson.................... 32 Chief Executive Officer and Chairman of the Board
Robin D. Richards....................... 42 President, Chief Operating Officer and Director
Paul L. H. Ouyang....................... 41 Chief Financial Officer and Executive Vice President
Steven G. Sheiner....................... 44 Executive Vice President, Sales and Marketing
Paul S. Alofs........................... 43 President of Strategic Business Units
Ronald D. Dotson........................ 41 Executive Vice President, Technology
David E. Easterly....................... 56 Director
Lawrence F. Probst III(1)............... 49 Director
Mark A. Stevens(1)(2)................... 39 Director
Theodore W. Waitt(1)(2)................. 36 Director

Key Employees
Joshua R. Beck.......................... 22 Chief Technical Officer
John R. Diaz............................ 49 Vice President of Industry Relations
Daniel K. O'Neill....................... 37 Vice President of Engineering
William P. Dow.......................... 34 Controller
</TABLE>

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

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

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

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

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<PAGE> 46

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

Paul S. Alofs has served as our President of Strategic Business Units since
May 1999. From July 1997 to May 1999 he served as General Manager and Executive
Vice President at the Disney Store, Inc., a wholly-owned subsidiary of the Walt
Disney Company. From October 1995 to June 1997, he served as President and
General Manager of BMG Music Canada, Inc., a music and entertainment company.
From November 1989 to October 1995 he served as President of HMV Canada, a music
retailer. Mr. Alofs is a director of Mosaic Group, Inc. Mr. Alofs holds a
Bachelor of Commerce from the University of Windsor and a Master in Business
Administration from York University.

Ronald D. Dotson has served as our Executive Vice President, Technology
since May 1999. From August 1997 to April 1999, Mr. Dotson served as Director of
Engineering for Netscape Communications, Inc., an Internet software company.
From January 1994 to August 1997, he served as Chief Executive Officer for EOS,
a technical employment agency. Mr. Dotson also co-founded and served on the
board of advisors for Digital Style, an Internet software company. Mr. Dotson
received a Bachelor of Science, Master of Science and a Juris Doctor from
Williamette University.

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

Lawrence F. Probst III has served as one of our directors since April 1999.
Since May 1991, Mr. Probst has served as President and Chief Executive Officer
of Electronic Arts, Inc., a software company. Mr. Probst holds a Bachelor of
Science from the University of Delaware.

Mark A. Stevens has served as one of our directors since January 1999.
Since 1993, Mr. Stevens has been a general partner of Sequoia Capital, a venture
capital firm. Mr. Stevens is a director of Aspect Development, NVidia, Terayon
and several private companies. Mr. Stevens holds a Bachelor of Science, a
Bachelor of Arts, and a Master of Science from the University of Southern
California and a Master in Business Administration from the Harvard Business
School.

Theodore W. Waitt has served as one of our directors since March 1999.
Since February 1993, Mr. Waitt has served as the Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc., a manufacturer of personal
computers. Mr. Waitt attended the University of Iowa.

Joshua R. Beck has served as our Chief Technical Officer since April 1998.
From September 1996 to May 1998, Mr. Beck was a Senior System and Network
Engineer for Connectnet INS, Inc., a regional Internet service provider in
Southern California. From September 1995 to June 1996, Mr. Beck attended the
California Institute of Technology and from September 1996 to June 1998, Mr.
Beck attended the University of California, San Diego.

John R. Diaz has served as our Vice President of Industry Relations since
March 1999. Prior to joining MP3.com, Mr. Diaz was involved in freelance
television productions including the Bob Dylan 30th Anniversary Tribute, HBO's
Amnesty International, Rock in Rio II, Pink Floyd from Versailles and HBO's
Michael Jackson special from Bucharest. Prior to that, Mr. Diaz created the
concept for the acclaimed PBS series "On Tour" and served as the series'
producer.

Daniel K. O'Neill has served as our Vice President of Engineering since
March 1999. From July 1990 to March 1999, Mr. O'Neill held various technical and
management positions with Cadence Design Systems, Inc., a manufacturer of
semiconductor design automation software, serving most recently as a Senior

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<PAGE> 47

Member of the Consulting Staff. Mr. O'Neill holds a Bachelor of Science and a
Master of Science from Santa Clara University.

William P. Dow has served as our Controller since March 1999. From June
1997 to March 1999, Mr. Dow served as Vice President of Finance for Data Tree
Corporation, an information services company. From April 1995 to June 1997, Mr.
Dow served as Controller of GTI Corporation, a supplier of networking and
network-access products. From September 1988 to April 1995, Mr. Dow was employed
by PriceWaterhouseCoopers LLP, serving most recently as Audit Manager. Mr. Dow
holds a Bachelor of Science from San Diego State University and is a Certified
Public Accountant.

BOARD COMPOSITION

Upon the closing of this offering, in accordance with the terms of our
restated certificate of incorporation, the terms of office of the board of
directors will be divided into three classes:

- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000;

- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and

- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.

Our Class I directors will be Messrs. Robertson and Stevens, our Class II
directors will be Messrs. Probst and Richards, and our Class III directors will
be Messrs. Waitt and Easterly. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the effect
of delaying or preventing changes in control or management of our company.

BOARD COMMITTEES

The board of directors has established an audit committee and a
compensation committee. The audit committee consists of Mark A. Stevens and
Theodore W. Waitt. The audit committee makes recommendations to the board of
directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other services provided by our independent auditors
and reviews and evaluates our audit and control functions.

The compensation committee consists of Lawrence F. Probst III, Mark A.
Stevens and Theodore W. Waitt. The compensation committee makes recommendations
regarding our equity compensation plans and makes decisions concerning salaries
and incentive compensation for our employees and consultants.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1998, we did not have a compensation committee. Michael L.
Robertson, our Chief Executive Officer, made all decisions concerning executive
compensation during 1998.

DIRECTOR COMPENSATION

Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for expenses in connection with attendance at board and committee
meetings. All directors are eligible to participate in our 1998 Equity Incentive
Plan.

In March 1999, Lawrence F. Probst III was granted an option to purchase
75,000 shares of common stock at an exercise price of $0.33 per share. The
shares underlying this option vest over a four year period.

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<PAGE> 48

EXECUTIVE COMPENSATION

Except for Michael L. Robertson, all of our executive officers began to
work for us after December 31, 1998. Accordingly, information given below is
only for Mr. Robertson. The following table sets forth summary information
concerning compensation awarded to, earned by, or accrued for services rendered
to us in all capacities during the fiscal year ended December 31, 1998. The
compensation does not include medical, group life insurance or other benefits
which are available generally to all of our salaried employees and perquisites
and other personal benefits received which do not exceed the lesser of $50,000
or 10% of his salary and bonus as disclosed in this table.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Michael L. Robertson........................................ $70,833
Chief Executive Officer
</TABLE>

EMPLOYMENT AGREEMENTS

On May 13, 1999, we entered into an Employment Agreement with Michael L.
Robertson, our Chief Executive Officer. This agreement has a four year term
commencing on January 20, 1999. It provides for an annual base salary of
$150,000 and for an annual performance bonus of up to $50,000. This agreement
further provides that Mr. Robertson can terminate his employment with us during
the term of the agreement only upon twelve months' notice.

On January 6, 1999 we entered into a letter agreement with Robin D.
Richards, our President and Chief Operating Officer regarding the terms of his
employment. This agreement provides for an annual base salary of $240,000.

On February 19, 1999 we entered into a letter agreement with Paul L. H.
Ouyang, our Chief Financial Officer and Executive Vice President regarding the
terms of his employment. This agreement provides for an annual base salary of
$150,000. The agreement also provides that we will pay Mr. Ouyang six months
severance if we terminate his employment other than for "cause," as defined in
the agreement. Under the agreement we will reimburse Mr. Ouyang for expenses
related to relocation not to exceed $3,000 per month for a period of twelve
months.

On January 29, 1999, we entered into a letter agreement with Steven G.
Sheiner, our Executive Vice President, Sales & Marketing regarding the terms of
his employment. This agreement was amended on May 19, 1999. This agreement
provides for an annual base salary of $200,000.

On April 27, 1999, we entered into a letter agreement with Paul S. Alofs,
our President of Strategic Business Units regarding the terms of his employment.
This agreement provides for an annual base salary of $200,000.

On May 3, 1999, we entered into a letter agreement with Ronald D. Dotson,
our Executive Vice President, Technology, regarding the terms of his employment.
This agreement provides for an annual base salary of $140,000.

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<PAGE> 49

As of June 21, 1999, the Company had issued the following options to its
executive officers:

<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES AGGREGATE
NAME GRANTED EXERCISED EXERCISE PRICE SPECIAL VESTING PROVISIONS
---- ---------------- ---------------- -------------- --------------------------
<S> <C> <C> <C> <C>
Robin D. Richards 2,437,500 2,437,500 $260,000 - 100% upon termination
other than for cause
- 20% on IPO
- 100% on change of control
Paul L. H. Ouyang 630,000 630,000 $101,200 - 100% upon termination
other than for cause, or due
to death or disability
- 20% on IPO
- 100% on change of control
- 50% upon resignation for
good reason
Steven G. Sheiner 487,500 72,187 $ 10,250 - 10% on IPO
- 100% on change of control
Paul S. Alofs 495,000 -- -- - 20% on earlier of IPO or
April 27, 2000
- remainder monthly over
next four years
Ronald D. Dotson 150,000 -- -- - none
</TABLE>

Except as stated above, all of these options vest over four years.

1998 EQUITY INCENTIVE PLAN

In December 1998, the board adopted and the stockholders approved our 1998
Equity Incentive Plan. The 1998 Plan was subsequently amended by the board of
directors in January 1999 and, subject to stockholder approval, in May 1999. A
total of 12,750,000 shares of common stock, as amended, has been authorized for
issuance under to the 1998 Plan. Pursuant to the 1998 Plan, shares subject to
stock awards that have expired or otherwise terminated without having been
exercised in full again become available for grant, but exercised shares
repurchased by us pursuant to a right of repurchase will not again become
available for grant.

The 1998 Plan permits the grant of options to our directors, officers, key
employees and consultants and our advisors. Options may be either incentive
stock options within the meaning of Section 422 of the Internal Revenue Code to
employees or nonstatutory stock options. In addition, the 1998 Plan permits the
grant of stock bonuses and rights to purchase restricted stock. No person may be
granted options covering more than 2,250,000 shares of common stock in any
calendar year.

The 1998 Plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1998 Plan to the
compensation committee. Subject to the limitations set forth in the 1998 Plan,
the administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish vesting schedules, to specify the
exercise price of options and the type of consideration to be paid upon exercise
and, subject to restrictions, to specify other terms of awards.

The maximum term of options granted under the 1998 Plan is ten years.
Incentive stock options granted under the 1998 Plan generally are
non-transferable. Nonstatutory stock options generally are nontransferable,
although the applicable option agreement may permit transfers. Options generally
expire three months after the termination of an optionholder's service. However,
if an optionholder is permanently disabled or dies during his or her service,
such person's options generally may be exercised up to 12 months following
disability or 18 months following death.

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<PAGE> 50

The exercise price of options granted under the 1998 Plan is determined by
the administrator in accordance with the guidelines set forth in the 1998 Plan.
The exercise price of an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the grant. The exercise
price of a nonstatutory stock option cannot be less than 85% of the fair market
value of the common stock on the date of grant.

Options granted under the 1998 Plan vest at the rate determined by the
administrator and specified in the option agreement. The terms of any stock
bonuses or restricted stock purchase awards granted under the 1998 Plan will be
determined by the administrator. The purchase price of restricted stock under
any restricted stock purchase agreement will not be less than 85% of the fair
market value of our common stock on the date of grant. Stock bonuses and
restricted stock purchase agreements awarded under the 1998 Plan are generally
nontransferable, although the applicable award agreement may permit transfers.

Upon changes in control in our ownership, all outstanding stock awards
under the 1998 Plan must either be assumed or substituted by the surviving
entity. In the event the surviving entity does not assume or substitute such
stock awards, then the vesting and exercisability of outstanding awards will
accelerate prior to the charge in control and such awards will terminate to the
extent not exercised prior to the change in control. Even if the surviving
entity does assume or substitute outstanding stock awards, if the holder of an
award is terminated other than for cause, or constructively terminated, within
one month prior to or eighteen months following a change in control, that
holder's award will vest in full.

The board may amend or terminate the 1998 Plan at any time. Amendments will
generally be submitted for stockholder approval only to the extent required by
applicable law.

As of June 21, 1999, we had issued and outstanding under the 1998 Plan
options to purchase 4,169,213 shares of common stock. The per share exercise
prices of these options ranged from $0.11 to $2.00.

EMPLOYEE STOCK PURCHASE PLAN

In May 1999, the board adopted and the stockholders approved the 1999
Employee Stock Purchase Plan. A total of 300,000 shares of common stock has been
authorized for issuance under the Purchase Plan. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, eligible employees will be able to
purchase common stock at a discount in periodic offerings. The Purchase Plan
will commence on the effective date of this offering.

Unless otherwise determined by the board, all employees are eligible to
participate in the Purchase Plan so long as they are employed by us (or a
subsidiary designated by the board) for at least 20 hours per week and are
customarily employed by us (or a subsidiary designated by the board) for at
least 5 months per calendar year.

Employees who participate in an offering may have up to 15% of their
earnings for the period of that offering withheld pursuant to the Purchase Plan.
The amount withheld is used at the end of the offering period to purchase shares
of common stock. The price paid for common stock at the end of an offering
period will equal the lower of 85% of the fair market value of the common stock
at the commencement date of that offering period or 85% of the fair market value
of the common stock on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.

Upon changes in control in our ownership, the board has discretion to
provide that each right to purchase common stock will be assumed or an
equivalent right substituted by the successor corporation or the board may
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to such change in control transaction.

The board has the authority to amend or terminate the Purchase Plan;
provided, however, that no such action may adversely affect any outstanding
rights to purchase common stock. Amendments will generally be submitted for
stockholder approval only to the extent required by law.

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<PAGE> 51

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY

Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our other employees and agents to the fullest extent permitted by
Delaware law, except with respect to proceedings initiated by such persons. We
are also empowered under our bylaws to enter into indemnification contracts with
our directors and officers and to purchase insurance on behalf of any person we
are required or permitted to indemnify. Pursuant to this provision, we have
entered into indemnification agreements with each of our directors and officers.

In addition, our restated certificate of incorporation provides our
directors will not be personally liable to us or our stockholders for monetary
damages for any breach of fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or its
stockholders,

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,

- under Section 174 of the Delaware General Corporation Law or

- for any transaction from which the director derives an improper personal
benefit.

Our restated certificate of incorporation will also provide that if the
Delaware General Corporation Law is amended after the approval by our
stockholders of the restated certificate of incorporation to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of our directors shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law. The provision does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.

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<PAGE> 52

CERTAIN TRANSACTIONS

The following is a description of transactions since our inception in March
1998 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than our compensation arrangements with our executive officers which are
described under "Management."

In January 1999, we sold 7,150,000 shares of Series A preferred stock to
various investors at a purchase price of $1.54 per share, of which 6,224,675
were sold to entities affiliated with Sequoia Capital. Mark A. Stevens, one of
our directors, is either a managing member of the general partner or a general
partner of these entities. Upon the closing of this offering, each share of
Series A preferred stock will automatically convert into one and one-half shares
of common stock.

In March 1999, we granted Lawrence Probst III, a director, an option to
purchase 75,000 shares of common stock under our 1998 Equity Incentive Plan.
This option has an exercise price of $0.33 per share and is subject to vesting
over a four-year period.

In April 1999, we sold 1,000,000 shares of Series A preferred stock to
Theodore W. Waitt, a director, at a purchase price of $2.00 per share. Also in
April 1999, we sold 100,000 shares of Series A preferred stock to Lawrence F.
Probst III, a director, at a purchase price of $2.00 per share. Upon the closing
of this offering, each share of Series A preferred stock will automatically
convert into one and one-half shares of common stock.

On January 25, 1999, we loaned Robin D. Richards, our President and Chief
Operating Officer, $260,000, which he used to exercise an option to purchase
2,437,500 shares of common stock that was granted to him under our 1998 Equity
Incentive Plan. The loan, as amended, is a full recourse note secured by 187,500
shares of our common stock that bears interest at 4.64% and is due in January
2003.

All of the securities sold in these transactions were purchased at prices
equal to the fair value of the securities, as determined by our board of
directors, on the date of issuance.

One of our directors, Theodore W. Waitt, is Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc. From time to time we purchase
computer equipment from Gateway. As of May 31, 1999, we had spent approximately
$99,000 on Gateway 2000 computer equipment. We believe these purchases were on
terms no less favorable than those available in arm's-length transactions with
unaffiliated parties.

In June 1999, we sold 4,182,578 shares of Series C preferred stock to Cox
Interactive Media, Inc. for a total purchase price of approximately $45 million.
We also entered into a joint venture with Cox Interactive Media to create and
operate music-related websites. David E. Easterly, one of our directors, is the
President and Chief Operating Officer and a director of Cox Enterprises, Inc.,
the parent corporation of Cox Interactive Media, and a director of Cox
Interactive Media. Upon the closing of this offering, each share of Series C
preferred stock will automatically convert into one and one-half shares of
common stock. The Series C preferred stock sold to Cox Interactive Media was
purchased at a price equal to the fair value of the stock, as determined by our
board of directors on the date of issuance.

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<PAGE> 53

PRINCIPAL STOCKHOLDERS

The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:

- each person who beneficially owns more than five percent of the common
stock;

- each of our directors;

- our Chief Executive Officer; and

- all directors and executive officers as a group.

Unless otherwise indicated, the address for each person or entity named below is
c/o MP3.com, Inc., 10350 Science Center Drive, Building 14, San Diego,
California 92121.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership before the offering is based on 53,277,855 shares of common stock
outstanding as of June 21, 1999, as adjusted to reflect the conversion of all
outstanding shares of preferred stock into common stock upon the closing of this
offering. The percentage of beneficial ownership after the offering additionally
reflects the 9,000,000 shares offered hereby and the sale of 250,000 shares in a
private placement pursuant to an agreement with Boutit, Inc. entered into on May
12, 1999.

The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 1,350,000 additional shares of our common stock, and up to
63,877,864 shares of common stock will be outstanding after the completion of
this offering.

All share numbers in this section reflect a three-for-two split in our
common stock that will take place prior to the close of this offering.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES OUTSTANDING
BENEFICIALLY OWNED --------------------
------------------ BEFORE AFTER
NUMBER OFFERING OFFERING
------------------ -------- --------
<S> <C> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER
Michael L. Robertson...................................... 25,637,010 48.1% 41.0%
Mark A. Stevens(1)........................................ 9,337,011 17.5 14.9
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
David E. Easterly(2)...................................... 6,273,867 11.8 10.0
Cox Interactive Media, Inc.
1400 Lake Hearn Dr., N.P.
Atlanta, GA 30319
Robin D. Richards(3)...................................... 2,437,500 4.6 3.9
Theodore W. Waitt......................................... 1,500,000 2.8 2.4
Lawrence F. Probst III.................................... 150,000 * *
All directors and officers as a group (10 persons)(4)..... 46,068,044 86.4% 73.6%
</TABLE>

- ---------------
* Represents beneficial ownership of less than 1%.

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<PAGE> 54

(1) Includes:

- 8,462,134 shares held by Sequoia Capital VIII, which represents 15.6% and
13.5%, respectively, of the total number of shares outstanding before and
after this offering;

- 107,376 shares held by Sequoia International Technology Partners VIII,
which represents less than 1% of the total number of shares outstanding
before and after this offering;

- 560,221 shares held by Sequoia International Technology Partners VIII(Q),
which represents 1.0% and less than one percent, respectively, of the
total number of shares outstanding before and after this offering;

- 186,739 shares held by CMS Partners LLC, which represents less than 1% of
the total number of shares outstanding before and after this offering;
and

- 20,541 shares held by Sequoia 1997, which represents less than 1% of the
total number of shares outstanding before and after this offering.

Mr. Stevens is a managing member of the general partner, or a partner, of
each of the above-listed investment funds, and shares investment and voting
power over these shares with the other managing members or general partners
of these funds, none of whom are affiliated with us. Mr. Stevens disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.

(2) Includes 6,273,867 shares held by Cox Interactive Media, Inc. Mr. Easterly,
one of our directors, is the President and Chief Operating Officer and a
director of Cox Enterprises, Inc., the parent corporation of Cox Interactive
Media, and a director of Cox Interactive Media, and shares voting power over
these securities with the other members of the board of directors of Cox
Interactive Media, none of whom are affiliated with us. Mr. Easterly has no
pecuniary interest in and disclaims beneficial ownership of these shares.

(3) Includes 1,965,233 shares subject to repurchase by us as of June 21, 1999.

(4) Includes:

- shares listed in footnotes 1, 2 and 3 above;

- 630,000 shares held by Paul L. H. Ouyang, of which 534,375 are subject to
a right of repurchase by us as of June 21, 1999; and

- 30,469 shares issuable upon exercise of options held by Steven G. Sheiner
exercisable within 60 days of June 21, 1999. Excludes 27,218 shares
issuable upon exercise of options exercisable upon consummation of this
offering.

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<PAGE> 55

DESCRIPTION OF CAPITAL STOCK

Immediately following the closing of this offering and the filing of our
restated certificate of incorporation, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.001 par value per share, and
15,000,000 shares of preferred stock, $0.001 par value per share. As of June 21,
1999, after giving effect to the conversion of all outstanding preferred stock
into common stock upon the closing of this offering, there were outstanding
53,527,855 shares of common stock held of record by 71 stockholders and options
to purchase 4,169,213 shares of common stock.

COMMON STOCK

The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 19,307,516 shares of common stock. See Notes 4 and
6 of Notes to Financial Statements for a description of the currently
outstanding preferred stock. Following the conversion, our certificate of
incorporation will be amended and restated to delete all references to these
shares of preferred stock. Under the restated certificate of incorporation, the
board has the authority, without further action by stockholders, to issue up to
15,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon the preferred stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
common stock. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and reduce the likelihood that such holders
will receive dividend payments and payments upon liquidation. The issuance could
have the effect of decreasing the market price of the common stock. The issuance
of preferred stock also could have the effect of delaying, deterring or
preventing a change in control of the. We have no present plans to issue any
additional shares of preferred stock.

