MP3 COM INC, 424B4, 1999-07-21

MP3 COM INC
424B4, 1999-07-21
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE> 1
This filing is made pursuant to Rule 424(b)(4)
under the Securities Act of 1933 in connection
with Registration No. 333-78545 and
Registration No. 333-83333

12,347,233 Shares

[MP3 LOGO]

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

Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "MPPP."

Of the 12,347,233 shares for sale in this offering, we have offered
3,347,233 shares to Arkaro Holding B.V., a subsidiary of Groupe Arnault, which
has expressed an interest in acquiring shares of our common stock. If this offer
is accepted, we would sell these shares directly to Arkaro Holding B.V. at the
initial public offering price as part of an agreement we have signed with them.
As a result, we are offering 9,000,000 shares for sale to the public through the
underwriters. See "Underwriting."

In addition, at our request, the underwriters have reserved up to 1,850,000
shares of common stock for sale at the initial public offering price to artists
and customers of MP3.com, consultants and others with whom we do business,
existing stockholders and friends of MP3.com. These shares are part of the
9,000,000 shares that will be issued through the underwriters. 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.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE COMMISSIONS MP3.COM
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per share to be issued through the underwriters...... $28.00 $1.96 $26.04
Per share offered to Arkaro Holding B.V. ............ $28.00 $0 $28.00
Total................................................ $345,722,524 $17,640,000 $328,082,524
</TABLE>

Delivery of the shares of common stock will be made on or about July 26,
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., INC.

The date of this prospectus is July 21, 1999.

<PAGE> 2

DESCRIPTION OF INSIDE-COVER ARTWORK

PANEL ONE

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

There is 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 6,000,000 visitors per month.

- 44,000,000 songs delivered online.

- A database of over 3,900,000 music lovers.

- Music from over 18,000 artists, with 100's more 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.
<PAGE> 3

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
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.............................. 30
</TABLE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT............................ 45
RELATED-PARTY TRANSACTIONS............ 52
PRINCIPAL STOCKHOLDERS................ 53
DESCRIPTION OF CAPITAL STOCK.......... 55
SHARES ELIGIBLE FOR FUTURE SALE....... 57
UNDERWRITING.......................... 59
NOTICE TO CANADIAN RESIDENTS.......... 61
LEGAL MATTERS......................... 62
EXPERTS............................... 62
ADDITIONAL INFORMATION................ 62
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>

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

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 AUGUST 14, 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> 4

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 100,000 songs from over 18,000 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.

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.

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 this year, our growth has been dramatic.
The number of our employees increased from eight on December 31, 1998, to 142 on
June 30, 1999. In June 1999, we added over 125 artists and 660 new songs on
average each day. During June 1999, visitors to our website viewed over 57
million webpages, listened to or downloaded over 10 million songs and conducted
over 5.5 million music searches.

We recently formed several strategic relationships that we believe will
help increase our music content, brand awareness and electronic commerce
opportunities. In July 1999, Groupe Arnault agreed to purchase an aggregate of
$150 million in advertising, promotion and marketing services from us over the
next three years. Groupe Arnault is a French corporation with interests in
diverse companies such as LVMH Moet Hennessy Louis Vuitton and others. Groupe
Arnault will also have an exclusive right for 90 days after this offering to
negotiate the terms of a joint venture with us covering the territories of
Europe and Asia. In a separate agreement, we have offered Arkaro Holding B.V., a
subsidiary of Groupe Arnault, the opportunity to purchase shares of our common
stock directly from us in this offering totaling five percent of our outstanding
capital stock after the offering. In June 1999, Cox Interactive Media, Inc.
invested $45 million in us and formed a joint venture with us that will focus on
providing downloadable music for affiliated radio stations across the U.S. 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.

3
<PAGE> 5

THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Common stock offered......................... 12,347,233 shares
Common stock to be outstanding after the
offering................................... 66,637,623 shares
Shares offered to Arkaro Holding B.V. ....... We have offered 3,347,233 of the shares for
sale in this offering to Arkaro Holding B.V.,
a subsidiary of Groupe Arnault. If this offer
is accepted, we would sell these shares
directly to Arkaro Holding B.V. As a result,
we will offer 9,000,000 shares for sale to
the public through the underwriters.
Directed shares.............................. At our request, the underwriters have
reserved up to 1,850,000 shares of common
stock offered for sale at the initial public
offering price to artists and customers of
MP3.com, consultants and others with whom we
do business, existing stockholders and
friends of MP3.com. 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."
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 July 15, 1999 and
gives effect to the three-for-two split in our common stock that occurred on
July 16, 1999. It also includes 89,285 shares to be issued to Boutit, Inc. in a
private placement concurrent with the closing of this offering and 3,347,233
shares to be issued to Arkaro Holding B.V. assuming it accepts our offer to
purchase these shares directly from us in this offering. However, it does not
include 7,913,813 shares of common stock reserved under our stock benefit plans,
of which 4,967,613 shares were covered by outstanding options at a weighted
average exercise price of $1.20 per share as of July 15, 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 3% of our stock after the offering include the following:

<TABLE>
<CAPTION>
OWNERSHIP
STOCKHOLDER POST-OFFERING
----------- -------------
<S> <C>
Michael L. Robertson........................................ 38.0%
Entities affiliated with Sequoia Capital.................... 14.5%
Cox Interactive Media, Inc. ................................ 9.4%
Arkaro Holding B.V. ........................................ 5.0%
Robin D. Richards........................................... 3.2%
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."

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.