REGISTRATION RIGHTS

Pursuant to the Second Amended and Restated Investor Rights Agreement dated
June 4, 1999 between us and several of our investors, the investors, holding an
aggregate of 18,316,169 shares of our common stock issued or issuable upon
conversion of our preferred stock, have registration rights pertaining to the
securities they hold, at any time after 180 days following the closing of this
offering. If we propose to register any of our securities under the Securities
Act for our own account or the account of any of our stockholders other than
these holders of registrable shares, holders of such registrable shares are
entitled, subject to limitations and conditions, to notice of such registration
and are, subject to conditions and limitations, entitled to include registrable
shares in the offering therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. In addition, commencing 180 days after the
effective date of the registration statement of which this prospectus is a part,
we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least a
majority of the registrable shares, provided the reasonably expected aggregate
offering price will equal or exceed $5,000,000 including underwriting discounts
and commissions. We are required to use our best efforts to effect such
registration, subject to conditions and limitations. We are not obligated to
effect more than two of such stockholder-initiated registrations. Further,
holders of registrable

53
<PAGE> 56

securities may require us to file additional registration statements on Form
S-3, subject to conditions and limitations.

We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity or debt offerings.

ANTI-TAKEOVER PROVISIONS

Delaware Law

We are governed by the provisions of Section 203 of the Delaware Law. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sale or other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. The statute could
have the effect of delaying, deferring or preventing a change in our control.

Charter and Bylaw Provisions

Our restated certificate of incorporation provides that the board of
directors, as of the date of this prospectus, will be divided into three classes
of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us and
may maintain the composition of the board of directors, as the classification of
the board of directors generally increases the difficulty of replacing a
majority of directors. Our restated certificate of incorporation provides that
any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing. In addition, our bylaws provide that
special meetings of our stockholders may be called only by the Chairman of the
board of directors, our Chief Executive Officer, by the board of directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors, or by the holders of 10% of our outstanding voting stock. Our
restated certificate of incorporation also specifies that the authorized number
of directors may be changed only by resolution of the board of directors and
does not permit cumulative voting for directors, unless required under
applicable California law. Under cumulative voting, a minority stockholder
holding a sufficient percentage of a class of shares may be able to ensure the
election of one or more directors; however, it is expected that following the
closing of the offering, cumulative voting will not be available to our
stockholders. These and other provisions contained in our restated certificate
of incorporation and bylaws could delay or discourage some transactions
involving an actual or potential change in control of us or our management
(including transactions in which stockholders might otherwise receive a premium
for their shares over then current prices) and may limit the ability of
stockholders to remove current management or approve transactions that
stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.

THE NASDAQ STOCK MARKET'S NATIONAL MARKET

We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "MPPP."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE> 57

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.

Upon completion of this offering, we will have 62,527,855 outstanding
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, all of the
shares sold in this offering will be freely tradable without restriction under
the Securities Act unless purchased by our affiliates.

The remaining 53,527,855 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.

As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:

- no shares may be sold prior to 180 days from the date of this prospectus;

- 31,375,125 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and

- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.

Lock-Up Agreements. All of our stockholders and option holders have agreed
not to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exercisable or exchangeable for
shares of our common stock, for a period of 180 days after the date the
registration statement of which this prospectus is a part is declared effective.
Transfers or dispositions can be made sooner with the prior written consent of
Credit Suisse First Boston Corporation.

Rule 144. In general, under Rule 144, a person who his beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of our common stock then outstanding which
will equal approximately 625,279 shares immediately after this offering;
or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.

Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.

Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us in connection with a
compensatory stock purchase plan or option plan or other written agreement will
be eligible to resell their shares beginning 90 days after the date of this
prospectus. Non-affiliates will be able to sell their shares subject only to the
manner-of-sale provisions of Rule 144. Affiliates will be able to sell their
shares without compliance with the holding period requirements of Rule 144.

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<PAGE> 58

Registration Rights. Upon completion of this offering, the holders of
18,316,169 shares of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Except for shares purchased by
affiliates, registration of their shares under the Securities Act would result
in such shares becoming freely tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration.

Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance upon exercise of outstanding options. The
registration statement is expected to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under the registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market beginning 180
days after the effective date of the registrant statement of which this
prospectus is a part.

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<PAGE> 59

UNDERWRITING

Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc. and Charles Schwab &
Co., Inc. are acting as representatives, the following respective numbers of
shares of common stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
BancBoston Robertson Stephens Inc...........................
Charles Schwab & Co., Inc...................................

--------
Total.............................................
========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,350,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.

The following table summarizes the compensation and expenses we will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid
by us................... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

We and our officers and directors and certain other stockholders have
agreed not to offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in the case of issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.

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<PAGE> 60

At our request, the underwriters have reserved up to 1,800,000 shares of
common stock offered hereby for sale at the initial public offering price to
artists and customers of MP3.com, consultants, business associates and certain
other persons, which may include existing stockholders or other affiliates of
MP3.com. As a result, the number of shares available for sale to the general
public will be reduced to the extent that persons purchase these reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares of common stock
offered hereby.

We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.

We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "MPPP."

Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include the following: the information set
forth in this prospectus and otherwise available to the representatives; market
conditions for initial public offerings; the history and the prospects for the
industry in which we will compete; the ability of our management; the prospects
for our future earnings; the present state of our development and our current
financial condition; the general condition of the securities markets at the time
of this offering; and the recent market prices of, and the demand for, publicly
traded common stock of generally comparable companies.

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the securities to be higher than it would otherwise
be in the absence of such transactions. These transactions may be effected on
The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.

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<PAGE> 61

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom British Columbia securities law applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any common stock
acquired by such purchaser pursuant to this offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

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<PAGE> 62

LEGAL MATTERS

Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus and certain other legal
matters. As of the date of this prospectus, certain members and associates of
Cooley Godward LLP beneficially own an aggregate of 48,701 shares of Series A
preferred stock (convertible into 73,051 shares of common stock) through an
investment partnership. O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters for the underwriters.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and for the period from March 17, 1998
(inception) through December 31, 1998, as described in their report. We have
included our financial statements in our prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
may be summary in nature, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
registration statement may be obtained from such offices upon the payment of the
fees prescribed by the SEC. In addition, registration statements and certain
other filings made with the commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system, including our registration statement
and all exhibits and amendments to our registration statement, are publicly
available through the commission's website at http://www.sec.gov.

As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. Upon approval of the common stock for
listing on Nasdaq, such reports, proxy and information statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.

Except as otherwise indicated, all information in this prospectus assumes:

- the underwriters' over-allotment option will not be exercised;

- a three-for-two split in our common stock;

- the conversion of each outstanding share of preferred stock into one and
one-half shares of common stock upon the closing of this offering;

- that we will issue 250,000 shares of common stock (assuming an initial
public offering price of $10.00 per share) concurrent with the closing of
this offering in a private placement pursuant to an agreement with
Boutit, Inc. entered into on May 12, 1999; and

- the filing of our restated certificate of incorporation.

MP3.com, the MP3.com logo, DAM CD and the DAM CD logo are trademarks of
MP3.com, Inc. All other trade names and trademarks appearing in this prospectus
are the property of their holders.

60
<PAGE> 63

MP3.COM, INC.

INDEX TO FINANCIAL STATEMENTS
PERIOD FROM MARCH 17, 1998 (INCEPTION) TO DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2

FINANCIAL STATEMENTS

Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited)............................................... F-3

Statements of Operations for the period from March 17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-4

Statements of Stockholders' Equity for the period from March
17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-5

Statements of Cash Flows for the period from March 17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-6

Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 64

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
MP3.com, Inc.

We have audited the accompanying balance sheet of MP3.com, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the period from March 17, 1998 (inception) to December
31, 1998. These financial statements are the responsibility of MP3.com's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MP3.com, Inc. at December
31, 1998, and the results of its operations and its cash flows for the period
from March 17, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

San Diego, California
April 2, 1999,
except for Note 6, as to which the date is
, 1999.
- --------------------------------------------------------------------------------

The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 6 to the financial
statements.

/s/ ERNST & YOUNG LLP

San Diego, California

June 21, 1999

F-2
<PAGE> 65

MP3.COM, INC.

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, STOCKHOLDERS'
1998 1999 EQUITY
------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 39,509 $ 9,327,149
Accounts receivable, net of allowance for doubtful
accounts of $56,615 and $76,500, respectively...... 292,818 400,201
Unbilled receivables.................................. 64,726 58,905
Prepaid expenses and other current assets............. -- 242,960
--------- -----------
Total current assets.......................... 397,053 10,029,215
Property and equipment, net of accumulated
depreciation.......................................... 52,551 1,150,547
Other assets............................................ 13,751 65,846
--------- -----------
Total assets.................................. $ 463,355 $11,245,608
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 35,722 $ 613,579
Accrued severance..................................... 52,500 --
Accrued expenses...................................... 17,693 84,663
Income taxes payable.................................. 34,584 --
Deferred revenues..................................... 15,145 83,585
Deferred income taxes................................. 94,511 94,511
Capital lease obligations............................. 14,429 5,888
--------- -----------
Total current liabilities..................... 264,584 882,226
Deferred income taxes................................... 4,065 4,065
Commitments and contingencies (Notes 3 and 6)
Stockholders' equity:
Preferred stock, par value $0.001 per share; none
authorized at December 31, 1998 and March 31, 1999;
none issued and outstanding at December 31, 1998
and March 31, 1999; authorized 15,000,000 and none
issued and outstanding, pro forma (unaudited)...... -- -- $ --
Convertible preferred stock, par value $0.001 per
share; authorized 5,000,000 and 9,500,000 at
December 31, 1998 and March 31, 1999, respectively;
none authorized pro forma (unaudited)..............
Series A, authorized 5,000,000 and 8,150,000 at
December 31, 1998 and March 31, 1999,
respectively; none and 7,150,000 issued and
outstanding at December 31, 1998 and March 31,
1999, respectively; none issued and outstanding
pro forma (unaudited)............................ -- 7,150 --
Common stock, par value $0.001 per share; authorized
50,000,000 at December 31, 1998 and March 31, 1999;
issued and outstanding 29,249,999 and 31,694,999 at
December 31, 1998 and March 31, 1999, respectively;
authorized 200,000,000 and 42,419,995 issued and
outstanding pro forma (unaudited).................. 29,250 31,695 42,420
Additional paid in capital............................ 701,064 16,351,763 16,348,188
Notes receivable from stockholder..................... -- (260,000) (260,000)
Deferred compensation................................. (178,070) (4,008,125) (4,008,125)
Accumulated deficit................................... (357,538) (1,763,166) (1,763,166)
--------- ----------- -----------
Total stockholders' equity.................... 194,706 10,359,317 $10,359,317
--------- ----------- ===========
$ 463,355 $11,245,608
========= ===========
</TABLE>

See accompanying notes.
F-3
<PAGE> 66

MP3.COM, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17,
1998
(INCEPTION) TO THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $ 1,162,438 $ 665,785
Cost of revenues............................................ 214,958 205,303
----------- -----------
Gross profit................................................ 947,480 460,482
Operating expenses:
Sales and marketing....................................... 79,328 523,278
Product development....................................... 395,213 305,046
General and administrative................................ 142,510 458,762
Amortization of deferred compensation..................... 550,197 652,315
----------- -----------
Total operating expenses.......................... 1,167,248 1,939,401
----------- -----------
Loss from operations........................................ (219,768) (1,478,919)
Interest income (expense), net.............................. (3,810) 73,291
----------- -----------
Loss before income taxes.................................... (223,578) (1,405,628)
Provision for income taxes.................................. 133,960 --
----------- -----------
Net loss.................................................... $ (357,538) $(1,405,628)
=========== ===========
Historical net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.05)
=========== ===========
Weighted average shares -- basic and diluted.............. 26,182,785 27,537,067
=========== ===========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.04)
=========== ===========
Weighted average shares -- basic and diluted.............. 36,907,785 38,262,067
=========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 67

MP3.COM, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PREFERRED PREFERRED COMMON COMMON PAID IN FROM DEFERRED ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL STOCKHOLDER COMPENSATION DEFICIT
--------- --------- ---------- ------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
exchange for certain
assets and liabilities.... -- $ -- 26,178,749 $26,179 $ (26,179) $ -- $ -- $ --
Exercise of stock options... -- -- 3,071,250 3,071 (1,024) -- -- --
Deferred compensation
related to the grant of
stock options for common
stock..................... -- -- -- -- 728,267 -- (728,267) --
Amortization of deferred
compensation.............. -- -- -- -- -- -- 550,197 --
Net loss.................... -- -- -- -- -- -- -- (357,538)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at December 31,
1998...................... -- -- 29,249,999 29,250 701,064 -- (178,070) (357,538)
Exercise of stock options in
exchange for notes
receivable from
stockholders
(unaudited)............... -- -- 3,168,750 3,169 334,831 (338,000) -- --
Cancellation of note
receivable from
stockholder (unaudited)... -- -- (723,750) (724) (77,276) 78,000 -- --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 7,150,000 7,150 -- -- 10,910,774 -- -- --
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ -- -- -- -- 4,482,370 -- (4,482,370) --
Amortization of deferred
compensation
(unaudited)............... -- -- -- -- -- -- 652,315 --
Net loss (unaudited)........ -- -- -- -- -- -- -- (1,405,628)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at March 31, 1999
(unaudited)............... 7,150,000 $7,150 31,694,999 $31,695 $16,351,763 $(260,000) $ (4,008,125) $(1,763,166)
========= ====== ========== ======= =========== ========= ============ ===========

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock in
exchange for certain
assets and liabilities.... $ --
Exercise of stock options... 2,047
Deferred compensation
related to the grant of
stock options for common
stock..................... --
Amortization of deferred
compensation.............. 550,197
Net loss.................... (357,538)
-----------
Balance at December 31,
1998...................... 194,706
Exercise of stock options in
exchange for notes
receivable from
stockholders
(unaudited)............... --
Cancellation of note
receivable from
stockholder (unaudited)... --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 10,917,924
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ --
Amortization of deferred
compensation
(unaudited)............... 652,315
Net loss (unaudited)........ (1,405,628)
-----------
Balance at March 31, 1999
(unaudited)............... $10,359,317
===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 68

MP3.COM, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 THREE MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(357,538) $(1,405,628)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation.............................................. 9,999 33,689
Deferred income taxes..................................... 98,576 --
Amortization of deferred compensation..................... 550,197 652,315
Changes in operating assets and liabilities:
Accounts receivable.................................... (224,284) (107,383)
Unbilled receivables................................... (64,726) 5,821
Prepaid expenses and other current assets.............. -- (242,960)
Accounts payable....................................... 25,291 577,857
Deferred revenue....................................... 15,145 68,440
Accrued expenses....................................... 104,777 (20,114)
--------- -----------
Cash provided by (used in) operating activities............. 157,437 (437,963)
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (29,471) (1,131,685)
Other assets................................................ (13,751) (52,095)
--------- -----------
Cash used in investing activities........................... (43,222) (1,183,780)
FINANCING ACTIVITIES:
Payments of notes payable................................... (73,000) --
Payments under capital lease obligations.................... (18,650) (8,541)
Issuance of common stock.................................... 2,047 --
Net proceeds from issuance of Series A preferred stock...... -- 10,917,924
--------- -----------
Cash (used in) provided by financing activities............. (89,603) 10,909,383
--------- -----------
Increase in cash and cash equivalents....................... 24,612 9,287,640
Cash and cash equivalents at beginning of period............ 14,897 39,509
--------- -----------
Cash and cash equivalents at end of period.................. $ 39,509 $ 9,327,149
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................... $ 2,622 $ 8,217
========= ===========
Taxes paid.................................................. $ 800 $ 58,000
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Property and equipment acquired under capital leases........ $ 33,079 $ --
========= ===========
Common stock issued for notes receivable.................... $ -- $ 338,000
========= ===========
Cancellation of stockholder notes receivable................ $ -- $ 78,000
========= ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 69

MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND PERTAINING TO MARCH 31, 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

MP3.com, Inc. is developing a revolutionary approach to the promotion and
distribution of music. MP3.com uses the Internet and file formats that make
music files smaller to enable artists to distribute and promote their music and
to enable consumers to conveniently access this music. Consumers can search,
sample and download certain music free of charge.

MP3.com, Inc., formerly named ZCo, Inc., was incorporated in Delaware and
commenced operations on March 17, 1998 (inception). At inception, MP3.com's
principal founder contributed certain personal assets and liabilities to
MP3.com. In exchange, the principal founder received 26,178,749 shares of
MP3.com's common stock. The assets and liabilities assumed by MP3.com were
recorded at carryover basis. There were no significant revenues and operations
related to the assets and liabilities transferred to MP3.com.

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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

INTERIM FINANCIAL DATA

The financial statements as of March 31, 1999 and for the three months
ended March 31, 1999 are unaudited. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
results of operations for the interim period ended March 31, 1999 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 1999. Financial statements
for the period from March 17, 1998 (inception) to March 31, 1998 have not been
presented as the operating activity was insignificant and disclosure would not
be meaningful.

CONCENTRATION OF CREDIT RISKS

MP3.com sells its advertising related products and services to customers
primarily in music and consumer products industries. An allowance for doubtful
accounts is maintained based on the expected collectibility of accounts
receivable. MP3.com maintains a significant portion of its cash and cash
equivalents with one financial institution. MP3.com has not experienced any
significant losses on its cash and cash equivalents and accounts receivable.

Three customers accounted for 19.0%, 12.2%, and 10.3%, respectively, of net
revenues from March 17, 1998 (inception) to December 31, 1998. Two customers
accounted for 13.5% and 13.1%, respectively, for the quarter ended March 31,
1999.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash, money market funds, and
certificates of deposit with maturities of three months or less when purchased.
The carrying value of these instruments approximates fair value.

F-7
<PAGE> 70
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MP3.com generally invests its excess cash in money market funds and certificates
of deposit with a financial institution with a strong credit rating. Such
investments are made in accordance with MP3.com's investment policy, which
establishes guidelines to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

MP3.com's financial instruments, including cash and cash equivalents,
accounts receivable, unbilled receivables, accounts payable, accrued severance,
accrued expenses, income tax payable and capital lease obligations are carried
at cost, which approximates fair value because of the short-term maturity of
these instruments.

DEPRECIATION AND AMORTIZATION

Property and equipment is stated at historical cost and depreciated using
the straight-line method over the estimated useful lives of 3 to 5 years.

IMPAIRMENT OF LONG-LIVED ASSETS

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

REVENUE RECOGNITION

MP3.com's revenues are derived principally from the sale of banner and
sponsorship advertisements. To date, the duration of MP3.com's banner
advertising commitments has ranged from one month to one year. Sponsorship
advertising contracts involve more integration with MP3.com's website, such as
the placement of buttons that provide users with direct links to the
advertiser's website. Sponsorship advertisement contracts are recognized ratably
over the period in which the advertisement is displayed. Advertising revenues on
banner advertisement contracts are recognized as the impression is delivered or
displayed. In each case, revenue is recognized only if MP3.com has no remaining
significant obligations and collection of the resulting receivable is probable.
MP3.com banner advertisement obligations typically include guarantees of minimum
number of "impressions" or times that an advertisement appears in pages viewed
by users of MP3.com's website. In these circumstances, MP3.com recognizes
revenues at the lesser of the ratio of impressions delivered over the guaranteed
impressions or the straight-line basis over the term of the agreement. To the
extent minimum guaranteed impressions are not met, MP3.com defers recognition of
the corresponding revenues until the remaining guaranteed impressions are
achieved.

Deferred revenue represents payments or billings in excess of revenue
recognized relating to banner and sponsorship advertising contracts. Unbilled
receivables represent revenues recognized in excess of billings related to
banner and sponsorship advertising agreements.

Revenues derived from the sale of CDs and music-related merchandise are
recognized upon shipment.

F-8
<PAGE> 71
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT COSTS

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

STOCK-BASED COMPENSATION

MP3.com accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-Based Compensation". Under APB 25,
compensation cost is recognized over the vesting period based on the excess, if
any, on the date of grant of the deemed fair value of MP3.com's stock over the
employee's exercise price. When the exercise price of the employee stock options
is less than the fair value price of the underlying stock on the grant date,
deferred stock compensation is recognized and amortized to expense in accordance
with FASB Interpretation No. 28 over the vesting period of the individual
options, generally four years. Options or stock awards issued to non-employees
are valued using the fair value method and expensed over the period services are
provided.

NET LOSS PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY

MP3.com computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Under the provisions of SFAS No. 128, basic net income (loss)
per share is computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of unvested restricted common shares, incremental
common shares issuable upon the exercise of stock options, and common shares
issuable on assumed conversion of Series A preferred stock, are included in
diluted net income (loss) per share to the extent such shares are dilutive.
Common equivalent shares are not included in the computation of dilutive net
loss per share for the period March 17, 1998 (inception) to December 31, 1998
and the three months ended March 31, 1999 because the effect would be
anti-dilutive.

Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of MP3.com's initial public offering
(using the as-if-converted method). If MP3.com's initial public offering is
consummated, all of the convertible preferred stock outstanding as of the
closing date will automatically be converted into an aggregate of 10,724,996
shares of common stock based on the shares of convertible preferred stock
outstanding at March 31, 1999. Unaudited pro forma stockholders' equity at
December 31, 1998, as adjusted for the conversion of the convertible preferred
stock, is disclosed on the balance sheet.

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

F-9
<PAGE> 72
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets for the computation of basic and diluted net loss
per share as follows:

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, THREE
1998 MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Numerator:
Net loss........................................ $ (357,538) $(1,405,628)
=========== ===========
Denominator:
Weighted average shares outstanding............. 26,199,931 31,285,417
Weighted average unvested common shares subject
to repurchase agreements..................... (17,146) (3,748,350)
----------- -----------
Denominator for basic and diluted calculation..... 26,182,785 27,537,067
=========== ===========
Net loss per share:
Basic and diluted............................... $ (0.01) $ (0.05)
=========== ===========
</TABLE>

Dilutive common stock equivalents include common stock options and
preferred stock as if converted and restricted stock subject to vesting.
Potentially dilutive securities total 17,146 and 15,195,067, for the period
March 17, 1998 (inception) to December 31, 1998 and the three months ended March
31, 1999, respectively, were excluded from historical and pro forma diluted
earnings per share because of their anti-dilutive effect.

COMPREHENSIVE INCOME

MP3.com adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Net income (loss) and other comprehensive income (loss), including
foreign currency translation adjustments, and unrealized gains and losses on
investments shall be reported, net of their related tax effect, to arrive at
comprehensive income. To date, there have been no differences between MP3.com's
net loss and its total comprehensive loss for the period from March 17, 1998
(inception) to December 31, 1998.

SEGMENT INFORMATION

MP3.com adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 requires public companies to
report financial and descriptive information about their reportable operating
segments. MP3.com identifies its operating segments based on how management
internally evaluates separate financial information (if available), business
activities and management responsibility. MP3.com believes it operates in a
single business segment and adoption of this standard did not have a material
impact on MP3.com's financial statements. Through December 31, 1998, there have
been no foreign operations.

F-10
<PAGE> 73
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A summary of advertising and merchandise revenue from customers is as
follows:

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, THREE
1998 MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Advertising......................................... $1,060,551 $560,036
Merchandise......................................... 101,887 105,749
---------- --------
$1,162,438 $665,785
========== ========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. MP3.com has adopted the provisions of SOP
98-1 during the three months ended March 31, 1999 with no material effect.

In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities." This
standard requires companies to expense the costs of start-up activities and
organization costs as incurred. In general, SOP 98-5 is effective for fiscal
years beginning after December 15, 1998. MP3.com has adopted the provisions of
SOP 98-5 during the three months ended March 31, 1999 with no material effect.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following :

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Computer equipment............................ $53,079 $ 263,254
Software...................................... -- 272,834
Office furniture and equipment................ 9,471 548,736
Leasehold improvements........................ -- 109,411
------- ----------
62,550 1,194,235
Accumulated depreciation...................... (9,999) (43,688)
------- ----------
$52,551 $1,150,547
======= ==========
</TABLE>

3. LEASE COMMITMENTS

MP3.com leases its facilities and certain equipment under noncancellable
operating and capital leases, expiring at various dates through February 2001.
Cost and accumulated depreciation of equipment under capital leases at December
31, 1998 is $33,079 and $6,432, respectively. Depreciation of equipment under
capital leases are included in depreciation expense.

F-11
<PAGE> 74
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. LEASE COMMITMENTS (CONTINUED)
Future minimum annual lease payments under noncancellable operating and
capital leases at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Year ended December 31,
1999.......................................... $243,455 $15,015
2000.......................................... 260,235 --
2001.......................................... 21,915 --
-------- -------
Minimum lease payments.......................... $525,605 15,015
========
Less amounts representing interest.............. (586)
-------
Total present value of future minimum for
capital lease payments and current portion.... $14,429
=======
</TABLE>

Rent expense for the period from March 17, 1998 (inception) to December 31,
1998 totaled $9,560.

4. STOCKHOLDERS' EQUITY

CHANGES IN CAPITALIZATION

In December 1998, the board of directors authorized a 19,500-for-1 stock
split of all outstanding common stock. All share and per share information has
been retroactively restated to reflect the stock split.

PREFERRED STOCK

MP3.com has authorized 5,000,000 shares of preferred stock with a par value
of $0.001. As of December 31, 1998, there were no preferred stock issued and
outstanding. MP3.com's board of directors can fix or change the features of
preferred stock. See Note 6 "Recent Events".

STOCK OPTIONS

During 1998, MP3.com adopted the Founders Stock Option Plan and the 1998
Equity Incentive Plan for the granting of both incentive and non-qualified stock
options. Under the plans, incentive stock options may be granted to employees,
directors, and officers of MP3.com and non-qualified stock options may be
granted to consultants, employees, directors, and officers of MP3.com. Options
granted under the plans are for periods not to exceed ten years, and must be
issued at prices not less than 100% and 85%, for incentive and nonqualified
stock options, respectively, of the fair value of the stock on the date of
grant, as determined by the board of directors. Options granted to stockholders
who own greater than 10% of the outstanding stock are for periods not to exceed
five years and must be issued at prices not less than 110% of the fair value of
the stock on the date of grant, as determined by the board of directors.

The founders plan reserved 3,071,250 shares of common stock for granting to
certain founders of MP3.com. During 1998, all of the shares reserved in the
founders plan were granted, and in December 1998 all of the shares were
exercised at $0.001 per share and are subject to repurchase agreements. Common
shares obtained by an early exercise of unvested options are subject to
repurchase by MP3.com at the original exercise price and will vest according to
the respective option agreement. Repurchase can only be initiated at MP3.com's
option. As of December 31, 1998, there were 585,000 shares vested and 2,486,250
shares were subject to repurchase by MP3.com.

The incentive plan reserved 9,750,000 shares of common stock, as amended,
for granting to employees and non-employees of MP3.com. Grants under the
incentive plan vest over four years with 25% on the first

F-12
<PAGE> 75
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (CONTINUED)

anniversary and ratably monthly for the following 36 months. As of December 31,
1998, there were no grants of incentive plan stock options.

The following table summarizes MP3.com's stock option activity for the
plans:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE PRICE
GRANT SHARES PER SHARE
------------- ---------- ----------------
<S> <C> <C> <C>
Balance at March 17, 1998 (inception).............. -- -- --
Shares reserved.................................. 9,821,250 -- --
Shares granted................................... (3,071,250) 3,071,250 $0.001
Shares exercised................................. -- (3,071,250) $0.001
---------- ----------
Balance as of December 31, 1998.................... 6,750,000 -- --
Increase in shares available (unaudited)......... 3,000,000 -- --
Shares granted (unaudited)....................... (5,926,500) 5,926,500 $ 0.16
Shares exercised (unaudited)..................... -- (3,168,750) $ 0.11
---------- ----------
Balance as of March 31, 1999 (unaudited)........... 3,823,500 2,757,750 $ 0.20
========== ==========
</TABLE>

For the period from March 17, 1998 (inception) to December 31, 1998, the
weighted average exercise price and weighted average grant date fair value for
options to purchase 2,193,750 shares of common stock that were granted at
exercise prices less than deemed fair value were approximately $0.001 and $0.33,
respectively. The remaining options to purchase 877,500 shares of common stock
were granted at exercise prices equal to the deemed fair value. For the three
months ended March 31, 1999, the weighted average grant date fair value for
options granted at exercise prices less than deemed fair value was approximately
$0.85. For the three months ended March 31, 1999, no options were granted at
exercise prices equal to or in excess of deemed fair value.

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

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11 1,327,500 9.14 $0.11 -- --
$0.22 571,500 9.53 $0.22 -- --
$0.33 858,750 10.00 $0.33 22,500 $0.33
</TABLE>

STOCK BASED COMPENSATION

MP3.com has recorded deferred compensation in connection with the grants of
certain stock options to employees and consultants of $728,267 and $4,482,370,
during the period from March 17, 1998 (inception) to December 31, 1998 and the
three months ended March 31, 1999, respectively.

During the three months ended March 31, 1999, MP3.com granted options to
purchase 322,500 common shares to four consultants at a weighted average
exercise price of $0.33. MP3.com recorded compensation totaling $283,800 for the
fair value of the options which will be amortized to sales and marketing expense
over the life of the consulting arrangements. The fair value of the options was
estimated at the date of grant using the minimum value method with the following
weighted average assumptions: risk free interest rate of 5.5%;

F-13
<PAGE> 76
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (CONTINUED)

an expected option life of two years; and no annual dividends. For the three
months ended March 31, 1999, MP3.com amortized $19,800 to sales and marketing
expense related to the consulting agreements.

Had compensation expense for MP3.com's stock-based compensation plans been
determined consistent with SFAS 123, MP3.com's net loss would have decreased to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Net loss as reported........................................ $(357,538)
=========
Pro forma net loss under SFAS 123........................... $(357,129)
=========
Pro forma net loss per share, basic and diluted under SFAS
123....................................................... $ (0.01)
=========
Weighted average fair value of options granted.............. $ 0.33
=========
</TABLE>

Pro forma information is required by SFAS 123, and has been determined as
if MP3.com had accounted for its stock options under the fair value method of
that statement. The fair value of these options was estimated at the date of
grant using the minimum value method with the following weighted average
assumptions: risk free interest rate of 5.5%; an expected option life of five
years; and no annual dividends. The effect of applying SFAS 123 on 1998 pro
forma net loss as stated above is not necessarily representative of the effect
on reported net income (loss) for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years.

5. INCOME TAXES

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

The provision for income taxes as of December 31, 1998 is as follows:

<TABLE>
<S> <C>
Current:
Federal................................. $ 28,340
State................................... 7,044
--------
Total current................... 35,384
Deferred:
Federal................................. 76,954
State................................... 21,622
--------
Total deferred.................. 98,576
--------
Provision for income taxes................ $133,960
========
</TABLE>

F-14
<PAGE> 77
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)
Significant components of the net deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax liabilities:
Accrual to cash basis................. $ 96,975
Other, net............................ 1,601
----------
$ 98,576
==========
</TABLE>

A reconciliation of income taxes at the statutory federal income tax rate
to the provision for income taxes is as follows for the period from March 17,
1998 (inception) to December 31, 1998:

<TABLE>
<S> <C>
U.S. federal taxes at the statutory rate.................... $(76,017)
State taxes, net of federal benefit......................... 20,024
Nondeductible amortization of deferred compensation......... 187,067
Other nondeductible expenses................................ 2,886
--------
$133,960
========
</TABLE>

6. RECENT EVENTS

In January 1999, MP3.com issued 7,150,000 shares of Series A convertible
preferred shares at $1.54 per share for net proceeds of approximately $10.9
million. In April 1999, MP3.com issued 1.1 million shares of Series A
convertible preferred shares at $2.00 per share for proceeds of $2.2 million.
There were no issuance costs in connection with the proceeds of $2.2 million.
Each share of Series A preferred stock is convertible, at the option of the
preferred stockholder, into common stock at the rate of one share of preferred
stock to one and one-half share of common stock.

The Series A preferred stockholders are entitled to receive non cumulative
dividends at a rate of 8% of the issuance price per annum per share. Preferred
stock dividends are payable if and when the dividends are declared by the board
of directors. The Series A preferred stockholders are entitled to receive
liquidation preferences at the rate of $1.54 per share, prior and in preference
to any distribution of assets to common stockholders. Additionally, the Series A
preferred stockholders have voting rights for each share of common stock into
which the preferred shares convert.

In February 1999, MP3.com obtained a line of credit with a bank for
$3,000,000 which expires in February 2000. Under the terms of the agreement,
advances bear interest at the bank's floating prime rate plus 1.0% (8.75% at
December 31, 1998 and March 31, 1999). The line of credit has a sub-limit by
which MP3.com may finance certain equipment purchases not to exceed $1,500,000.
Further, the line of credit agreement provides that any capital equipment
financing outstanding in August 1999 may be converted to a three year term note.
There are no compensating cash balance requirements and borrowings under the
line of credit are collateralized by substantially all of MP3.com's assets.
Under the line of credit, MP3.com is required to comply with certain financial
covenants. MP3.com was in compliance with all such covenants on March 31, 1999.
In April 1999, MP3.com drew $1,234,000 on the line of credit.

In April 1999, MP3.com entered into an artist promotion consulting
agreement for the term of three years. Independent of the promotion agreement,
in April 1999, MP3.com entered into a Series B preferred stock purchase
agreement whereby MP3.com issued 439,103 shares of MP3.com's Series B
convertible preferred stock at $5.69 per share for total proceeds of
approximately $2.5 million. The Series B convertible preferred stockholders have
substantially the same rights and features as the Series A convertible preferred
stockholders. Additionally, the consultants were issued a warrant for 658,653
shares of common stock exercisable at $0.33 per common share of which 540,096
shares of common stock were exercised. The

F-15
<PAGE> 78
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. RECENT EVENTS (CONTINUED)

warrants expire upon the earlier of (i) the closing of an initial public
offering of MP3.com's common stock, (ii) the sale or merger of MP3.com which
results in a change of control as defined, or (iii) or the closing for the sale
of substantially all of MP3.com's assets. MP3.com recorded deferred advertising
of approximately $2,191,000, representing the fair value of the warrants which
will be amortized during the year ended December 31, 1999. The fair value of the
warrants was estimated at the date of grant using the minimum value method with
the following assumptions: risk free interest rate of 5.5%; an expected warrant
life of three years; and no annual dividends.

MP3.com was named as an additional defendant in an action entitled
PlayMedia Systems, Inc., et al., v. Nullsoft, Inc., et al., etc. (Case No.
99-02494) filed in the United States District Court for the Central District of
California. The First Amended Complaint alleged that MP3.com is liable for
copyright infringement with respect to "AMP" software used for decoding mp3
files distributed over the Internet. In May 1999, MP3.com and PlayMedia mutually
agreed to dismiss the action at no financial cost to MP3.com.

In May 1999, MP3.com adopted an Employee Stock Purchase Plan. Under the
plan, employees of MP3.com who elect to participate may purchase Common Stock at
85% of the lower of the fair market value of the common stock on the
commencement date or the ending date of each offering period. The plan permits
an enrolled employee to make contributions by having withheld from his or her
salary an amount between 1% and 15% of compensation to purchase shares of common
stock. The maximum number of shares that may be issued under the plan is
300,000.

In May 1999, MP3.com entered into a three year agreement with Boutit, Inc.
Under the terms of the agreement, MP3.com obtained the exclusive rights to
certain master music recordings and arranged for other promotional events in
exchange for shares of MP3.com's common stock valued at $2.5 million. The number
of shares to be issued upon completion of the initial public offering will be
determined by dividing $2.5 million by the price of a common share offered to
the public in the initial public offering. MP3.com expects to expense the value
of the stock over the term of the arrangement. In the event MP3.com does not
complete a firm underwritten public offering within eight months of the date of
the agreement, Boutit, Inc. can terminate the agreement.

In May 1999, MP3.com's board of directors authorized, subject to
stockholder approval, the restatement of MP3.com's certificate of incorporation
to effect a three-for-two stock split effective [ , 1999]. The Restated
Certificate increased the authorized common stock to 200,000,000 shares and
increased the authorized preferred stock to 15,000,000 shares. The preferred
stock is "blank check preferred," which can be created and issued by the board
of directors without stockholder approval, with rights senior to those of common
stock. The accompanying financial statements have been restated to reflect the
three-for-two common stock split. In addition, MP3.com's board of directors,
subject to stockholder approval, increased the number of shares reserved under
the 1998 Equity Incentive Plan to 12,750,000.

In June 1999, MP3.com sold 4,182,578 shares of Series C convertible
preferred stock (which will be converted into 6,273,867 shares of common stock
at the closing of this offering) to Cox Interactive Media, Inc. for a total
purchase price of approximately $45 million. In addition, MP3.com and Cox have
formed a joint venture to create and operate music related websites. MP3.com and
Cox own 46.5% and 53.5%, respectively, of the joint venture, and MP3.com is
committed to fund approximately $14 million during the first year of the joint
venture's operations. All future capital calls, if necessary, will be based upon
each partner's ownership percentage.

In June 1999, MP3.com established the MP3.com Foundation. MP3.com's board
of directors authorized the initial contribution to the Foundation of 100,000
shares of common stock. The deemed fair value of the contribution was $681,000.
The value will be charged to expense during the second quarter of 1999.

F-16
<PAGE> 79
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. RECENT EVENTS (CONTINUED)

For the period from March 31, 1999 to June 21, 1999, MP3.com granted
additional options to purchase 2,932,650 shares of common stock at a weighted
average exercise price of $0.96 per share. Included in the 2,932,650 options are
450,000 options granted to consultants at a weighted average exercise price of
$1.00 outside of MP3.com's equity incentive plan. All 450,000 options were
exercised in May 1999. For the same period, employees and consultants exercised
options for 1,044,187 shares of common stock and investors exercised warrants
for 658,653 shares of common stock.

F-17
<PAGE> 80

BACK PANEL ARTWORK:

- Top acts of tomorrow as well as current major artists.

- MP3.com. Where the world comes for music.

<PAGE> 81

MP3 LOGO
<PAGE> 82

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and The Nasdaq National Market application fee.

<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Registration fee............................................ $ 31,970
NASD filing fee............................................. 12,000
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 225,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 41,030
--------
Total............................................. $975,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").

The Registrant's Restated Certificate of Incorporation and Bylaws include
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty to the
extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware
(the "Delaware Law") and (ii) require the Registrant to indemnify its directors
and officers to the fullest extent permitted by Section 145 of the Delaware Law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.

II-1
<PAGE> 83

The Registrant has entered into indemnity agreements with each of its
directors and officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an officer of the
Registrant or any of its affiliated enterprises, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.

At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.

The Registrant has an insurance policy covering the officers and directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since inception (March 17, 1998) the Registrant has sold and issued the
following unregistered securities:

(a) On March 18, 1998 the Registrant issued and sold 26,178,749 shares
of its common stock to Michael L. Robertson, a founder of the Registrant,
in exchange for certain assets and liabilities having an aggregate net
value of $17,452.50. The Registrant relied on the exemption provided by
Section 4(2) under the Securities Act.

(b) On December 30, 1998 the Registrant issued and sold an aggregate of
3,071,250 shares of its common stock to three founding employees of the
Registrant, in the aggregate amount of $2,047.50 pursuant to the employees'
exercise of incentive stock options granted to them under the Registrant's
Founders Stock Option Plan. The Registrant relied on the exemption provided
by Section 4(2) under the Securities Act.

(c) In January and February 1999 the Registrant issued and sold
7,150,000 shares of its Series A preferred stock (convertible into
10,724,996 shares of common stock) to sixteen accredited investors for an
aggregate purchase price of $11,011,000. The Registrant relied on the
exemption provided by Section 4(2) under the Securities Act and Regulation
D promulgated thereunder.

(d) On April 5, 1999 the Registrant issued and sold 1,000,000 shares of
its Series A preferred stock (convertible into 1,500,000 shares of common
stock) to Theodore W. Waitt, an accredited investor, for an aggregate
purchase price of $2,000,000. The Registrant relied on the exemption
provided by Section 4(2) under the Securities Act and Regulation D
promulgated thereunder.

(e) On April 23, 1999 the Registrant issued and sold 100,000 shares of
its Series A preferred stock (convertible into 150,000 shares of common
stock) to Lawrence F. Probst III, an accredited investor, for an aggregate
purchase price of $200,000. The Registrant relied on the exemption provided
by Section 4(2) under the Securities Act and Regulation D promulgated
thereunder.

(f) On April 26, 1999, the Registrant issued a warrant to purchase up to
658,653 shares of its common stock to Atlas/Third Rail Management, Inc., a
sophisticated investor, at an exercise price of $0.33 per share.
Atlas/Third Rail is a business consultant of the Registrant and had access
to material information about the Registrant. For the issuance of the
warrant, the Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.

(g) On April 29, 1999, the Registrant issued and sold 439,103 shares of
its Series B preferred stock (convertible into 658,653 shares of common
stock) to fifteen accredited investors for an aggregate purchase price of
$2,498,496. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.

II-2
<PAGE> 84

(h) In April and May 1999, the Registrant issued and sold an aggregate
of 750,000 shares of its common stock for an aggregate purchase price of
$550,000 to two sophisticated business consultants of the Registrant,
pursuant to the exercise of stock options. These consultants had access to
material information about the Registrant. The Registrant relied on the
exemption provided by Section 4(2) of the Securities Act.

(i) On May 12, 1999, the Registrant and Boutit, Inc., d/b/a No Limit
Records, entered into a strategic partnership pursuant to a binding
Memorandum of Agreement. Pursuant to this agreement, No Limit is bound to
provide website content to the Registrant and perform promotional and other
activities and the Registrant is required to issue $2.5 million of common
stock to Boutit, Inc., an accredited investor, at the initial public
offering price in a private placement concurrent with the closing of this
offering. The Registrant is relying upon the exemption provided by Section
4(2) under the Securities Act and Regulation D promulgated thereunder.

(j) On May 13, 1999, the Registrant issued and sold 22,500 shares of its
common stock for a purchase price of $22,500 to Tori Amos, an accredited
investor. The Registrant relied on the exemption provided by Section 4(2)
of the Securities Act and Regulation D promulgated thereunder.

(k) On June 4, 1999 the Registrant issued and sold 4,182,578 shares of
Series C preferred stock (convertible into 6,273,867 shares of common
stock) to Cox Interactive Media, Inc., an accredited investor, for a total
purchase price of $45,004,539. The Registrant relied on the exemption
provided by Section 4(2) under the Securities Act and Regulation D
promulgated thereunder.

(l) On June 10, 1999 the Registrant donated 100,000 shares of common
stock to MP3.com Foundation, a non-profit public benefit corporation.
Exemption from registration of these shares was not necessary because the
transaction did not involve a "sale" of securities as that term is used in
Section 2(3) of the Securities Act. The Registrant relied upon the
exemption provided by Section 4(2) under the Securities Act and Regulation
D promulgated thereunder.

(m) In April and June 1999, the Registrant issued and sold 658,653
shares of its common stock for a purchase price of $219,552 to seven
accredited investors, pursuant to the exercise of warrants held by such
investors. The Registrant relied on the exemption provided by Section 4(2)
of the Securities Act and Regulation D promulgated thereunder.

(n) As of June 21, 1999, the Registrant had issued and sold, in the
aggregate, 3,912,937 shares of its common stock for per-share exercise
prices ranging from $0.11 to $1.00 to employees and consultants pursuant to
their exercise of stock options granted under the Registrant's 1998 Equity
Incentive Plan. The Registrant relied on the exemption provided by Rule 701
under the Securities Act.

(o) From time to time since its incorporation, the Registrant has issued
stock options to purchase shares of its common stock, pursuant to the
Registrant's 1998 Equity Incentive Plan and Founders' Stock Option Plan and
pursuant to option grants not under either of such plans. With respect to
all grants of options, exemption from registration was unnecessary in that
the transactions did not involve a "sale" of securities as that term is
used in Section 2(3) of the Securities Act.

The common stock amounts and per-share exercise prices in the descriptions
above reflect the three for two stock split of the Registrant's common stock
which will take place prior to the effectiveness of this offering. The
recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Registrant.

II-3
<PAGE> 85

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.(1)
3.1 Restated Certificate of Incorporation, as currently in
effect.
3.2* Form of Restated Certificate of Incorporation, to be filed
and become effective prior to the closing of this offering.
3.3* Form of Restated Certificate of Incorporation, to be filed
and become effective upon the closing of this offering.
3.4* Bylaws, as currently in effect.
3.5* Form of Bylaws, as amended, to become effective upon the
closing of this offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1 1998 Equity Incentive Plan (the "1998 Plan").
10.2 Form of Stock Option Agreement pursuant to the 1998 Plan.
10.3* 1999 Employee Stock Purchase Plan and related offering
documents.
10.4* Employment Agreement by and between the Company and Michael
L. Robertson dated as of May 13, 1999.
10.5* Letter Agreement regarding employment by and between the
Company and Robin D. Richards dated as of January 6, 1999.
10.6* Letter Agreement regarding employment by and between the
Company and Paul L. H. Ouyang dated as of February 19, 1999.
10.7* Letter Agreement regarding employment by and between the
Company and Steven G. Sheiner, as amended, dated as of May
19, 1999.
10.8* Letter Agreement regarding employment by and between the
Company and Paul S. Alofs dated as of April 27, 1999.
10.9* Office lease by and between the Company and General Atomics
dated as of February 1, 1999.
10.10* Credit Agreement and related borrowing agreements by and
between the Company and Imperial Bank dated as of February
11, 1999.
10.11 Second Amended and Restated Investor Rights Agreement by and
among the Company and certain stockholders of the Company
dated June 4, 1999.
10.12* Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13* Form of Indemnity Agreement between the Company and its
directors and officers.
10.14* Form of Music Submission Agreement.
10.15* Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
10.16* Warrant Agreement by and between the Company and Atlas/Third
Rail Management, Inc, dated as of April 30, 1999.
10.17* Promissory Note from Robin D. Richards to the Company dated
as of January 25, 1999.
10.18* Stock Pledge Agreement, as amended, from Robin D. Richards
to the Company dated as of January 25, 1999.
</TABLE>

II-4
<PAGE> 86

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.19+* Memorandum of Agreement dated May 12, 1999 between the
Company and Boutit, Inc. d/b/a No Limit Records.
10.20* Letter Agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
10.21+* Series C Preferred Stock Purchase Agreement by and between
the Company and Cox Interactive Media, Inc. dated as of May
19, 1999.
10.22+* Sponsorship Agreement by and between the Company and
Tickets.com, Inc. dated as of February 17, 1999.
10.23+* Sponsorship Agreement by and between the Company and Xing
Technology, Inc. dated as of February 18, 1999.
10.24+* Advertising Insertion Order by and between the Company and
Bill Gross' idealab! dated as of May 19, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-8.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>

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

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

* Previously filed.

(1) To be filed by amendment.

(b) FINANCIAL STATEMENT SCHEDULES.

Schedule II -- Valuation and Qualifying Accounts.

All other schedules are omitted because they are not required, are not
applicable or the information is included in our financial statements or notes
thereto.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(a) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a

II-5
<PAGE> 87

form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE> 88

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, County of San Diego, State of California, on June 21, 1999.

By: /s/ MICHAEL L. ROBERTSON
----------------------------------
Michael L. Robertson
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ MICHAEL L. ROBERTSON Chief Executive Officer and Director June 21, 1999
- ------------------------------------------ (Principal Executive Officer)
Michael L. Robertson

* President, Chief Operating Officer June 21, 1999
- ------------------------------------------ and Director
Robin D. Richards

* Chief Financial Officer and Executive Vice June 21, 1999
- ------------------------------------------ President (Principal Financial and
Paul L. H. Ouyang Accounting Officer)

* Director June 21, 1999
- ------------------------------------------
Lawrence F. Probst III

* Director June 21, 1999
- ------------------------------------------
Mark A. Stevens

* Director June 21, 1999
- ------------------------------------------
Theodore W. Waitt
</TABLE>

* By: /s/ MICHAEL L. ROBERTSON
-----------------------------------------
(Michael L. Robertson)
(Attorney-in-fact)

II-7
<PAGE> 89

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our report dated
April 2, 1999 (except for Note 6, as to which the date is , 1999) in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-78545) and
related Prospectus of MP3.com, Inc.

Our audit also included the financial statement schedule of MP3.com, Inc.
for the period from March 17, 1998 (inception) to December 31, 1998 listed in
Item 16(b). This schedule is the responsibility of MP3.com's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

ERNST & YOUNG LLP

San Diego, California

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

The foregoing consent is in the form that will be signed upon the
completion of the restatement of the capital accounts described in Note 6 to the
financial statements.

/s/ ERNST & YOUNG LLP

San Diego, California

June 21, 1999

II-8
<PAGE> 90

MP3.COM, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------
ADDITIONS DEDUCTIONS
------------------------- ----------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS ACCOUNTS- BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE WRITE-OFFS END OF PERIOD
- ---------------------------------------- ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the period March 17, 1998
(inception) to December 31, 1998:
Allowance for doubtful accounts....... $ -- $56,615 $ -- $ -- $56,615
</TABLE>

II-9
<PAGE> 91

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.(1)
3.1 Restated Certificate of Incorporation, as currently in
effect.
3.2* Form of Restated Certificate of Incorporation, to be filed
and become effective prior to the closing of this offering.
3.3* Form of Restated Certificate of Incorporation, to be filed
and become effective upon the closing of this offering.
3.4* Bylaws, as currently in effect.
3.5* Form of Bylaws, as amended, to become effective upon the
closing of this offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1 1998 Equity Incentive Plan (the "1998 Plan").
10.2 Form of Stock Option Agreement pursuant to the 1998 Plan.
10.3* 1999 Employee Stock Purchase Plan and related offering
documents.
10.4* Employment Agreement by and between the Company and Michael
L. Robertson dated as of May 13, 1999.
10.5* Letter Agreement regarding employment by and between the
Company and Robin D. Richards dated as of January 6, 1999.
10.6* Letter Agreement regarding employment by and between the
Company and Paul L. H. Ouyang dated as of February 19, 1999.
10.7* Letter Agreement regarding employment by and between the
Company and Steven G. Sheiner, as amended, dated as of May
19, 1999.
10.8* Letter Agreement regarding employment by and between the
Company and Paul S. Alofs dated as of April 27, 1999.
10.9* Office lease by and between the Company and General Atomics
dated as of February 1, 1999.
10.10* Credit Agreement by and between the Company and Imperial
Bank dated as of February 11, 1999.
10.11 Second Amended and Restated Investor Rights Agreement by and
among the Company and certain stockholders of the Company
dated June 4, 1999.
10.12* Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13* Form of Indemnity Agreement between the Company and its
directors and officers.
10.14* Form of Music Submission Agreement.
10.15* Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
10.16* Warrant Agreement by and between the Company and Atlas/Third
Rail Management, Inc, dated as of April 30, 1999.
10.17* Promissory Note from Robin D. Richards to the Company dated
as of January 25, 1999.
10.18* Stock Pledge Agreement, as amended, from Robin D. Richards
to the Company dated as of January 25, 1999.
</TABLE>

<PAGE> 92

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.19+* Memorandum of Agreement dated May 12, 1999 between the
Company and Boutit, Inc. d/b/a No Limit Records.
10.20* Letter agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
10.21+* Series C Preferred Stock Purchase Agreement by and between
the Company and Cox Interactive Media, Inc. dated as of May
19, 1999.
10.22+* Sponsorship Agreement by and between the Company and
Tickets.com, Inc. dated as of February 17, 1999.
10.23+* Sponsorship Agreement by and between the Company and Xing
Technology, Inc. dated as of February 18, 1999.
10.24+* Advertising Insertion Order by and between the Company and
Bill Gross' idealab! dated as of May 19, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-8.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>

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

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

* Previously filed.

(1) To be filed by amendment.

<PAGE> 1

EXHIBIT 3.1

RESTATED CERTIFICATE OF INCORPORATION
OF
MP3.COM, INC.

Robin Richards and Steven Przesmicki hereby certify that:

ONE: The original name of this corporation was Zco Inc. and the date of
filing the original Certificate of Incorporation of this corporation with the
Secretary of State of the State of Delaware was March 17, 1998.

TWO: They are the duly elected and acting President and Secretary,
respectively, of MP3.com, Inc., a Delaware corporation.

THREE: The Restated Certificate of Incorporation, as amended, of this
corporation is hereby amended and restated in its entirety to read as follows:

The name of the corporation is MP3.COM, INC. (the "Corporation" or the
"Company").

II.

The address of the registered office of the Corporation in the State of
Delaware is:

CorpAmerica, Inc.
30 Old Rudnick Lane
Dover, DE 19901
County of Kent

The name of the Corporation's registered agent at said address is
CorpAmerica, Inc.

III.

The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.

IV.

A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is sixty-six million five
hundred thousand (66,500,000). Fifty-one million (51,000,000) shares shall be
Common Stock, each having a par value of one-tenth of one cent ($0.001) (the
"Common Stock"). Fifteen million five hundred thousand (15,500,000) shares shall
be Preferred Stock, each having a par value of one-tenth of one cent ($0.001)
(the "Preferred Stock").

1.
<PAGE> 2

B. Subject to the rights of the Preferred Stock set forth in Section
E.2(b)(vi) below, the number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares of Common Stock then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation (voting together on an as-if-converted basis).

C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Restated Certificate of Incorporation, to fix or
alter the rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series prior or subsequent to
the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.

D. Eight million two hundred fifty thousand (8,250,000) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"). Four hundred thirty-nine thousand one hundred
three (439,103) of the authorized shares of Preferred Stock are hereby
designated "Series B Preferred Stock" (the "Series B Preferred"). four million
one hundred eighty-two thousand five hundred seventy-eight (4,182,578) of the
authorized shares of Preferred Stock are hereby designated "Series C Preferred
Stock" (the "Series C Preferred").

E. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred, Series B Preferred and Series C Preferred
are as follows:

1. DIVIDEND RIGHTS.

(a) Subject to the right of any series of Preferred
Stock that may from time to time come into existence, the holders of Series A
Preferred, Series B Preferred and Series C Preferred, in preference to the
holders of Common Stock, shall be entitled to receive, when and as declared by
the Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of eight percent (8%) of the respective
Original Issue Price (as defined below) per annum per share on each outstanding
share of Series A Preferred, Series B Preferred and Series C Preferred (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares). The "Original Issue Price" of (i) the
Series A Preferred shall be one dollar and fifty-four cents ($1.54) per share,
(ii) the Series B Preferred shall be five dollars and sixty-nine cents ($5.69)
per share and (i) the Series C Preferred shall be ten dollars and seventy-six
cents ($10.76) per share. Such dividends shall be payable only when, as and if
declared by the Board of Directors and shall be non-cumulative.

(b) So long as any shares of Series A Preferred, Series
B Preferred or Series C Preferred shall be outstanding, no dividend, whether in
cash or property, shall be paid or declared, nor shall any other distribution be
made, on the Common Stock, nor shall any shares of Common Stock be purchased,
redeemed, or otherwise acquired for value by the Company (except for
acquisitions of Common Stock by the Company pursuant to agreements which permit

2.
<PAGE> 3

the Company to repurchase such shares upon termination of services to the
Company or in exercise of the Company's right of first refusal upon a proposed
transfer) until all dividends (set forth in Section 1(a) above) on the Series A
Preferred, Series B Preferred and Series C Preferred shall have been paid or
declared and set apart. In the event dividends are paid on any share of Common
Stock, an additional dividend shall be paid with respect to all outstanding
shares of Series A Preferred, Series B Preferred and Series C Preferred in an
amount equal per share (on an as-if-converted to Common Stock basis) to the
amount paid or set aside for each share of Common Stock. The provisions of this
Section 1(b) shall not, however, apply to (i) a dividend payable in Common
Stock, (ii) the acquisition of shares of Common Stock in exchange for other
shares of Common Stock, or (iii) any repurchase of any outstanding securities of
the Company that is unanimously approved by the Company's Board of Directors.

2. VOTING RIGHTS

(a) GENERAL RIGHTS. Except as otherwise provided herein or as
required by law, the Series A Preferred, the Series B Preferred and Series C
Preferred shall be voted equally with the Common Stock and not as a separate
class, at any annual or special meeting of stockholders of the Company, and may
act by written consent in the same manner as the Common Stock, in either case
upon the following basis: each holder of shares of Series A Preferred, Series B
Preferred and Series C Preferred, respectively, shall be entitled to such number
of votes as shall be equal to the whole number of shares of Common Stock into
which such holder's aggregate number of shares of Series A Preferred, Series B
Preferred and Series C Preferred are convertible (pursuant to Section 4 hereof)
immediately after the close of business on the record date fixed for such
meeting or the effective date of such written consent.

(b) SEPARATE VOTE OF SERIES A PREFERRED, SERIES B PREFERRED AND
SERIES C PREFERRED. Subject to the rights of any series of Preferred Stock which
may from time to time come into existence, for so long as at least a total of
500,000 shares of Series A Preferred, Series B Preferred and/or Series C
Preferred (subject to adjustment for any stock split, reverse stock split or
other similar event affecting the Series A Preferred, Series B Preferred and
Series C Preferred) remain outstanding, in addition to any other vote or consent
required herein or by law, the vote or written consent of the holders of at
least a majority of the outstanding Series A Preferred, Series B Preferred and
Series C Preferred, voting together as a single class, shall be necessary for
effecting or validating the following actions:

(i) Any amendment, alteration, or repeal of any
provision of the Certificate of Incorporation of the Company (including any
filing of a Certificate of Designation) that alters or changes the voting
powers, preferences or other special rights, privileges or restrictions of the
Series A Preferred, Series B Preferred or Series C Preferred, or that otherwise
adversely affects the voting powers, preferences or other special rights,
privileges or restrictions of the Series A Preferred, Series B Preferred or
Series C Preferred;

(ii) Any authorization or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Company ranking on a parity
with or senior to the Series A Preferred, Series B Preferred or Series C
Preferred in right of redemption, liquidation

3.
<PAGE> 4

preference, voting or dividends, or any increase in the authorized or designated
number of any such new class or series;

(iii) Any agreement by the Company regarding an Asset
Transfer or Acquisition (each as defined in Section 3(c));

(iv) Any voluntary dissolution or liquidation of the
Company;

(v) Any action that results in the payment or
declaration of a dividend on any shares of Common Stock or Preferred Stock
(other than a dividend payable solely in shares of Common Stock);

(vi) Any increase or decrease (other than by redemption
or conversion) in the authorized number of shares of Common Stock or Preferred
Stock; or

(vii) Any redemption or repurchase of Common Stock
(except for acquisitions of Common Stock by the Company (A) pursuant to
agreements which permit the Company to repurchase such shares upon termination
of services to the Company or (B) in exercise of the Company's right of first
refusal upon a proposed transfer).

(c) BOARD OF DIRECTORS. The Company shall not, without the
written consent or affirmative vote of (i) the holders of at least a majority of
the then outstanding Common Stock consenting or voting (as the case may be) as a
separate class and (ii) the holders of at least a majority of the then
outstanding Series A Preferred, Series B Preferred and Series C Preferred, each
consenting or voting (as the case may be) together as a single class, increase
the maximum number of directors constituting the Board of Directors to a number
in excess of six (6). For so long as at least 5,500,000 shares of Series A
Preferred remain outstanding (subject to adjustment for any stock split, reverse
stock split or similar event affecting the Series A Preferred), the holders of
Series A Preferred, voting together as a separate class, shall be entitled to
elect two (2) members of the Company's Board of Directors (the "Series A
Directors") at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors. For so long as at least 3,575,000 but not more than 5,499,999
shares of Series A Preferred remain outstanding (subject to adjustment for any
stock split, reverse stock split or similar event affecting the Series A
Preferred), the holders of Series A Preferred, voting together as a separate
class, shall be entitled to elect one (1) member of the Company's Board of
Directors at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
director and to fill any vacancy caused by the resignation, death or removal of
such director. For so long as at least 3,500,000 shares of Series C Preferred
remain outstanding (subject to adjustment for any stock split, reverse stock
split or similar event affecting the Series C Preferred), the holders of Series
C Preferred, voting together as a separate class, shall be entitled to elect one
(1) member of the Company's Board of Directors (the "Series C Director") at each
meeting or pursuant to each consent of the Company's stockholders for the
election of directors, and to remove from office such directors and to fill any
vacancy caused by the resignation, death or removal of such directors. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of the

4.
<PAGE> 5

holders of a majority of the then outstanding shares of Series A Preferred and a
majority of the then outstanding shares of Series C Preferred shall constitute a
quorum of the Series A Preferred and Series C Preferred, respectively, for the
election of directors to be elected solely by the holders of the Series A
Preferred and Series C Preferred, respectively. The holders of Common Stock,
voting together as a separate class, shall be entitled to elect three (3)
members of the Board of Directors at each meeting or pursuant to each consent of
the Company's stockholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation, death
or removal of such directors. At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the then
outstanding shares of Common Stock shall constitute a quorum of the Common Stock
for the election of directors to be elected solely by the holders of the Common
Stock. The holders of Common Stock, Series A Preferred, Series B Preferred and
Series C Preferred, voting together as a single class on an as-if-converted
basis, shall be entitled to elect all remaining members of the Board of
Directors at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors. No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the Corporation is subject to Section 2115 of the California General
Corporation Law ("CGCL"). During such time or times that the Corporation is
subject to Section 2115(b) of the CGCL, every stockholder entitled to vote at an
election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder desires. No stockholder, however,
shall be entitled to so cumulate such stockholder's votes unless (i) the names
of such candidate or candidates have been placed in nomination prior to the
voting and (ii) the stockholder has given notice at the meeting, prior to the
voting, of such stockholder's intention to cumulate such stockholder's votes. If
any stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have been properly placed in
nomination. Under cumulative voting, the candidates receiving the highest number
of votes, up to the number of directors to be elected, are elected.

(d) REMOVAL.

(i) Subject to the rights of the holders of
Common Stock, Series A Preferred, Series B Preferred and Series C Preferred to
remove certain directors pursuant to Section 2(c) above, during such time or
times that the Corporation is subject to Section 2115(b) of the CGCL, the Board
of Directors or any individual director may be removed from office at any time
without cause by the affirmative vote of the holders of at least a majority of
the outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election which the same total number of votes were cast (or, if such
action is taken by written consent, all shares entitled to vote were voted) and
the entire number of directors authorized at the time of such director's most
recent election were then being elected.

5.
<PAGE> 6

(ii) At any time or times that the Corporation is not
subject to Section 2115(b) of the CGCL, and subject to any limitations imposed
by law, Section 2(d)(i) above shall not apply and, subject to the rights of the
holders of Common Stock, Series A Preferred, Series B Preferred and Series C
Preferred to remove certain directors pursuant to Section 2(c) above, the Board
of Directors or any director may be removed from office at any time (a) with
cause by the affirmative vote of the holders of a majority of the voting power
of all then-outstanding shares of voting stock of the Corporation entitled to
vote at an election of directors or (b) without cause by the affirmative vote of
the holders of a majority of the voting power of all then-outstanding shares of
voting stock of the Corporation, entitled to vote at an election of directors.

3. LIQUIDATION RIGHTS.

(a) Upon any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, before any distribution or payment
shall be made to the holders of Common Stock, subject to the rights of any
series of Preferred Stock that may from time to time come into existence, the
holders of Series A Preferred, Series B Preferred and Series C Preferred shall
be entitled to be paid out of the assets of the Company an amount per share of
Series A Preferred, Series B Preferred and Series C Preferred, respectively,
equal to their respective Original Issue Price plus all declared and unpaid
dividends on the Series A Preferred, Series B Preferred and Series C Preferred,
respectively (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) for each share of
Series A Preferred, Series B Preferred and Series C Preferred held by them. If,
upon any such liquidation, distribution, or winding up, the assets of the
Company shall be insufficient to make payment in full to all holders of Series A
Preferred, Series B Preferred and Series C Preferred of the liquidation
preference set forth in this Section 3(a), subject to the rights of any series
of Preferred Stock that may from time to time come into existence, then such
assets shall be distributed among the holders of Series A Preferred, Series B
Preferred and Series C Preferred at the time outstanding, ratably in proportion
to the full amounts to which they would otherwise be respectively entitled.

(b) After the payment of the full liquidation preference of the
Series A Preferred, Series B Preferred and Series C Preferred as set forth in
Section 3(a) above, and any other distribution that may be required with respect
to any series of Preferred Stock that may from time to time come into existence,
the remaining assets of the Company legally available for distribution, if any,
shall be distributed ratably to the holders of the Common Stock.

(i) any consolidation or merger of the Company with or
into any other corporation or other entity or person in which the stockholders
of the Company immediately prior to such consolidation or merger own less than
50% of the Company's voting power immediately after such consolidation or
merger, excluding any consolidation or merger effected exclusively to change the
domicile of the Company (an "Acquisition"); or

6.
<PAGE> 7

(ii) a sale of all or substantially all of the assets of
the Company (an "Asset Transfer").

(iii) In either of such events, if the consideration
received by this Corporation is other than cash, its value will be deemed its
fair market value as determined in good faith by the Board of Directors. Any
securities shall be valued as follows:

(A) Securities not subject to investment letter
or other similar restrictions on free marketability covered by (B) below:

(1) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such quotation system over the thirty
(30) day period ending three (3) days prior to the closing;

(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and

(3) If there is no active public market, the
value shall be the fair market value thereof, as determined by the Board of
Directors.

(B) The method of valuation of securities
subject to investment letter or other restrictions on free marketability (other
than restrictions arising solely by virtue of a stockholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount from the
market value determined as above in (A) (1), (2) or (3) to reflect the
approximate fair market value thereof, as determined by the Board of Directors.

4. CONVERSION RIGHTS.

The holders of the Series A Preferred, Series B Preferred and
Series C Preferred shall have the following rights with respect to the
conversion of the Series A Preferred, Series B Preferred and Series C Preferred,
respectively, into shares of Common Stock (the "Conversion Rights"):

(a) OPTIONAL CONVERSION. Subject to and in compliance with the
provisions of this Section 4, any shares of Series A Preferred, Series B
Preferred and Series C Preferred may, at the option of the holder, be converted
at any time into fully-paid and nonassessable shares of Common Stock. The number
of shares of Common Stock to which a holder of Series A Preferred, Series B
Preferred or Series C Preferred shall be entitled upon conversion shall be the
product obtained by multiplying the "Series A Preferred Conversion Rate," the
"Series B Preferred Conversion Rate" or the "Series C Preferred Conversion
Rate," as applicable, then in effect (determined as provided in Section 4(b)) by
the respective number of shares of Series A Preferred, Series B Preferred or
Series C Preferred being converted.

(b) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION RATE. The conversion rate in effect at any time for
conversion of the Series A Preferred (the "Series A Preferred Conversion Rate"),
the Series B Preferred (the "Series B

7.
<PAGE> 8

Preferred Conversion Rate") and the Series C Preferred (the "Series C Preferred
Conversion Rate") respectively, shall be the quotient obtained by dividing the
Original Issue Price of the Series A Preferred, the Series B Preferred and
Series C Preferred, respectively, by the "Series A Preferred Conversion Price,"
the "Series B Preferred Conversion Price" and the "Series C Preferred Conversion
Price," respectively, calculated as provided in Section 4(c).

(c) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION PRICE. The conversion price for the Series A Preferred, the
Series B Preferred and Series C Preferred, respectively, shall initially be the
respective Original Issue Price of the Series A Preferred (the "Series A
Preferred Conversion Price"), the Series B Preferred (the "Series B Preferred
Conversion Price") and the Series C Preferred (the "Series C Preferred
Conversion Price"). Such initial Series A Preferred Conversion Price, Series B
Preferred Conversion Price and Series C Preferred Conversion Price shall be
adjusted from time to time in accordance with this Section 4. All references
herein to the Series A Preferred Conversion Price, Series B Preferred Conversion
Price and Series C Preferred Conversion Price shall mean the Series A Preferred
Conversion Price, Series B Preferred Conversion Price and Series C Preferred
Conversion Price, respectively, as so adjusted.

(d) MECHANICS OF CONVERSION. Each holder of Series A Preferred,
Series B Preferred or Series C Preferred who desires to convert the same into
shares of Common Stock pursuant to this Section 4 shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Company or any transfer agent for the Series A Preferred, Series B Preferred and
Series C Preferred, and shall give written notice to the Company at such office
that such holder elects to convert the same. Such notice shall state the number
of shares of Series A Preferred, Series B Preferred and Series C Preferred being
converted. Thereupon, the Company shall promptly issue and deliver at such
office to such holder a certificate or certificates for the number of shares of
Common Stock to which such holder is entitled and shall promptly pay (i) in cash
or, to the extent sufficient funds are not then legally available therefor, in
Common Stock (at the Common Stock's fair market value determined by the Board of
Directors as of the date of such conversion), any declared and unpaid dividends
on the shares of Series A Preferred, Series B Preferred and Series C Preferred
being converted and (ii) in cash (at the Common Stock's fair market value
determined by the Board of Directors as of the date of conversion) the value of
any fractional share of Common Stock otherwise issuable to any holder of Series
A Preferred, Series B Preferred and Series C Preferred, as applicable. Such
conversion shall be deemed to have been made at the close of business on the
date of such surrender of the certificates representing the shares of Series A
Preferred, Series B Preferred and Series C Preferred to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act of
1933, the conversion may, at the option of any holder tendering Series A
Preferred, Series B Preferred or Series C Preferred for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
Common Stock upon conversion of such Series A Preferred, Series B Preferred or
Series C Preferred shall not be deemed to have converted such Series A
Preferred, Series B Preferred or Series C Preferred until immediately prior to
the closing of such sale of securities.

8.
<PAGE> 9

(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. The term
"Original Issue Date" shall mean, with respect to the Series A Preferred,
January 21, 1999, with respect to the Series B Preferred, April 29, 1999 and
with respect to the Series C Preferred, the date the first share of Series C
Preferred is issued. If the Company shall at any time or from time to time after
the applicable Original Issue Date effect a subdivision of the outstanding
Common Stock without a corresponding subdivision of the Preferred Stock, the
Series A Preferred Conversion Price, Series B Preferred Conversion Price and the
Series C Preferred Conversion Price, as applicable, in effect immediately before
that subdivision shall be proportionately decreased. Conversely, if the Company
shall at any time or from time to time after the Original Issue Date combine the
outstanding shares of Common Stock into a smaller number of shares without a
corresponding combination of the Preferred Stock, the Series A Preferred
Conversion Price, the Series B Preferred Conversion Price and the Series C
Preferred Conversion Price, as applicable, in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 4(e) shall become effective at the close of business on the date the
subdivision or combination becomes effective.

(f) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If
the Company at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series A Preferred Conversion
Price, Series B Preferred Conversion Price and Series C Preferred Conversion
Price, as applicable, that are then in effect shall be decreased as of the time
of such issuance or, in the event such record date is fixed, as of the close of
business on such record date, by multiplying the Series A Preferred Conversion
Price, the Series B Preferred Conversion Price and the Series C Preferred
Conversion Price, as applicable, then in effect by a fraction (i) the numerator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (ii) the denominator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully paid
or if such distribution is not fully made on the date fixed therefor, the Series
A Preferred Conversion Price, Series B Preferred Conversion Price and Series C
Preferred Conversion Price, as applicable, shall be recomputed accordingly as of
the close of business on such record date and thereafter the Series A Preferred
Conversion Price, Series B Preferred Conversion Price and Series C Preferred
Conversion Price, as applicable, shall be adjusted pursuant to this Section 4(f)
to reflect the actual payment of such dividend or distribution.

(g) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If at any time or from time to time after the applicable Original Issue Date,
the Common Stock issuable upon the conversion of the Series A Preferred, Series
B Preferred and Series C Preferred is changed into the same or a different
number of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than an Acquisition or Asset Transfer as
defined in Section 3(c) or a subdivision or combination of shares or stock
dividend or a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Section 4), in any such event each holder of Series A
Preferred, Series B Preferred and Series C Preferred, as applicable, shall have
the right thereafter to convert such stock into the kind and amount of

9.
<PAGE> 10

stock and other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of shares of
Common Stock into which such shares of Series A Preferred, Series B Preferred
and Series C Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.

(h) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time after the applicable Original Issue Date,
there is a capital reorganization of the Common Stock (other than an Acquisition
or Asset Transfer as defined in Section 3(c) or a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section 4), as a part of such capital reorganization,
provision shall be made so that the holders of the Series A Preferred, Series B
Preferred and Series C Preferred, as applicable, shall thereafter be entitled to
receive upon conversion of the Series A Preferred, Series B Preferred and Series
C Preferred, as applicable, the number of shares of stock or other securities or
property of the Company to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of Series A Preferred, Series B Preferred and Series C Preferred, as
applicable, after the capital reorganization to the end that the provisions of
this Section 4 (including adjustment of the Series A Preferred Conversion Price,
Series B Preferred Conversion Price and Series C Preferred Conversion Price then
in effect and the number of shares issuable upon conversion of the Series A
Preferred, Series B Preferred and Series C Preferred) shall be applicable after
that event and be as nearly equivalent as practicable.

(i) SALE OF SHARES BELOW SERIES A PREFERRED CONVERSION PRICE,
SERIES B PREFERRED CONVERSION PRICE OR SERIES C PREFERRED CONVERSION PRICE.

(i) If at any time or from time to time after the
applicable Original Issue Date, the Company issues or sells, or is deemed by the
express provisions of this Section 4(i) to have issued or sold, Additional
Shares of Common Stock (as defined in Section 4(i)(iv) below), other than as a
dividend or other distribution on any class of stock as provided in Section 4(f)
above, and other than a subdivision or combination of shares of Common Stock as
provided in Section 4(e) above, for an Effective Price (as defined in Section
4(i)(iv) below) less than the then effective Series A Preferred Conversion
Price, Series B Preferred Conversion Price or Series C Preferred Conversion
Price, as applicable, then and in each such case the then existing Series A
Preferred Conversion Price, Series B Preferred Conversion Price or Series C
Preferred Conversion Price, as applicable, shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying the Series A Preferred Conversion Price, Series B Preferred
Conversion Price or Series C Preferred Conversion Price, as applicable, by a
fraction (i) the numerator of which shall be (A) the number of shares of Common
Stock deemed outstanding (as defined below) immediately prior to such issue or
sale, plus (B) the number of shares of Common Stock which the aggregate
consideration received (as defined in Section 4(i)(ii) by the Company for the
total number of Additional Shares of Common Stock so issued would purchase at
such Series A Preferred Conversion Price, Series B Preferred

10.
<PAGE> 11

Conversion Price or Series C Preferred Conversion Price, as applicable, and (ii)
the denominator of which shall be the number of shares of Common Stock deemed
outstanding (as defined below) immediately prior to such issue or sale plus the
total number of Additional Shares of Common Stock so issued. For the purposes of
the preceding sentence, the number of shares of Common Stock deemed to be
outstanding as of a given date shall be the sum of (A) the number of shares of
Common Stock actually outstanding, (B) the number of shares of Common Stock into
which the then outstanding shares of Series A Preferred, Series B Preferred and
Series C Preferred could be converted if fully converted on the day immediately
preceding the given date, and (C) the number of shares of Common Stock which
could be obtained through the exercise or conversion of all other rights,
options and convertible securities outstanding on the day immediately preceding
the given date.

(ii) For the purpose of making any adjustment required
under this Section 4(i), the consideration received by the Company for any issue
or sale of securities shall (A) to the extent it consists of cash, be computed
at the net amount of cash received by the Company after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale but without deduction of
any expenses payable by the Company, (B) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of Common
Stock, Convertible Securities (as defined in Section 4(i)(iii)) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such Additional Shares
of Common Stock, Convertible Securities or rights or options.

(iii) For the purpose of the adjustment required under
this Section 4(i), if the Company issues or sells (i) stock or other securities
convertible into, Additional Shares of Common Stock (such convertible stock or
securities being herein referred to as "Convertible Securities") or (ii) rights
or options for the purchase of Additional Shares of Common Stock or Convertible
Securities and if the Effective Price of such Additional Shares of Common Stock
is less than the Series A Preferred Conversion Price, Series B Preferred
Conversion Price or Series C Preferred Conversion Price, as applicable, in each
case the Company shall be deemed to have issued at the time of the issuance of
such rights or options or Convertible Securities the maximum number of
Additional Shares of Common Stock issuable upon exercise or conversion thereof
and to have received as consideration for the issuance of such shares an amount
equal to the total amount of the consideration, if any, received by the Company
for the issuance of such rights or options or Convertible Securities, plus, in
the case of such rights or options, the minimum amounts of consideration, if
any, payable to the Company upon the exercise of such rights or options, plus,
in the case of Convertible Securities, the minimum amounts of consideration, if
any, payable to the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) upon the conversion
thereof; provided that if in the case of Convertible Securities the minimum
amounts of such consideration cannot be ascertained, but are a function of
antidilution or similar protective clauses, the Company shall be deemed to have
received the minimum amounts of consideration without reference to such clauses;
provided further that if the minimum amount of consideration

11.
<PAGE> 12

payable to the Company upon the exercise or conversion of rights, options or
Convertible Securities is reduced over time or on the occurrence or
non-occurrence of specified events other than by reason of antidilution
adjustments, the Effective Price shall be recalculated using the figure to which
such minimum amount of consideration is reduced; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of such rights, options or Convertible Securities is subsequently
increased, the Effective Price shall be again recalculated using the increased
minimum amount of consideration payable to the Company upon the exercise or
conversion of such rights, options or Convertible Securities. No further
adjustment of the Series A Preferred Conversion Price, the Series B Preferred
Conversion Price and Series C Preferred Conversion Price, as applicable, as
adjusted upon the issuance of such rights, options or Convertible Securities,
shall be made as a result of the actual issuance of Additional Shares of Common
Stock on the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Series A Preferred Conversion Price, the Series B
Preferred Conversion Price and the Series C Preferred Conversion Price, as
applicable, as adjusted upon the issuance of such rights, options or Convertible
Securities shall be readjusted to the Series A Preferred Conversion Price, the
Series B Preferred Conversion Price and the Series C Preferred Conversion Price,
as applicable, which would have been in effect had an adjustment been made on
the basis that the only Additional Shares of Common Stock so issued were the
Additional Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such exercise,
plus the consideration, if any, actually received by the Company for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities,
whether or not converted, plus the consideration, if any, actually received by
the Company (other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities) on the conversion of such Convertible
Securities, provided that such readjustment shall not apply to prior conversions
of Series A Preferred, Series B Preferred and Series C Preferred.

(iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company or deemed to be issued pursuant to
this Section 4(i), other than (A) shares of Common Stock issued upon conversion
of the Series A Preferred, Series B Preferred or Series C Preferred, (B) up to
6,500,000 shares of Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options, warrants
or other rights (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like) after the Original Issue Date to employees,
officers or directors of, or consultants or advisors to the Company or any
subsidiary pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board, (C) shares of Common Stock issued
pursuant to the exercise of options, warrants or convertible securities
outstanding as of the Original Issue Date, (D) shares of Common Stock and/or
options, warrants or other Common Stock purchase rights, and the Common Stock
issued pursuant to such options, warrants or other rights, issued for
consideration other than cash pursuant to a merger, consolidation, acquisition
or similar business combination approved by the Board (which approval must
include the vote of at least one Series A Director), (E) shares of Common Stock
issued pursuant to any equipment leasing or loan arrangement, or debt financing
from a

12.
<PAGE> 13

bank or similar financial or lending institution approved by the Board (which
approval must include the vote of at least one Series A Director), (F) shares of
Common Stock issued in connection with strategic transactions involving the
Company and other entities, including joint ventures, manufacturing, marketing
or distribution arrangements or technology transfer or development arrangements
approved by the Board (which approval must include the vote of at least one
Series A Director) and (G) shares of Common Stock issued in connection with
those certain warrant(s) to purchase an aggregate of 439,103 shares of Common
Stock issued on April 27, 1999. References to Common Stock in the subsections of
this clause (iv) above shall mean all shares of Common Stock issued by the
Company or deemed to be issued pursuant to this Section 4(i). The "Effective
Price" of Additional Shares of Common Stock shall mean the quotient determined
by dividing the total number of Additional Shares of Common Stock issued or
sold, or deemed to have been issued or sold by the Company under this Section
4(i), into the aggregate consideration received, or deemed to have been received
by the Company for such issue under this Section 4(i), for such Additional
Shares of Common Stock.

(j) CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Series A Preferred Conversion Price, Series B Preferred
Conversion Price or Series C Preferred Conversion Price for the number of shares
of Common Stock or other securities issuable upon conversion of the Series A
Preferred, Series B Preferred or Series C Preferred, if the Series A Preferred,
Series B Preferred or Series C Preferred is then convertible pursuant to this
Section 4, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of Series A
Preferred, Series B Preferred and Series C Preferred, as applicable, at the
holder's address as shown in the Company's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (i) the
consideration received or deemed to be received by the Company for any
Additional Shares of Common Stock issued or sold or deemed to have been issued
or sold, (ii) the Series A Preferred Conversion Price, Series B Preferred
Conversion Price or Series C Preferred Conversion Price, as applicable, at the
time in effect, (iii) the number of Additional Shares of Common Stock and (iv)
the type and amount, if any, of other property which at the time would be
received upon conversion of the Series A Preferred, Series B Preferred and
Series C Preferred, as applicable.

(k) NOTICES OF RECORD DATE. Upon (i) any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or
other capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any Asset
Transfer (as defined in Section 3(c)), or any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Company shall mail to
each holder of Series A Preferred, Series B Preferred and Series C Preferred at
least ten (10) days prior to the record date specified therein (or such shorter
period approved by a majority of the outstanding Series A Preferred, Series B
Preferred and Series C Preferred, voting together as a single class) a notice
specifying (A) the date on which any such record is to be taken for the purpose
of such dividend or distribution and a description of such dividend or
distribution, (B) the date on which any such Acquisition, reorganization,

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<PAGE> 14

reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up is expected to become effective, and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up.

(l) AUTOMATIC CONVERSION.

(i) Each share of Series A Preferred, Series B Preferred
and Series C Preferred shall automatically be converted into shares of Common
Stock, based on the then-effective Series A Preferred Conversion Rate, Series B
Preferred Conversion Rate and Series C Preferred Conversion Rate, respectively,
(A) at any time upon the affirmative election of the holders of at least a
majority of the outstanding shares of the Series A Preferred, the Series B
Preferred and the Series C Preferred, voting together as a single class, or (B)
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Company in which (i) in the case of the Series A Preferred, the per share price
is at least $2.00 (as adjusted for stock splits, dividends, recapitalizations
and the like), in the case of the Series B Preferred, is at least $8.54 (as
adjusted for stock splits, dividends, recapitalizations and the like) and in the
case of the Series C Preferred, is at least $10.76 (as adjusted for stock
splits, dividends, recapitalizations and the like), and (ii) the gross cash
proceeds to the Company (before underwriting discounts, commissions and fees)
are at least $15,000,000. Upon such automatic conversion, any declared and
unpaid dividends shall be paid in accordance with the provisions of Section
4(d).

(ii) Upon the occurrence of either of the events
specified in Section 4(l)(i) above, the outstanding shares of Series A
Preferred, Series B Preferred and/or Series C Preferred, as applicable, shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Company or its transfer agent; provided, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series A Preferred, Series B Preferred and/or Series C Preferred are either
delivered to the Company or its transfer agent as provided below, or the holder
notifies the Company or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the Company
to indemnify the Company from any loss incurred by it in connection with such
certificates. Upon the occurrence of such automatic conversion of the Series A
Preferred, Series B Preferred and/or Series C Preferred, the holders of Series A
Preferred, Series B Preferred and/or Series C Preferred, as applicable, shall
surrender the certificates representing such shares at the office of the Company
or any transfer agent for the Series A Preferred, Series B Preferred and Series
C Preferred. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of Series A Preferred, Series B Preferred
and/or Series C Preferred, as applicable, surrendered were convertible on the
date on which such automatic conversion occurred, and any declared and unpaid
dividends shall be paid in accordance with the provisions of Section 4(d).

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<PAGE> 15

(m) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred, Series B Preferred and
Series C Preferred. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred, Series B
Preferred and Series C Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Company shall, in lieu
of issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common Stock's fair market value (as determined by the Board
of Directors) on the date of conversion.

(n) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred, Series B Preferred and Series C Preferred,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series A
Preferred, Series B Preferred and Series C Preferred. If at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A Preferred,
Series B Preferred and Series C Preferred, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.

(o) NOTICES. Any notice required by the provisions of this
Section 4 shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient; if not, then
on the next business day, (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or (iv)
one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Company.

(p) PAYMENT OF TAXES. The Company will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series A Preferred, Series B Preferred and Series C Preferred,
excluding any tax or other charge imposed in connection with any transfer
involved in the issue and delivery of shares of Common Stock in a name other
than that in which the shares of Series A Preferred, Series B Preferred and
Series C Preferred so converted were registered.

(q) NO DILUTION OR IMPAIRMENT. Without the consent of the
holders of then outstanding Series A Preferred, Series B Preferred and Series C
Preferred as required under Section 2(b), the Company shall not amend its
Restated Certificate of Incorporation or participate in any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or take any other voluntary action, for the purpose of avoiding or
seeking to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but shall at all times in good
faith assist in carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of the holders of

15.
<PAGE> 16

the Series A Preferred, Series B Preferred and Series C Preferred against
dilution or other impairment.

5. NO REISSUANCE OF SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED.

No share or shares of Series A Preferred, Series B Preferred and
Series C Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued.

A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.

B. This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the CGCL) for breach of duty to the Corporation
and its stockholders through bylaw provisions or through agreements with the
agents, or through stockholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times that the Corporation is subject to Section 2115(b) of the CGCL, to
the limits on such excess indemnification set forth in Section 204 of the CGCL.

C. Any repeal or modification of this Article V shall only be
prospective and shall not effect the rights under this Article V in effect at
the time of the alleged occurrence of any action or omission to act giving rise
to liability.

VI.

For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:

A. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. Subject to Section E.2(c)
of Article IV above, the number of directors which shall constitute the whole
Board of Directors shall be fixed by the Board of Directors in the manner
provided in the Bylaws.

B. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the stockholders entitled to
vote. The Board of Directors shall also have the power to adopt, amend or repeal
Bylaws.

C. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.

16.
<PAGE> 17

VII.

The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this reservation.

* * * *

FOUR: This Restated Certificate of Incorporation has been duly approved
by the Board of Directors of this Corporation.

FIVE: This Restated Certificate of Incorporation has been duly adopted
in accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware by the Board of Directors and the
stockholders of the Corporation. The total number of outstanding shares entitled
to vote or act by written consent was twenty-two million four hundred
twenty-eight thousand sixty-five (22,428,065) shares of Common Stock, eight
million two hundred fifty thousand (8,250,000) shares of Series A Preferred
Stock and four hundred thirty-nine thousand one hundred three (439,103) shares
of Series B Preferred Stock. A majority of the outstanding shares of Common
Stock approved this Restated Certificate of Incorporation by written consent in
accordance with Section 228 of the General Corporation Law of the State of
Delaware and written notice of such was given by the Corporation in accordance
with said Section 228.

17.
<PAGE> 18

IN WITNESS WHEREOF, MP3.COM, INC. has caused this Restated Certificate
of Incorporation to be signed by its President and the Secretary in San Diego,
California this 19th day of May 1999.

MP3.COM, INC.

/s/ ROBIN RICHARDS
------------------------------------
ROBIN RICHARDS,
President and Chief Operating Officer

/s/ STEVEN M. PRZESMICKI
------------------------------------
STEVEN M. PRZESMICKI,
Secretary

18.

<PAGE> 1
EXHIBIT 4.2

COMMON STOCK COMMON STOCK

NUMBER SHARES

[MP3.COM LOGO]

SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 62473M 10 9

INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE

THIS CERTIFIES THAT

is the holder of

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
OF

MP3.COM, INC.

transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

/s/ [SIGNATURE ILLEGIBLE] /s/ [SIGNATURE ILLEGIBLE]
- ------------------------- -------------------------
SECRETARY CHAIRMAN
SEAL
TO COME

COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR

BY AUTHORIZED SIGNATURE
-----------------------
<PAGE> 2

The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights, so far as the same shall have been fixed, and a statement of the
authority of the Board of Directors to designate and fix any preferences, rights
and limitations of any wholly unissued series. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common

UNIF GIFT MIN ACT - ............. Custodian ..................
(Cust) (Minor)

under Uniform Gifts to Minors
Act ......................................
(State)

UNIF TRF MIN ACT - ............. Custodian (until age ......)
(Cust)

............... under Uniform Transfers
(Minor)

to Minors Act ...........................
(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

_______________________________________

____________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

____________________________________________________________________________

_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated ______________________________

X __________________________________________

NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed

By ____________________________________

THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.

<PAGE> 1
EXHIBIT 5.1

[COOLEY GODWARD LLP LETTERHEAD]

June 21, 1999

MP3.COM, INC.
10350 Science Center Drive, Building 14
San Diego, CA 92121

Ladies and Gentlemen:

You have requested our opinion with respect to certain matters in connection
with the filing by MP3.COM, INC. (the "Company") of a Registration Statement on
Form S-1 (the "Registration Statement"), with the Securities and Exchange
Commission (the "Commission"), including a related prospectus to be filed with
the Commission pursuant to Rule 424(b) of Regulation C (the "Prospectus")
promulgated under the Securities Act of 1933, as amended, and public offering of
up to 10,350,000 shares of the Company's common stock including: (i) 9,000,000
underwritten shares and (ii) up to 1,350,000 shares for which the underwriters
have been granted an over-allotment option (collectively, the "Common Stock").

In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Bylaws and the originals or copies
certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below, (ii) assumed that the
Restated Certificate of Incorporation, as set forth in Exhibit 3.2 of the
Registration Statement, shall have been duly approved and filed with the office
of the Secretary of State of the State of Delaware, effecting a 3-for-2 split of
the Company's common stock and (iii) assumed that the shares of the Common Stock
will be sold by the Company and the underwriters at a price established by the
Pricing Committee of the Company's Board of Directors.

On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.

<PAGE> 2
MP3.COM, INC.
June 21, 1999
Page Two

We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.

Very truly yours,
Cooley Godward LLP

By: /s/ D. BRADLEY PECK
---------------------------
D. Bradley Peck

<PAGE> 1

EXHIBIT 10.1

MP3.COM, INC.

AMENDED AND RESTATED 1998 EQUITY INCENTIVE PLAN

ADOPTED DECEMBER 30, 1998
APPROVED BY STOCKHOLDERS DECEMBER 30, 1998
AMENDED BY STOCKHOLDERS JANUARY 19, 1999
AMENDED BY THE BOARD OF DIRECTORS MAY 13, 1999
AMENDED AND RESTATED JUNE __, 1999
APPROVED BY STOCKHOLDERS JUNE __, 1999
ADJUSTED FOR TWO-FOR-THREE SPLIT ___________, 1999
TERMINATION DATE: DECEMBER 29, 2008

1. PURPOSES.

(a) AMENDMENT AND RESTATEMENT. The Plan amends and restates the MP3.com,
Inc. 1998 Equity Incentive Plan adopted December 30, 1998. All outstanding Stock
Awards granted under the prior plan also shall be amended.

(b) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.

(c) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.

(d) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.

2. DEFINITIONS.

(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.

(b) "BOARD" means the Board of Directors of the Company.

(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).

1
<PAGE> 2

(e) "COMMON STOCK" means the common stock of the Company.

(f) "COMPANY" means MP3.com, Inc., a Delaware corporation.

(g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.

(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.

(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.

(j) "DIRECTOR" means a member of the Board of Directors of the Company.

(k) "DISABILITY" means (1) for purposes of Incentive Stock Option
awards, the permanent and total disability of a person within the meaning of
Section 22(e)(3) of the Code, and (2) for purposes of all Stock Awards other
than Incentive Stock Option awards, the inability of a person, in the opinion of
a qualified physician acceptable to the Company, to perform the major duties of
that person's position with the Company or an Affiliate of the Company because
of the sickness or injury of the person.

(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.

(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:

2
<PAGE> 3

(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.

(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.

(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

(p) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.

(q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.

(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.

(s) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

(t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.

(u) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.

3
<PAGE> 4

(v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.

(w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.

(x) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.

(y) "PLAN" means this MP3.com, Inc. 1999 Amended and Restated Equity
Incentive Plan.

(z) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.

(aa) "SECURITIES ACT" means the Securities Act of 1933, as amended.

(bb) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.

(cc) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.

(dd) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.

3. ADMINISTRATION.

(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c). Any interpretation of the Plan by the Board and any decision by
the Board under the Plan shall be final and binding on all persons.

(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what

4
<PAGE> 5

type or combination of types of Stock Award shall be granted; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive Common Stock pursuant to a
Stock Award; and the number of shares of Common Stock with respect to which a
Stock Award shall be granted to each such person.

(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.

(iii) To amend the Plan or a Stock Award as provided in Section
12.

(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.

(i) GENERAL. The Board may delegate administration of the Plan
to a committee or committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan.

(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors, the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or (2) delegate
to a committee of one or more members of the Board who are not Non-Employee
Directors the authority to grant Stock Awards to eligible persons who are not
then subject to Section 16 of the Exchange Act.

5
<PAGE> 6

4. SHARES SUBJECT TO THE PLAN.

(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate twelve million seven
hundred fifty thousand (12,750,000) shares of Common Stock.

(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the shares of Common Stock not acquired under
such Stock Award shall revert to and again become available for issuance under
the Plan.

(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may
be granted only to Employees. Stock Awards other than Incentive Stock Options
may be granted to Employees, Directors and Consultants.

(b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be
granted an Incentive Stock Option unless the exercise price of such Option is at
least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.

(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than two million two
hundred fifty thousand (2,250,000) shares of the Common Stock during any
calendar year.

(d) CONSULTANTS. A Consultant shall not be eligible for the grant of a
Stock Award if, at the time of grant, a Form S-8 Registration Statement under
the Securities Act ("Form S-8") is not available to register either the offer or
the sale of the Company's securities to such Consultant because of the nature of
the services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by the rules
governing the use of Form S-8, unless the Company determines both (i) that such
grant (A) shall be registered in another manner under the Securities Act (e.g.,
on a Form S-3 Registration Statement) or (B) does not require registration under
the Securities Act in order to comply with the requirements of the Securities
Act, if applicable, and (ii) that such grant complies with the securities laws
of all other relevant jurisdictions.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock

6
<PAGE> 7

Options or Nonstatutory Stock Options at the time of grant, and, if certificates
are issued, a separate certificate or certificates will be issued for shares of
Common Stock purchased on exercise of each type of Option. The provisions of
separate Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.

(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the Common Stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

(d) CONSIDERATION. The purchase price of Common Stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash (or by check) at the time the Option is
exercised or (ii) at the discretion of the Board at the time of the grant of the
Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by
delivery to the Company of other Common Stock (which has been held for a period
required to avoid a charge to the Company's reported earnings, generally six (6)
months or was not acquired, directly or indirectly from the Company), (2)
according to a deferred payment or other similar arrangement with the
Optionholder or (3) in any other form of legal consideration that may be
acceptable to the Board; provided, however, that at any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.

In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be

7
<PAGE> 8

exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.

(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement. If
the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.

(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.

(h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Optionholder does not exercise his
or her Option within the time specified in the Option Agreement, the Option
shall terminate.

(i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.

(j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date

8
<PAGE> 9

twelve (12) months following such termination (or such longer or shorter period
specified in the Option Agreement) or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.

(k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement) or (2) the expiration of the term of such Option as set
forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.

(l) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate.

(m) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares of Common Stock
equal to the number of shares of Common Stock surrendered as part or all of the
exercise price of such Option; (ii) have an expiration date which is the same as
the expiration date of the Option the exercise of which gave rise to such
Re-Load Option; and (iii) have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the
Re-Load Option on the date of exercise of the original Option. Notwithstanding
the foregoing, a Re-Load Option shall be subject to the same exercise price and
term provisions heretofore described for Options under the Plan.

Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of

9
<PAGE> 10

the Code. There shall be no Re-Load Options on a Re-Load Option. Any such
Re-Load Option shall be subject to the availability of sufficient shares of
Common Stock under subsection 4(a) and the "Section 162(m) Limitation" on the
grants of Options under subsection 5(c) and shall be subject to such other terms
and conditions as the Board may determine which are not inconsistent with the
express provisions of the Plan regarding the terms of Options.

7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:

(i) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.

(ii) VESTING. Shares of Common Stock awarded under the stock
bonus agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.

(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.

(iv) TRANSFERABILITY. Rights to acquire shares under the stock
bonus agreement shall be transferable by the Participant only upon such terms
and conditions as are set forth in the stock bonus agreement, as the Board shall
determine in its discretion, so long as Common Stock awarded under the stock
bonus agreement remains subject to the terms of the stock bonus agreement.

(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:

(i) PURCHASE PRICE. The purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price shall
not be less than eighty-five percent (85%) of the Common Stock's Fair Market
Value on the date such award is made or at the time the purchase is consummated.

10
<PAGE> 11

(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.

(iii) VESTING. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.

(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may repurchase
or otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.

(v) TRANSFERABILITY. Rights to acquire shares under the
restricted stock purchase agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the restricted stock
purchase agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.

8. COVENANTS OF THE COMPANY.

(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.

(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.

9. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.

11
<PAGE> 12

10. MISCELLANEOUS.

(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.

(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.

(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.

(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.

(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (1) the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (2) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates

12
<PAGE> 13

issued under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.

(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award; provided, however, that no
shares are withheld with a value exceeding the minimum amount of tax required to
be withheld by law; or (iii) delivering to the Company owned and unencumbered
shares of the Common Stock.

11. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)

(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.

(c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation or acquiring corporation shall assume
or continue any Stock Awards outstanding under the Plan or shall substitute
similar stock awards (including an award to acquire the same consideration paid
to the stockholders in the transaction described in this subsection 11(c)) for
those outstanding under the Plan. In the event any surviving corporation or
acquiring corporation refuses to assume or continue such Stock Awards or to
substitute similar stock

13
<PAGE> 14

awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated prior to such
event, the vesting of such Stock Awards (and, if applicable, the time during
which such Stock Awards may be exercised) shall be accelerated in full, and such
Stock Awards shall terminate if not exercised (if applicable) at or prior to
such event. With respect to any other Stock Awards outstanding under the Plan,
such Stock Awards shall terminate if not exercised (if applicable) prior to such
event.

(d) CHANGE IN CONTROL--SECURITIES ACQUISITION. In the event of an
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Exchange Act, or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or an Affiliate) of the beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of Directors, then any
surviving corporation or acquiring corporation shall assume or continue any
Stock Awards outstanding under the Plan or shall substitute similar stock awards
for those outstanding under the Plan. In the event any surviving corporation or
acquiring corporation refuses to assume or continue such Stock Awards or to
substitute similar stock awards for those outstanding under the Plan, then with
respect to Stock Awards outstanding, the vesting of such Stock Awards (and, if
applicable, the time during which such Stock Awards may be exercised) shall be
accelerated in full.

12. AMENDMENT OF THE PLAN AND STOCK AWARDS.

(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.

(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.

(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.

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<PAGE> 15

(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.

(E) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.

13. TERMINATION OR SUSPENSION OF THE PLAN.

(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.

(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect, except with the written consent of the Participant.

14. EFFECTIVE DATE OF PLAN.

The Plan shall become effective on the Listing Date, but no Stock Award
shall be exercised unless and until the Plan has been approved by the
stockholders of the Company, which approval shall be within twelve (12) months
before or after the date the Plan is adopted by the Board.

15. CHOICE OF LAW.

The law of the State of California shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.

<PAGE> 1
EXHIBIT 10.2

MP3.COM, INC.
STOCK OPTION GRANT NOTICE
AMENDED AND RESTATED 1998 EQUITY INCENTIVE PLAN

MP3.com, Inc. (the "Company"), pursuant to its Amended and Restated 1998 Equity
Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase
the number of shares of the Company's Common Stock set forth below. This option
is subject to all of the terms and conditions as set forth herein and in the
Stock Option Agreement, the Plan and the Notice of Exercise, all of which are
attached hereto and incorporated herein in their entirety.

Optionholder: _________________________________________
Date of Grant: _________________________________________
Vesting Commencement Date: _________________________________________
Number of Shares Subject to Option: _________________________________________
Exercise Price (Per Share): _________________________________________
Total Exercise Price: _________________________________________
Expiration Date: _________________________________________

TYPE OF GRANT: [ ] Incentive Stock Option [ ] Nonstatutory Stock Option

EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [ ] Early Exercise Permitted

VESTING SCHEDULE: 1/4th of the shares vest one year after the Vesting
Commencement Date.
1/48th of the shares vest monthly thereafter over the
next three years.

PAYMENT: By one or a combination of the following items (described in
the Stock Option Agreement):

By cash or check
Pursuant to a Regulation T Program if the Shares are
publicly traded
By delivery of already-owned shares if the Shares are
publicly traded

ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:

OTHER AGREEMENTS: __________________________________________________
__________________________________________________

MP3.COM, INC. OPTIONHOLDER:

By:________________________________ ___________________________________
Signature Signature

Title:_____________________________ Date:______________________________

Date:______________________________

ATTACHMENTS: Stock Option Agreement, Amended and Restated 1998 Equity
Incentive Plan and Notice of Exercise

<PAGE> 2

ATTACHMENT I

STOCK OPTION AGREEMENT

<PAGE> 3

MP3.COM, INC.
AMENDED AND RESTATED 1998 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)

Pursuant to the Stock Option Grant Notice ("Grant Notice") and this
Stock Option Agreement, MP3.com, Inc. (the "Company") has granted you an option
under its 1998 Equity Incentive Plan (the "Plan") to purchase the number of
shares of the Company's Common Stock indicated in the Grant Notice at the
exercise price indicated in the Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.

The details of your option are as follows:

1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in the Grant Notice, provided that vesting will cease upon
the termination of your Continuous Service.

2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares subject to
your option and your exercise price per share referenced in the Grant Notice may
be adjusted from time to time for Capitalization Adjustments, as provided in the
Plan.

3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in the
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of this option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:

(a) a partial exercise of your option shall be deemed to cover
first vested shares and then the earliest vesting installment of unvested
shares;

(b) any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Company's form of Early Exercise Stock
Purchase Agreement;

(c) you shall enter into the Company's form of Early Exercise
Stock Purchase Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred; and

(d) if your option is an incentive stock option, then, as
provided in the Plan, to the extent that the aggregate Fair Market Value
(determined at the time of grant) of stock with respect to which your option
plus all other incentive stock options you hold are exercisable for the first
time by you during any calendar year (under all plans of the Company and its
Affiliates) exceeds one hundred thousand dollars ($100,000), the options or
portions thereof that exceed

1.
<PAGE> 4

such limit (according to the order in which they were granted) shall be treated
as nonstatutory stock options.

4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY THE GRANT
NOTICE, which may include one or more of the following:

(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board which,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.

(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock that either have been held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or were not acquired, directly or indirectly from the Company, that are
owned free and clear of any liens, claims, encumbrances or security interests,
and that are valued at Fair Market Value on the date of exercise. "Delivery" for
these purposes, in the sole discretion of the Company at the time your option is
exercised, shall include delivery to the Company of your attestation of
ownership of such shares of Common Stock in a form approved by the Company.
Notwithstanding the foregoing, your option may not be exercised by tender to the
Company of Common Stock to the extent such tender would constitute a violation
of the provisions of any law, regulation or agreement restricting the redemption
of the Company's stock.

5. WHOLE SHARES. Your option may only be exercised for whole shares.

6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, your option may not be exercised unless the shares issuable
upon exercise of your option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act. The exercise of your option must also comply with other
applicable laws and regulations governing the option, and the option may not be
exercised if the Company determines that the exercise would not be in material
compliance with such laws and regulations.

7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:

(a) three (3) months after the termination of your Continuous
Service for any reason other than Disability or death, provided that if during
any part of such three (3) month period the option is not exercisable solely
because of the condition set forth in paragraph 6, the option shall not expire
until the earlier of the Expiration Date or until it shall have been

2.
<PAGE> 5

exercisable for an aggregate period of three (3) months after the termination of
your Continuous Service;

(b) twelve (12) months after the termination of your Continuous
Service due to Disability;

(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your Continuous
Service terminates;

(d) the Expiration Date indicated in the Grant Notice; or

(e) the tenth (10th) anniversary of the Date of Grant.

If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of the option and
ending on the day three (3) months before the date of the option's exercise, you
must be an employee of the Company or an Affiliate, except in the event of your
death or your Disability. The Company has provided for extended exercisability
of your option under certain circumstances for your benefit, but cannot
guarantee that your option will necessarily be treated as an "incentive stock
option" if you provide services to the Company or an Affiliate as a Consultant
or Director or if you exercise your option more than three (3) months after the
date your employment with the Company or an Affiliate terminates.

8. EXERCISE.

(a) You may exercise the vested portion of your option (and the
unvested portion of your option if the Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.

(b) By exercising your option you agree that, as a condition to
any exercise of your option, the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (1) the exercise of your option,
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise, or (3) the disposition of shares acquired upon
such exercise.

(c) If your option is an incentive stock option, by exercising
your option you agree that you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of your option that occurs within two (2) years after
the date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.

(d) By exercising your option you agree that the Company (or a
representative of the underwriters) may, in connection with the first
underwritten registration of the offering of

3.
<PAGE> 6

any securities of the Company under the Securities Act, require that you not
sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same
economic effect as a sale, any shares of Common Stock or other securities of the
Company held by you, for a period of time specified by the underwriter(s) (not
to exceed one hundred eighty (180) days) following the effective date of the
registration statement of the Company filed under the Securities Act. You
further agree to execute and deliver such other agreements as may be reasonably
requested by the Company and/or the underwriter(s) which are consistent with the
foregoing or which are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to your Common Stock until the end of such period.

9. TRANSFERABILITY.

(a) If your option is an Incentive Stock Option, it is not
transferable, except by will or by the laws of descent and distribution, and is
exercisable during your life only by you. Notwithstanding the foregoing, by
delivering written notice to the Company, in a form satisfactory to the Company,
you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise your option.

(b) If your option is a Nonstatutory Stock Option, it is
transferable to (i) your family members, (ii) a trust the beneficiaries of which
are you and/or your family members, (iii) a family limited partnership the
partners of which are you and/or your family members, or (iv) a family limited
liability company the members of which are you and/or your family members. A
"family member" shall be limited to your spouse, children, stepchildren and
grandchildren (whether adopted or natural), or such other family members for
whom a Form S-8 is available at the time of transfer. Notwithstanding the
foregoing, by delivering written notice to the Company, in a form satisfactory
to the Company, you may designate a third party who, in the event of your death,
shall thereafter be entitled to exercise your option.

10. RIGHT OF FIRST REFUSAL. Vested shares that are received upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right.

11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.

12. WITHHOLDING OBLIGATIONS.

(a) At the time your option is exercised, in whole or in part, or
at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by

4.
<PAGE> 7

means of a "same day sale" pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board to the extent permitted by the
Company), any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company or an Affiliate, if any, which arise in
connection with your option.

(b) Upon your request and subject to approval by the Company, in
its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of Common
Stock otherwise issuable to you upon the exercise of your option a number of
whole shares having a Fair Market Value, determined by the Company as of the
date of exercise, not in excess of the minimum amount of tax required to be
withheld by law. If the date of determination of any tax withholding obligation
is deferred to a date later than the date of exercise of your option, share
withholding pursuant to the preceding sentence shall not be permitted unless you
make a proper and timely election under Section 83(b) of the Code, covering the
aggregate number of shares of Common Stock acquired upon such exercise with
respect to which such determination is otherwise deferred, to accelerate the
determination of such tax withholding obligation to the date of exercise of your
option. Notwithstanding the filing of such election, shares shall be withheld
solely from fully vested shares of Common Stock determined as of the date of
exercise of your option that are otherwise issuable to you upon such exercise.
Any adverse consequences to you arising in connection with such share
withholding procedure shall be your sole responsibility.

(c) Your option is not exercisable unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares or release such shares from any escrow provided for herein.

13. SPECIAL ACCELERATION PROVISIONS.

(a) TERMINATION. Notwithstanding any other provisions of the Plan
or this Stock Option Agreement to the contrary, if (i) a Change in Control
occurs and (ii) within one (1) month prior to the date of such Change in Control
or eighteen (18) months after the date of such Change in Control your Continuous
Service terminates due to an involuntary termination (not including death or
Disability) without Cause or due to a Constructive Termination, then the vesting
and exercisability of this option shall be accelerated in full.

(b) DEFINITIONS.

(i) "CAUSE" means the occurrence of any of the following
(and only the following): (i) conviction of any felony or any crime involving
moral turpitude or dishonesty, (ii) participation in a fraud or act of
dishonesty against the Company, (iii) conduct that, based upon a good faith and
reasonable factual investigation and determination by the Board, demonstrates
your gross unfitness to serve, or (iv) intentional, material violation of any
contract with the Company or any statutory duty to the Company that is not
corrected within thirty (30) days after written notice thereof. Physical or
mental disability shall not constitute "Cause."

5.
<PAGE> 8

(ii) "CONSTRUCTIVE TERMINATION" means the occurrence of
any of the following events or conditions: (i) (A) a change in the
Optionholder's status, title, position or responsibilities (including reporting
responsibilities) which represents an adverse change from the Optionholder's
status, title, position or responsibilities as in effect at any time within
ninety (90) days preceding the date of a Change in Control or at any time
thereafter; (B) the assignment to the Optionholder of any duties or
responsibilities which are inconsistent with the Optionholder's status, title,
position or responsibilities as in effect at any time within ninety (90) days
preceding the date of a Change in Control or at any time thereafter; or (C) any
removal of the Optionholder from or failure to reappoint or reelect the
Optionholder to any of such offices or positions, except in connection with the
termination of the Optionholder's Continuous Service for Cause, as a result of
the Optionholder's Disability or death or by the Optionholder other than as a
result of Constructive Termination; (ii) a reduction in the Optionholder's
annual base compensation or following (1) written notice and (2) failure to cure
the failure within ten (10) days of receipt of the written notice, any failure
to pay the Optionholder any compensation or benefits to which the Optionholder
is entitled within five (5) days of the date due; (iii) the Company's requiring
the Optionholder to relocate to any place outside a fifty (50) mile radius of
the Optionholder's current work site, except for reasonably required travel on
the business of the Company or its Affiliates which is not materially greater
than such travel requirements prior to the Change in Control; (iv) the failure
by the Company to (A) continue in effect (without reduction in benefit level
and/or reward opportunities) any material compensation or employee benefit plan
in which the Optionholder was participating at any time within ninety (90) days
preceding the date of a Change in Control or at any time thereafter, unless such
plan is replaced with a plan that provides substantially equivalent compensation
or benefits to the Optionholder, or (B) provide the Optionholder with
compensation and benefits, in the aggregate, at least equal (in terms of benefit
levels and/or reward opportunities) to those provided for under each other
employee benefit plan, program and practice in which the Optionholder was
participating at any time within ninety (90) days preceding the date of a Change
in Control or at any time thereafter; (v) any material breach by the Company of
any provision of an agreement between the Company and the Optionholder, whether
pursuant to this Plan or otherwise, other than a breach which is cured by the
Company within fifteen (15) days following notice by the Optionholder of such
breach; or (vi) the failure of the Company to obtain an agreement from any
successors and assigns to assume and agree to perform the obligations created
under this Plan.

(c) PARACHUTE PAYMENTS. In the event that the acceleration of the
vesting and exercisability of this option provided for in Section 13 and
benefits otherwise payable to an Optionholder (i) constitute "parachute
payments" within the meaning of Section 280G of the Code, or any comparable
successor provisions, and (ii) but for this subsection would be subject to the
excise tax imposed by Section 4999 of the Code, or any comparable successor
provisions (the "Excise Tax"), then such Optionholder's benefits hereunder shall
be either

(i) provided to such Optionholder in full, or

(ii) provided to such Optionholder as to such lesser
extent which would result in no portion of such
benefits being subject to the Excise Tax,

6.
<PAGE> 9

whichever of the foregoing amounts, when taking into account applicable federal,
state, local and foreign income and employment taxes, the Excise Tax, and any
other applicable taxes, results in the receipt by such Optionholder, on an
after-tax basis, of the greatest amount of benefits, notwithstanding that all or
some portion of such benefits may be taxable under the Excise Tax. Unless the
Company and such Optionholder otherwise agree in writing, any determination
required under this subsection shall be made in writing in good faith by the
independent public accounts of the Company. In the event of a reduction of
benefits hereunder, the Optionholder shall be given the choice of which benefits
to reduce. For purposes of making the calculations required by this subsection,
the accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of the Code, and other applicable legal authority.
The Company and the Optionholder shall furnish to the accountants such
information and documents as the accountants may reasonably request in order to
make a determination under this subsection. The Company shall bear all costs the
accountants may reasonably incur in connection with any calculations
contemplated by this subsection.

If, notwithstanding any reduction described in this subsection,
the IRS determines that the Optionholder is liable for the Excise Tax as a
result of the receipt of the payment of benefits as described above, then the
Optionholder shall be obligated to pay back to the Company, within thirty (30)
days after a final IRS determination or in the event that the Optionholder
challenges the final IRS determination, a final judicial determination, a
portion of the payment equal to the "Repayment Amount." The Repayment Amount
with respect to the payment of benefits shall be the smallest such amount, if
any, as shall be required to be paid to the Company so that the Optionholder's
net after-tax proceeds with respect to any payment of benefits (after taking
into account the payment of the Excise Tax and all other applicable taxes
imposed on such payment) shall be maximized. The Repayment Amount with respect
to the payment of benefits shall be zero if a Repayment Amount of more than zero
would not result in the Optionholder's net after-tax proceeds with respect to
the payment of such benefits being maximized. If the Excise Tax is not
eliminated pursuant to this paragraph, the Optionholder shall pay the Excise
Tax.

Notwithstanding any other provision of this subsection 13(c), if
(i) there is a reduction in the payment of benefits as described in this
subsection, (ii) the IRS later determines that the Optionholder is liable for
the Excise Tax, the payment of which would result in the maximization of the
Optionholder's net after-tax proceeds (calculated as if the Optionholder's
benefits had not previously been reduced), and (iii) the Optionholder pays the
Excise Tax, then the Company shall pay to the Optionholder those benefits which
were reduced pursuant to this subsection contemporaneously or as soon as
administratively possible after the Optionholder pays the Excise Tax so that the
Optionholder's net after-tax proceeds with respect to the payment of benefits is
maximized.

14. NOTICES. Any notices provided for in your option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after deposit
in the United States mail, postage prepaid, addressed to you at the last address
you provided to the Company.

7.
<PAGE> 10

15. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, and is further subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted pursuant to
the Plan. In the event of any conflict between the provisions of your option and
those of the Plan, the provisions of the Plan shall control.

16. RIGHTS UNDER STOCKHOLDERS AGREEMENT. As evidenced by your execution of the
Grant Notice, you agree that you shall, automatically and without further action
on your part, (i) be deemed to be a party to, a signatory of and bound by the
Stockholders Agreement, dated January 21, 1999, between the Company and the
Stockholders listed therein, a copy of which is attached as Attachment IV to the
Grant Notice (the "Stockholders Agreement"), and (ii) be deemed to be a
"Securityholder" for all purposes under the Stockholders Agreement. Your option
and any shares of Common Stock issued pursuant to the exercise of your option
shall be deemed a "Common Stock Equivalent" and "Common Stock," respectively,
under the Stockholders Agreement.

8.
<PAGE> 11

ATTACHMENT II

AMENDED AND RESTATED 1998 EQUITY INCENTIVE PLAN

<PAGE> 12

ATTACHMENT III

NOTICE OF EXERCISE

<PAGE> 13

NOTICE OF EXERCISE

MP3.com
P.O. Box 910091
San Diego, CA 92191-0091 Date of Exercise: _______________

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.

Type of option (check one): Incentive [ ] Nonstatutory [ ]

Stock option dated: _______________

Number of shares as
to which option is
exercised: _______________

Certificates to be
issued in name of: _______________

Total exercise price: $______________

Cash payment delivered
herewith: $______________

By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Amended and Restated 1998 Equity
Incentive Plan, (ii) to provide for the payment by me to you (in the manner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option, and (iii) if this exercise relates to an incentive
stock option, to notify you in writing within fifteen (15) days after the date
of any disposition of any of the shares of Common Stock issued upon exercise of
this option that occurs within two (2) years after the date of grant of this
option or within one (1) year after such shares of Common Stock are issued upon
exercise of this option.

I further agree that, if required by the Company (or a representative of
the underwriters) in connection with the first underwritten registration of the
offering of any securities of the Company under the Securities Act, I will not
sell or otherwise transfer or dispose of any shares of Common Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days) following the effective date of the registration statement of the

1.
<PAGE> 14

Company filed under the Securities Act as may be requested by the Company or the
representative of the underwriters. I further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.

Very truly yours,

___________________________________

<PAGE> 1
EXHIBIT 10.11

MP3.COM, INC.

SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT

June 4, 1999

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
SECTION 1. GENERAL.......................................................................2

1.1 Definitions...................................................................2

SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER........................................3

2.1 Restrictions on Transfer......................................................3

2.2 Demand Registration...........................................................4

2.3 Piggyback Registrations.......................................................5

2.4 Form S-3 Registration.........................................................7

2.5 Expenses of Registration......................................................8

2.6 Obligations of the Company....................................................8

2.7 Termination of Registration Rights............................................9

2.8 Delay of Registration; Furnishing Information................................10

2.9 Indemnification..............................................................10

2.10 Assignment of Registration Rights............................................12

2.11 Amendment of Registration Rights.............................................12

2.12 [Reserved]...................................................................13

2.13 "Market Stand-Off" Agreement; Agreement to Furnish Information...............13

2.14 Rule 144 Reporting...........................................................13

SECTION 3. COVENANTS OF THE COMPANY.....................................................14

3.1 Basic Financial Information and Reporting....................................14

3.2 Inspection Rights............................................................15

3.3 Limits on Access; Confidentiality of Records.................................15

3.4 Reservation of Common Stock..................................................15

3.5 Stock Vesting................................................................15

3.6 Key Man Insurance............................................................16

3.7 Proprietary Information and Inventions Agreement.............................16

3.8 Assignment of Right of First Refusal.........................................16

3.9 Election and Removal of Directors............................................16

3.10 Qualified Small Business.....................................................16

3.11 Termination of Covenants.....................................................17
</TABLE>

i.
<PAGE> 3

TABLE OF CONTENTS
(CONTINUED)

<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
SECTION 4. RIGHTS OF FIRST REFUSAL......................................................17

4.1 Subsequent Offerings.........................................................17

4.2 Exercise of Rights...........................................................17

4.3 Issuance of Equity Securities to Other Persons...............................17

4.4 Sale Without Notice..........................................................18

4.5 Termination and Waiver of Rights of First Refusal............................18

4.6 Transfer of Rights of First Refusal..........................................18

4.7 Excluded Securities..........................................................18

SECTION 5. MISCELLANEOUS................................................................19

5.1 Governing Law................................................................19

5.2 Survival.....................................................................19

5.3 Successors and Assigns.......................................................19

5.4 Entire Agreement.............................................................20

5.5 Severability.................................................................20

5.6 Amendment and Waiver.........................................................20

5.7 Delays or Omissions..........................................................20

5.8 Notices......................................................................20

5.9 Attorneys' Fees..............................................................21

5.10 Titles and Subtitles.........................................................21

5.11 Additional Investors.........................................................21

5.12 Counterparts.................................................................21
</TABLE>

ii.
<PAGE> 4

MP3.COM, INC.

SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT

THIS SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the
"AGREEMENT") is entered into as of the 4th day of June, 1999, by and among
MP3.COM, INC., a Delaware corporation (the "COMPANY"), certain holders of the
Company's Series A Preferred Stock ("SERIES A STOCK") set forth on Exhibit A
hereto (the "SERIES A INVESTORS"), certain holders of the Company's Series B
Preferred Stock ("SERIES B STOCK") set forth on Exhibit B hereto (the "SERIES B
INVESTORS"), certain holders of warrants to purchase the Company's Common Stock
(and holders of Common Stock issued upon exercise of such warrants) set forth on
Exhibit B-1 hereto (the "WARRANTHOLDERS") and the purchaser of the Company's
Series C Preferred Stock ("SERIES C STOCK") purchased pursuant to that certain
Series C Preferred Stock Purchase Agreement, dated May 19, 1999 (the "PURCHASE
AGREEMENT"), as set forth on Exhibit C hereto (the "SERIES C INVESTOR"). The
Series A Investors, the Series B Investors, the Warrantholders and the Series C
Investor shall be referred to hereinafter as the "INVESTORS" and each
individually as an "INVESTOR."

RECITALS

WHEREAS, in connection with the Company's prior sale and issuance of
Series A Preferred Stock, the Company and the Series A Investors previously
entered into an Investor Rights Agreement, dated as of January 21, 1999 and in
connection with the Company's prior sale and issuance of Series B Preferred
Stock, the Company, the Series A Investors and the Series B Investors previously
entered into the Amended and Restated Investor Rights Agreement, dated as of
April 29, 1999 (the "PRIOR AGREEMENT");

WHEREAS, the Company has issued warrants (the "WARRANTS"), dated as of
April 27, 1999, to purchase a total of 439,103 shares of Common Stock of the
Company to the holders set forth on Exhibit B-1;

WHEREAS, the Company proposes to sell and issue 4,182,578 shares of its
Series C Stock pursuant to the Purchase Agreement;

WHEREAS, the Series A Investors, the Series B Investors and the
Warrantholders consent, by their execution of this Agreement, to waive their
rights of first refusal pursuant to Section 4 of the Prior Agreement with
respect to the Series C Preferred; and

WHEREAS, as a condition of entering into the Purchase Agreement, the
Series C Investors have requested that the Company extend to them registration
rights, information rights and other rights as set forth below.

NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Purchase Agreement, the parties hereby amend and restate
the Prior Agreement in its entirety and mutually agree as follows:

1.
<PAGE> 5

SECTION 1. GENERAL

1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:

"AFFILIATE" means, with respect to a person or entity, any other
person or entity directly or indirectly controlling, controlled by or under
common control with such person or entity.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

"FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.

"HOLDER" means any person owning of record Registrable
Securities that have not been sold to the public or any assignee of record of
such Registrable Securities in accordance with Section 2.10 hereof.

"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.

"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.

"REGISTRABLE SECURITIES" means (a) Common Stock of the Company
issued or issuable upon conversion of the Shares; (b) Common Stock issued upon
exercise of the Warrant; and (c) any Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the transferor's
rights under Section 2 of this Agreement are not assigned.

"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.

"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements not
to exceed fifteen thousand dollars ($15,000) of a single special counsel for the
Holders, blue sky fees and expenses and the expense of any special audits

2.
<PAGE> 6

incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).

"RESTATED CERTIFICATE" means the Company's Third Restated
Certificate of Incorporation.

"SEC" or "COMMISSION" means the Securities and Exchange
Commission.

"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.

"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.

"SHARES" shall mean the Company's Series A Stock, Series B Stock
and Series C Stock held by (i) the Investors listed on Exhibit A, Exhibit B and
Exhibit C hereto, respectively, and their permitted assigns or (ii) Investors
made a party to this agreement pursuant to Section 5.11 below and their
permitted assigns.

SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER

2.1 RESTRICTIONS ON TRANSFER.

(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until:

(i) There is then in effect a registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or

(ii) (A) The transferee has agreed in writing to be
bound by the terms of this Agreement, (B) such Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and (C) if reasonably requested by the Company, such Holder shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.

(iii) Notwithstanding the provisions of paragraphs (i)
and (ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder which is (A) a partnership to its partners
or former partners in accordance with partnership interests, (B) a limited
liability company to its members or former members in accordance with their
interest in the limited liability company, (C) to the Holder's family member or
trust for the benefit of an individual Holder, or (D) an Affiliate of Cox
Enterprises, Inc. ("Cox") to any other Affiliate of Cox; provided that in each
case the transferee will be subject to the terms of this Agreement to the same
extent as if he were an original Holder hereunder.

3.
<PAGE> 7

(b) Each certificate representing Shares or Registrable
Securities shall (unless otherwise permitted by the provisions of the Agreement)
be stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws):

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder shall
have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.

(d) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.

2.2 DEMAND REGISTRATION.

(a) Subject to the conditions of this Section 2.2, if the
Company shall receive a written request from the Holders of a majority of the
Registrable Securities then outstanding (the "INITIATING HOLDERS") that the
Company file a registration statement under the Securities Act covering the
registration of at least a majority of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed $5,000,000 (a
"QUALIFIED PUBLIC OFFERING")) then the Company shall, within thirty (30) days of
the receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 2.2, use its best efforts to effect,
as soon as practicable, the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered.

(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.2 or any request pursuant to Section 2.4 and the Company shall
include such information in the written notice referred to in Section 2.2(a) or
Section 2.4(a), as applicable. In such event, the right of any Holder to include
its Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such

4.
<PAGE> 8

underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 2.2 or Section 2.4, if the
underwriter advises the Company that marketing factors require a limitation of
the number of securities to be underwritten (including Registrable Securities)
then the Company shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares that
may be included in the underwriting shall be allocated to the Holders of such
Registrable Securities on a pro rata basis based on the number of Registrable
Securities held by all such Holders (including the Initiating Holders). Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration.

(i) prior to the earlier of (A) December 31, 2002 or (B)
the effective date of the registration statement pertaining to the Initial
Offering;

(ii) after the Company has effected two (2)
registrations pursuant to this Section 2.2, and such registrations have been
declared or ordered effective;

(iii) during the period starting with the date of filing
of, and ending on the date one hundred eighty (180) days following the effective
date of a registration statement pertaining to a public offering; provided that
the Company makes reasonable good faith efforts to cause such registration
statement to become effective;

(iv) if within thirty (30) days of receipt of a written
request from Initiating Holders pursuant to Section 2.2(a), the Company gives
notice to the Holders of the Company's intention to make its Initial Offering
within ninety (90) days;

(v) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 2.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such registration statement to be effected at such time, in
which event the Company shall have the right to defer such filing for a period
of not more than ninety (90) days after receipt of the request of the Initiating
Holders; provided that such right to delay a request shall be exercised by the
Company not more than once in any twelve (12) month period; or

(vi) if the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2.4 below.

2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all
Holders of Registrable Securities in writing at least thirty (30) days prior to
the filing of any registration statement under the Securities Act for purposes
of a public offering of securities of the Company (including, but not limited
to, registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with

5.
<PAGE> 9

respect to corporate reorganizations or other transactions under Rule 145 of the
Securities Act) and will afford each such Holder an opportunity to include in
such registration statement all or part of such Registrable Securities held by
such Holder. Each Holder desiring to include in any such registration statement
all or any part of the Registrable Securities held by it shall, within twenty
(20) days after the above-described notice from the Company, so notify the
Company in writing. Such notice shall state the intended method of disposition
of the Registrable Securities by such Holder. If a Holder decides not to include
all of its Registrable Securities in any registration statement thereafter filed
by the Company, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.

(a) UNDERWRITING. If the registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; second, to the Holders on a pro rata
basis based on the total number of Registrable Securities held by the Holders;
and third, to any stockholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall (i) reduce the securities being offered by the
Company for its own account to be included in the registration and underwriting
or (ii) reduce the amount of securities of the selling Holders included in the
registration below twenty-five percent (25%) of the total amount of securities
included in such registration, unless such offering is the Initial Offering and
such registration does not include shares of any other selling shareholders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. In no event will
shares of any other selling stockholder included in such registration reduce the
number of shares which may be included by Holders without the written consent of
Holders of not less than sixty-six and two-thirds percent (66 2/3%) of the
Registrable Securities proposed to be sold in the offering. If any Holder
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired partners and
stockholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "HOLDER", and any pro rata
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.

6.
<PAGE> 10

(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.5 hereof.

2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 or any similar short-form
registration statement and any related qualification or compliance with respect
to all or a part of the Registrable Securities owned by such Holder or Holders,
the Company will:

(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and

(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within twenty (20) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 2.4:

(i) if Form S-3 (or any successor or similar form) is
not available for such offering by the Holders, or

(ii) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than five hundred thousand dollars
($500,000), or

(iii) after the Company has effected two (2)
registrations pursuant to this Section 2.4 and such registrations have been
declared effective; or

(iv) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would not be in the best interests of the Company and its
stockholders for such Form S-3 registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than ninety (90) days after
receipt of the request of the Holder or Holders under this Section 2.4;
provided, that such right to delay a request shall be exercised by the Company
not more than once in any twelve (12) month period, or

(v) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected one (1) registration
on Form S-3 for the Holders pursuant to this Section 2.4, or

7.
<PAGE> 11

(vi) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process (other than as required under the Securities Act) in
effecting such registration, qualification or compliance.

(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 2.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 2.2 or 2.3, respectively.

2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein,
all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 2.2 or
2.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
agree to forfeit their right to one requested registration pursuant to Section
2.2 or Section 2.4, as applicable, in which event such right shall be forfeited
by all Holders). If the Holders are required to pay the Registration Expenses,
such expenses shall be borne by the holders of securities (including Registrable
Securities) requesting such registration in proportion to the number of shares
for which registration was requested. If the Company is required to pay the
Registration Expenses of a withdrawn offering pursuant to clause (a) above, then
the Holders shall not forfeit their rights pursuant to Section 2.2 or Section
2.4 to a demand registration.

2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:

(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days or, if earlier,
until the Holder or Holders have completed the distribution related thereto. The
Company shall not be required to file, cause to become effective or maintain the
effectiveness of any registration statement that contemplates a distribution of
securities on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act.

(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.

8.
<PAGE> 12

(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.

(h) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration.

(i) Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.

2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted
under this Section 2 shall terminate and be of no further force and effect seven
(7) years after the date of the Company's Initial Offering. In addition, a
Holder's registration rights shall expire if all Registrable Securities held by
and issuable to such Holder (and its Affiliates, partners, former partners,
members and former members) may be sold without limitation under Rule 144 during
any ninety (90) day period.

9.
<PAGE> 13

2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.

(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.

(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.

(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 2.2 or Section 2.4 if, due to the
operation of subsection 2.2(b), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 2.2 or Section 2.4,
whichever is applicable.

2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:

(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act or the Exchange Act, against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will pay as incurred to
each such Holder, partner, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 2.9(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for

10.
<PAGE> 14

use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.

(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 2.9(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall the
aggregate indemnity under this Section 2.9 exceed the net proceeds from the
offering received by such Holder.

(c) Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.9.

11.
<PAGE> 15

(d) If the indemnification provided for in this Section 2.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall the aggregate
contributions by a Holder hereunder exceed the net proceeds from the offering
received by such Holder.

(e) The obligations of the Company and Holders under this
Section 2.9 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this Agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.

2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 2 may be assigned by
a Holder to a transferee or assignee of Registrable Securities which (a) is a
general partner, limited partner, retired partner, member or retired member of a
Holder, (b) is a Holder's family member or trust for the benefit of an
individual Holder, (c) acquires at least five hundred thousand (500,000) shares
of Registrable Securities (as adjusted for stock splits and combinations), (d)
with respect to Cox Interactive Media, Inc., an Affiliate of Cox, or (e) with
respect to Atlas/Third Rail Management, Inc. ("Atlas"), is an employee, officer
or Affiliate (including Thomas Spiegel) thereof or an artist represented
thereby; provided, that Atlas shall not have the right hereby to transfer its
rights pursuant to this Section 2 to any person or entity engaged, directly or
indirectly, in the business of digital distribution of music over the Internet
or in any other electronic medium, where such business generates greater than $1
million per year in revenues; and provided further, (i) the transferor shall,
within twenty (20) days after such transfer, furnish to the Company written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned and (ii) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.

2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this Section 2.11 shall be binding upon each Holder and the

12.
<PAGE> 16

Company. By acceptance of any benefits under this Section 2, Holders of
Registrable Securities hereby agree to be bound by the provisions hereunder.

2.12 [RESERVED]

2.13 "MARKET STAND-OFF" AGREEMENT; AGREEMENT TO FURNISH INFORMATION.
Each Holder hereby agrees that such Holder shall not sell, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any Common Stock
(or other securities) of the Company held by such Holder (other than those
included in the registration and other than a transfer to an Affiliate of such
Holder if such Affiliate agrees to be bound by the terms hereof) for a period
specified by the representative of the underwriters of Common Stock (or other
securities) of the Company not to exceed one hundred eighty (180) days following
the effective date of a registration statement of the Company filed under the
Securities Act; provided that:

(i) such agreement shall apply only to the Company's
Initial Offering; and

(ii) all executive officers and directors of the Company
enter into similar agreements.

Each Holder agrees to execute and deliver such other agreements as may
be reasonably requested by the Company or the underwriter which are consistent
with the foregoing or which are necessary to give further effect thereto. In
addition, if requested by the Company or the representative of the underwriters
of Common Stock (or other securities) of the Company, each Holder shall provide,
within ten (10) days of such request, such information as may be required by the
Company or such representative in connection with the completion of any public
offering of the Company's securities pursuant to a registration statement filed
under the Securities Act. The obligations described in this Section 2.13 shall
not apply to a registration relating solely to employee benefit plans on Form
S-1 or Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.

2.14 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:

(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;

(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act; and

13.
<PAGE> 17

(c) So long as a Holder owns any Registrable Securities, furnish
to such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become subject
to such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as a Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.

SECTION 3. COVENANTS OF THE COMPANY

3.1 BASIC FINANCIAL INFORMATION AND REPORTING.

(a) The Company will maintain true books and records of account
in which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.

(b) As soon as practicable after the end of each fiscal year of
the Company, and in any event within one hundred twenty (120) days thereafter,
the Company will furnish each Investor a balance sheet of the Company, as at the
end of such fiscal year, and a statement of income and a statement of cash flows
of the Company, for such year, all prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail. Such financial statements shall be accompanied by a report
and opinion thereon by independent public accountants of national standing
selected by the Company's Board of Directors.

(c) The Company will furnish each Investor, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, a balance sheet of the Company as of the end of each such
quarterly period, and a statement of income and a statement of cash flows of the
Company for such period and for the current fiscal year to date, prepared in
accordance with generally accepted accounting principles, with the exception
that no notes need be attached to such statements and year-end audit adjustments
may not have been made.

(d) So long as an Investor (with its Affiliates) shall own not
less than five hundred thousand (500,000) shares of Registrable Securities (as
adjusted for stock splits and combinations) (a "MAJOR INVESTOR"), the Company
will furnish each such Major Investor (i) at least thirty (30) days prior to the
beginning of each fiscal year an annual budget and operating plans for such
fiscal year (and as soon as available, any subsequent revisions thereto); and
(ii) as soon as practicable after the end of each month, and in any event within
twenty (20) days thereafter, a balance sheet of the Company as of the end of
each such month, and a statement of income and a statement of cash flows of the
Company for such month and for the current fiscal year to date, including a
comparison to plan figures for such period, prepared in accordance with
generally accepted accounting principles consistently applied, with the
exception that no notes need be attached to such statements and year-end audit
adjustments may not have been made.

14.
<PAGE> 18

(e) So long as any Series B Investor (with its Affiliates) owns
any shares of Registrable Securities, the Company will furnish to three (3)
Investors appointed by Atlas (as designated in writing to the Company) (i) at
least thirty (30) days prior to the beginning of each fiscal year an annual
budget and operating plans for such fiscal year (and as soon as available, any
subsequent revisions thereto); and (ii) as soon as practicable after the end of
each month, and in any event within twenty (20) days thereafter, a balance sheet
of the Company as of the end of each such month, and a statement of income and a
statement of cash flows of the Company for such month and for the current fiscal
year to date, including a comparison to plan figures for such period, prepared
in accordance with generally accepted accounting principles consistently
applied, with the exception that no notes need be attached to such statements
and year end audit adjustments may not have been made; provided, however, that
after the termination of that certain Consulting Agreement (the "Consulting
Agreement") between the Company and Atlas, dated as of April 19, 1999, Investors
who are holders of Registrable Securities issued or issuable upon conversion of
Series B Stock, or upon exercise of the Warrants, shall only be furnished with
balance sheets and statements of income pursuant to this subsection (e).

3.2 INSPECTION RIGHTS. Each Investor shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, and to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, and to review such information as is reasonably
requested all at such reasonable times and as often as may be reasonably
requested; provided, however, that the Company shall not be obligated under this
Section 3.2 (i) with respect to a competitor of the Company, (ii) with respect
to information which the Board of Directors determines in good faith is
confidential and should not, therefore, be disclosed, and (iii) with respect to
Series B Investors upon termination of the Consulting Agreement.

3.3 LIMITS ON ACCESS; CONFIDENTIALITY OF RECORDS. With respect to each
Investor holding less than 750,000 shares of Registrable Securities in the
aggregate (as adjusted for stock splits and combinations), each such Investor
agrees that its rights under Sections 3.1 and 3.2 above shall be subject to such
limitations and restrictions as the Board of Directors of the Company in good
faith determines to be necessary or appropriate for the protection of the
Company's business or proprietary interests from competitive harm. Each Investor
agrees to use, and to use its best efforts to insure that its authorized
representatives use, the same degree of care as such Investor uses to protect
its own confidential information to keep confidential any information furnished
to it which the Company identifies as being confidential or proprietary (so long
as such information is not in the public domain), except that such Investor may
disclose such proprietary or confidential information to any partner, subsidiary
or parent of such Investor for the purpose of evaluating its investment in the
Company as long as such partner, subsidiary or parent is advised of the
confidentiality provisions of this Section 3.3.

3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Preferred Stock and exercise of the Warrants, all Common Stock issuable from
time to time upon such conversion.

3.5 STOCK VESTING. Unless otherwise approved by the Board of Directors
(including those directors elected or appointed by the holders of Series A
Stock), all stock options and other stock equivalents issued after the date of
this Agreement to employees, directors, consultants and

15.
<PAGE> 19

other service providers shall be subject to vesting as follows: (a) twenty-five
percent (25%) of such stock shall vest at the end of the first year following
the earlier of the date of issuance or the date of commencement of such person's
services to the Company, and (b) seventy-five percent (75%) of such stock shall
vest monthly over the remaining three (3) years thereafter. With respect to any
shares of stock purchased by any such person, the Company's repurchase option
shall provide that upon such person's termination of employment or service with
the Company, with or without cause, the Company or its assignee (to the extent
permissible under applicable securities laws and other laws) shall have the
option to purchase at cost any unvested shares of stock held by such person.

3.6 KEY MAN INSURANCE. The Company will use its best efforts to maintain
in full force and effect term life insurance in the amount of one million
($1,000,000) dollars on the life of Michael Robertson, naming the Company as
beneficiary.

3.7 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall
require all employees and consultants to execute and deliver the Company's
standard Proprietary Information and Inventions Agreement.

3.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. In the event the Company
elects not to exercise any right of first refusal or right of first offer the
Company may have on a proposed transfer of any of the Company's outstanding
capital stock pursuant to the Company's charter documents, by contract or
otherwise, the Company shall, to the extent it may do so, assign such right of
first refusal or right of first offer to each Investor. In the event of such
assignment, each Investor shall have a right to purchase its pro rata portion
(as defined in Section 4.1) of the capital stock proposed to be transferred.

3.9 ELECTION AND REMOVAL OF DIRECTORS. In the event that the holders of
at least a majority of the then outstanding shares of Common Stock, the holders
of at least a majority of the then outstanding shares of Series A Stock, or the
holders of at least a majority of the then outstanding shares of Series C Stock,
respectively, notify the Company that an individual has been designated to serve
as a director which the holders of Common Stock, Series A Stock or Series C
Stock, respectively, are entitled to elect under Section E.2(c) of Article IV of
the Restated Certificate, the Company shall take such actions as may be
necessary to ensure that such individual is duly appointed or elected as a
director of the Company. In the event that the holders of at least a majority of
the then outstanding shares of Common Stock, the holders of at least a majority
of the then outstanding shares of Series A Stock, or the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock,
respectively, notify the Company that they desire to remove a director which the
holders of Common Stock, Series A Stock or Series C Stock, respectively, are
entitled to remove under Section E.2(c) of Article IV of the Restated
Certificate, the Company shall take such actions as may be necessary to ensure
that such individual is removed as a director of the Company.

3.10 QUALIFIED SMALL BUSINESS. The Company will use reasonable efforts
to comply with the reporting and recordkeeping requirements of Section 1202 of
the Internal Revenue Code, and any regulations promulgated thereunder and any
similar state laws and regulations and agrees not to repurchase any stock of the
Company from any stockholder other than Sequoia Capital or its Affiliates if
such repurchase would cause the Shares not to so qualify as "Qualified

16.
<PAGE> 20

Small Business Stock," unless such a repurchase is approved by the Company's
Board of Directors (including the approval of at least one member of the Board
of Directors designated by the Series A Preferred Stock holders, if such a
Director exists).

3.11 TERMINATION OF COVENANTS. All covenants of the Company contained in
Section 3 of this Agreement shall expire and terminate as to each Investor upon
the earlier of (i) the effective date of the registration statement pertaining
to the Initial Offering or (ii) upon (a) the sale, lease or other disposition of
all or substantially all of the assets of the Company or (b) an acquisition of
the Company by another corporation or entity by consolidation, merger or other
reorganization in which the holders of the Company's outstanding voting stock
immediately prior to such transaction own, immediately after such transaction,
securities representing less than fifty percent (50%) of the voting power of the
corporation or other entity surviving such transaction (each a "CHANGE IN
CONTROL").

SECTION 4. RIGHTS OF FIRST REFUSAL

4.1 SUBSEQUENT OFFERINGS. Each Major Investor, each Series B Investor
and each Warrantholder (each, a "Right of First Refusal Investor") shall have a
right of first refusal to purchase its pro rata share of all Equity Securities,
as defined below, that the Company may, from time to time, propose to sell and
issue after the date of this Agreement, other than the Equity Securities
excluded by Section 4.7 hereof. Each Investor's pro rata share is equal to the
ratio of (a) the number of shares of the Company's Common Stock (including all
shares of Common Stock issued or issuable upon conversion of the Shares or upon
exercise of the Warrants) which such Investor is deemed to be a holder of
immediately prior to the issuance of such Equity Securities to (b) the total
number of shares of the Company's outstanding Common Stock (including all shares
of Common Stock issued or issuable upon conversion of the Shares or upon the
exercise of any outstanding warrants or options) immediately prior to the
issuance of the Equity Securities. The term "EQUITY SECURITIES" shall mean (i)
any Common Stock, Preferred Stock or other security of the Company, (ii) any
security convertible, with or without consideration, into any Common Stock,
Preferred Stock or other security (including any option to purchase such a
convertible security), (iii) any security carrying any warrant or right to
subscribe to or purchase any Common Stock, Preferred Stock or other security or
(iv) any such warrant or right.

4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Right of First Refusal Investor written notice of
its intention, describing the Equity Securities, the price and the terms and
conditions upon which the Company proposes to issue the same. Each Right of
First Refusal Investor shall have twenty (20) days from the giving of such
notice to agree to purchase its pro rata share of the Equity Securities for the
price and upon the terms and conditions specified in the notice by giving
written notice to the Company and stating therein the quantity of Equity
Securities to be purchased. Notwithstanding the foregoing, the Company shall not
be required to offer or sell such Equity Securities to any Right of First
Refusal Investor who would cause the Company to be in violation of applicable
federal securities laws by virtue of such offer or sale.

4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the Right of
First Refusal Investors fail to exercise in full the rights of first refusal,
the Company shall have ninety (90)

17.
<PAGE> 21

days thereafter to sell the Equity Securities in respect of which the Right of
First Refusal Investors' rights were not exercised, at a price and upon general
terms and conditions materially no more favorable to the purchasers thereof than
specified in the Company's notice to the Right of First Refusal Investors
pursuant to Section 4.2 hereof. If the Company has not sold such Equity
Securities within ninety (90) days of the notice provided pursuant to Section
4.2, the Company shall not thereafter issue or sell any Equity Securities,
without first offering such securities to the Right of First Refusal Investors
in the manner provided above.

4.4 SALE WITHOUT NOTICE. In lieu of giving notice to the Right of First
Refusal Investors prior to the issuance of Equity Securities as provided in
Section 4.2, the Company may elect to give notice to the Right of First Refusal
Investors within thirty (30) days after the issuance of Equity Securities. Such
notice shall describe the type, price and terms of the Equity Securities. Each
Right of First Refusal Investor shall have twenty (20) days from the date of
receipt of such notice to elect to purchase its pro rata share of Equity
Securities (as defined in Section 4.1, and calculated before giving effect to
the sale of the Equity Securities to the purchasers thereof). The closing of
such sale shall occur within sixty (60) days of the date of notice to the Right
of First Refusal Investors.

4.5 TERMINATION AND WAIVER OF RIGHTS OF FIRST REFUSAL. The rights of
first refusal established by this Section 4 shall not apply to, and shall
terminate upon the earlier of (i) with respect to the Major Investors, the
effective date of the registration statement pertaining to an Initial Offering
that results in the Preferred Stock being converted into Common Stock or, with
respect to the Series B Investors and the Warrantholders, the effective date of
the registration statement pertaining to an Initial Offering that results in the
Preferred Stock being converted into Common Stock and the offer and sale of
Common Stock at a price per share of at least $8.54 (as adjusted for stock
splits, dividends, recapitalizations and the like) or (ii) a Change in Control.
The rights of first refusal established by this Section 4 may be amended, or any
provision waived with the written consent of Right of First Refusal Investors
holding a majority of the Registrable Securities held by all Right of First
Refusal Investors, or as permitted by Section 5.6.

4.6 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of
each Right of First Refusal Investor under this Section 4 may be transferred to
the same parties, subject to the same restrictions as any transfer of
registration rights pursuant to Section 2.10.

4.7 EXCLUDED SECURITIES. The rights of first refusal established by this
Section 4 shall have no application to any of the following Equity Securities:

(a) up to an aggregate amount of 8,500,000 shares of Common
Stock (and/or options, warrants or other Common Stock purchase rights issued
pursuant to such options, warrants or other rights) as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like issued or to be
issued after the Original Issue Date (as defined in the Company's Certificate of
Incorporation) to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors
of the Company;

(b) stock issued pursuant to any rights, agreements, options and
warrants outstanding as of the date of this Agreement; and stock issued pursuant
to any such rights,

18.
<PAGE> 22

agreements, options and warrants granted after the date of this Agreement,
provided that the rights of first refusal established by this Section 4 applied
with respect to the initial sale or grant by the Company of such rights or
agreements;

(c) any Equity Securities issued for consideration other than
cash pursuant to a merger, consolidation, acquisition or similar business
combination approved by the Board of Directors;

(d) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;

(e) the Warrants, the Shares or the shares of Common Stock
issued upon conversion of the Shares or exercise of the Warrants;

(f) any Equity Securities issued pursuant to any equipment
leasing or loan arrangement, or any debt financing from a bank or similar
financial or lending institution;

(g) any Equity Securities that are issued by the Company
pursuant to a registration statement filed under the Securities Act; and

(h) shares of the Company's Common Stock or Preferred Stock
issued in connection with strategic transactions involving the Company and other
entities, including (i) joint ventures, manufacturing, marketing or distribution
arrangements or (ii) technology transfer or development arrangements; provided
that such strategic transactions and the issuance of shares therein, has been
approved by the Company's Board of Directors.

4.8 WAIVER WITH RESPECT TO SERIES C PREFERRED STOCK. The Series A
Holders, Series B Holders and the Warrantholders consent, by their execution of
this Agreement, to waive their rights of first refusal pursuant to Section 4 of
the Prior Agreement with respect to the Series C Preferred and also agree to
waive their rights of first refusal to the extent necessary to permit the
Purchaser to exercise its rights pursuant to this Section 4 as set forth in
Section 3.26 of that certain Series C Preferred Stock Purchase Agreement dated
May 19, 1999 between the Company and the Series C Investor.

SECTION 5. MISCELLANEOUS

5.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.

5.2 SURVIVAL. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.

19.
<PAGE> 23

5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.

5.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto,
the Purchase Agreement and the other documents delivered pursuant thereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein. The Company and a majority
of the Series A Investors, hereby agree, as evidenced by their signatures
hereto, that all rights granted and covenants made under the Prior Agreement are
hereby waived, released and terminated in their entirety and shall have no
further force or effect whatsoever. The rights and covenants provided herein set
forth the sole and entire agreement between the parties hereto with respect to
the subject matter hereof.

5.5 SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

5.6 AMENDMENT AND WAIVER.

(a) Except as otherwise expressly provided, this Agreement may
be amended or modified only upon the written consent of the Company and the
holders of at least a majority of then outstanding Registrable Securities.

(b) Except as otherwise expressly provided, the obligations of
the Company and the rights of the Holders under this Agreement may be waived
only with the written consent of the holders of at least a majority of then
outstanding Registrable Securities.

5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.

20.
<PAGE> 24

5.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one (1) day after deposit with
a nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address as set forth on the signature pages hereof or
Exhibit A, Exhibit B or Exhibit C hereto or at such other address as such party
may designate by ten (10) days advance written notice to the other parties
hereto.

5.9 ATTORNEYS' FEES. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

5.10 TITLES AND SUBTITLES. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.

5.11 ADDITIONAL INVESTORS. Notwithstanding anything to the contrary
contained herein, if the Company shall issue additional shares of its Preferred
Stock pursuant to the Purchase Agreement, any purchaser of such shares of
Preferred Stock may become a party to this Agreement by executing and delivering
an additional counterpart signature page to this Agreement and shall be deemed
an "INVESTOR" hereunder.

5.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

21.
<PAGE> 25

IN WITNESS WHEREOF, the parties hereto have executed this SECOND AMENDED
AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first
paragraph hereof.

COMPANY:

MP3.COM, INC.

By: /s/ Robin Richards
---------------------------------
Name: Robin Richards
Title: President and Chief Operating
Officer

Address: 10350 Science Center Drive
Building No. 14
San Diego, CA 92121

<PAGE> 26

INVESTORS:

SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII
SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS VIII (Q)

By: SC VIII Management, LLC
A California Limited Liability Company
its General Partner

By: /s/ MARK STEVENS
--------------------------------
Name: Mark Stevens
------------------------------
Title: Managing Member

Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025

CMS PARTNERS LLC
SEQUOIA 1997

By: /s/ MARK STEVENS
--------------------------------
Name: Mark Stevens
------------------------------
Title: Partner
-----------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025

<PAGE> 27

IDEALAB! CAPITAL PARTNERS I-A, L.P.

By: idealab! Capital Management I, LLC,
its General Partner

By:_________________________________
Name: William S. Elkus
Title: Managing Member

Address: 130 West Union Street
Pasadena, CA 91103

IDEALAB! CAPITAL PARTNERS I-B, L.P.

By: idealab! Capital Management I, LLC,
its General Partner

By:_________________________________
Name: William S. Elkus
Title: Managing Member

Address: 130 West Union Street
Pasadena, CA 91103

GC&H INVESTMENTS

By:_________________________________
Name: John L. Cardoza
Title: Executive Partner

Address: c/o Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA
94111-3580

<PAGE> 28

STANFORD UNIVERSITY

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

PSERD TRUST DATED 3/11/86

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

BURCHAM COMMUNITY PROPERTY
TRUST DATED 5/23/90

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

TIMARK L.P.

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

<PAGE> 29

____________________________________
SCOTT TAYLOR SMITH

Address:____________________________
____________________________

GETTING THERE, LLC

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

BERG FAMILY TRUST DATED 1/17/89

By:_________________________________
Name:_______________________________
Title:______________________________

Address:____________________________
____________________________

SCOTT M. HARVEY

Address:____________________________
____________________________

<PAGE> 30

ATLAS/THIRD RAIL MANAGEMENT, INC.

By:_________________________________
Name:_______________________________
Title:______________________________
9169 Sunset Blvd.
Los Angeles, CA 90069
Attn: Dennis Gore

DENNIS GORE

____________________________________
2044 Coldwater Canyon Drive
Beverly Hills, CA 90210

THE COLUMBIA CHARITABLE FOUNDATION

By:_________________________________
Name:_______________________________
Title:______________________________

9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Thomas Spiegel, Chairman

ALANIS MORISSETTE

____________________________________
121 D West Prarie Avenue #381
Hayden, ID 83835

CHARLES V. ROVEN

____________________________________
9169 Sunset Boulevard
Los Angeles, CA 90069

<PAGE> 31

THE STEEL ROVEN EXEMPTION TRUST

By:_________________________________
Name:_______________________________
Title:______________________________
9169 Sunset Boulevard
Los Angeles, CA 90069
Attn: Charles V. Roven

SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO EVAN SPIEGEL, HELENE SPIEGEL TRUSTEE

By:_________________________________
Name:_______________________________
Title:______________________________
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel

SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO ANTHONY SPIEGEL, HELENE SPIEGEL TRUSTEE

By:_________________________________
Name:_______________________________
Title:______________________________
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel

BANK STREET PARTNERS

By:_________________________________
Name:_______________________________
Title:______________________________
15 Bank Street
San Anselmo, CA 94960
Attn: Jay Martin, General Partner

<PAGE> 32

KENNY WELCH

__________________________________
20 Newport Drive
Princeton Junction, NJ 08550

HENRY WELCH

__________________________________
38109 Greywalle Drive
Murrieta , CA 92562

RAY WRIGHT

__________________________________
1826 3rd Street
Manhattan Beach, CA 90266

BRIAN MCLAUGHLIN

__________________________________
1510 Anden Way, Suite 305
Sacramento, CA 95615

MIHAELA EVANS

__________________________________
2400 South Hayden Lake Road
Hayden, ID 83835

LESTER KNISPEL

__________________________________
16130 Ventura Boulevard, No. 550
Encino, CA 91436

<PAGE> 33

SCOTT WELCH

__________________________________
1417 2nd Street
Manhattan Beach, CA 90266

COX INTERACTIVE MEDIA, INC.

By: /s/ DAVID E. EASTERLY
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address:
---------------------------

<PAGE> 34

EXHIBIT A

SCHEDULE OF SERIES A INVESTORS

Sequoia Capital VIII

Sequoia International Technology Partners VIII

Sequoia International Technology Partners VIII (Q)

CMS Partners LLC

Sequoia 1997

idealab! Capital Partners I-A, L.P.

idealab! Capital Partners I-B, L.P.

GC&H Investments

Stanford University

PSERD Trust dated 3/11/86

Burcham Community Property Trust dated 5/23/90

Timark L.P.

Scott Taylor Smith

Getting There, LLC

Berg Family Trust dated 1/17/89

Scott M. Harvey

<PAGE> 35

EXHIBIT B

SCHEDULE OF SERIES B INVESTORS

Dennis Gore

The Columbia Charitable Foundation

Alanis Morissette

Charles V. Roven

The Steel Roven Exemption Trust

Spiegel 1982 Grandchildren's Trust
FBO Evan Spiegel, Helene Spiegel Trustee

Spiegel 1982 Grandchildren's Trust
FBO Anthony Spiegel, Helene Spiegel Trustee

Bank Street Partners

Kenny Welch

Henry Welch

Ray Wright

Brian McLaughlin

Mihaela Evans

Lester Knispel

Scott Welch

<PAGE> 36

EXHIBIT B-1

SCHEDULE OF WARRANTHOLDERS

Alanis Morissette

Rebecca Mostow

Charles V. Roven

The Steel Roven Exemption Trust

Thomas Spiegel 1982 Trust

Charles Scott Welch

Atlas/Third Rail Management, Inc.

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EXHIBIT C

SCHEDULE OF SERIES C INVESTOR

Cox Interactive Media, Inc.