4
<PAGE> 6

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.

<TABLE>
<CAPTION>
AT MARCH 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 9,327,149 $108,571,895 $435,054,419
Working capital............................................ 9,146,989 100,027,068 426,509,592
Total assets............................................... 11,245,608 115,292,354 441,774,878
Total stockholders' equity................................. 10,359,317 69,406,063 395,888,587
</TABLE>

- ---------------
(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 (giving effect to the three-for-two common stock split);

- the conversion of 1,000,000 shares of convertible Series A preferred
stock issued during April 1999 for $2,000,000 into 1,500,000 shares of
common stock (giving effect to the three-for-two common stock split);

- the conversion of 100,000 shares of convertible Series A preferred
stock issued in April 1999 for $200,000 with a deemed fair value of
$569,000 (the $369,000 difference will be charged to expense during the
second quarter of 1999) into 150,000 shares of common stock (giving
effect to the three-for-two common stock split);

- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 for $2,498,496 into 658,653 shares of
common stock (giving effect to the three-for-two common stock split);

- the conversion of 4,182,578 shares of Series C preferred stock issued
during June 1999 for $45,004,539 into 6,273,867 shares of common stock
(giving effect to the three-for-two common stock split);

- the three-for-two split in our common stock that occurred on July 16,
1999;

- the issuance and exercise of warrants to purchase 658,653 shares of
common stock for $219,551 with a deemed fair value of $2,191,000;

- the exercise of stock options to purchase 2,417,437 shares of common
stock for $4,322,160 from April 1, 1999 to July 15, 1999;

- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000;

- 89,285 shares of common stock that we will issue in a private placement
as part of our agreement with Boutit, Inc. entered into on May 12, 1999
for a deemed fair value of $2,500,000;

- our donation of 100,000 shares of common stock to the MP3.com
Foundation with a deemed fair value of approximately $767,000; and

- our receipt in July 1999 of a $45,000,000 advance payment from Groupe
Arnault for advertising, promotion and marketing services to be
provided in the fourth quarter of 1999 and the year 2000.

See Note 6 of Notes to Financial Statements.

(3) The As Adjusted column reflects our receipt of the net proceeds from the
offering after deducting estimated underwriting discounts and commissions
and estimated offering expenses. See "Capitalization" and "Use of Proceeds."

5
<PAGE> 7

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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<PAGE> 8

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 88% from December 1998 to
June 1999. Our number of employees increased from eight on December 31, 1998 to
142 on June 30, 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.

A SUBSTANTIAL PORTION OF OUR REVENUES AND REVENUE GROWTH FOR AT LEAST THE NEXT
THREE YEARS WILL COME FROM GROUPE ARNAULT. IF THIS RELATIONSHIP IS NOT RENEWED,
OR IF OTHER SIGNIFICANT SOURCES OF REVENUE ARE NOT DEVELOPED, WE MAY NOT HAVE
SUFFICIENT REVENUES TO SUSTAIN OUR GROWTH AND OUR STOCK PRICE MAY FALL.

We have recently entered into a three-year advertising, promotion and
marketing agreement with Groupe Arnault. We anticipate that for at least the
next three years a substantial portion of our revenues will come from sales of
our advertising, promotion and marketing services under this agreement. Although
payment for these services has been secured for the term of the agreement by a
$45 million pre-payment and a letter of

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<PAGE> 9

credit for the remaining $105 million of services to be provided under the
agreement, Groupe Arnault is under no obligation to renew its relationship with
us after the current agreement terminates at the end of June 2002. See
"Business -- Relationship with Groupe Arnault."

Furthermore, we anticipate that our revenue growth for the next three years
will largely be due to the scheduled growth in revenues under our agreement with
Groupe Arnault. Historically, most of our revenue sources have not provided for
a similarly-scheduled growth in revenues. If we do not develop significant
additional revenue sources in the future our business will be substantially
dependent on the Groupe Arnault agreement. Moreover, if Groupe Arnault does not
renew its relationship after termination of the current agreement at the end of
June 2002, or renews the relationship but at a lower level of commitment, our
revenues or growth rate may decline in periods subsequent to the end of the
current agreement.

We cannot guarantee that we will be able to develop enough additional
revenue to offset the loss of revenues that would result if Groupe Arnault does
not renew its relationship or that the other revenue sources we may develop will
be sufficient to maintain our rate of revenue growth. If either event causes our
revenues or our revenue growth rate to be substantially reduced, we may not have
sufficient revenues to support our business and the market price of our stock
may fall.

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 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

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<PAGE> 10

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 that 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, LEAD TO MARKET CONFUSION, ALIENATE ADVERTISERS AND CONSUMERS AND
REDUCE OUR REVENUES.

The traditional music industry has not embraced the development of the mp3
format to deliver music, in part because users of mp3 technology can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Although our business model for the digital distribution of
music can support more than one audio compression format and method of delivery,
and is intended to discourage music piracy and ensure that only legitimate music
is posted on our 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 established artists with record contracts, due to our
current brand identity and its potentially negative associations. In addition,
adverse news or events relating to mp3 technology may lead to confusion in the
public markets regarding our company and its prospects, alienate advertisers and
consumers, reduce revenues and harm our overall financial results.

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.

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<PAGE> 11

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. In
addition, in July 1999 we entered into an agreement with Groupe Arnault under
which Groupe Arnault will have an exclusive right for 90 days after this
offering to negotiate the terms of a joint venture with us covering the
territories of Europe and Asia. We cannot guarantee that we and Groupe Arnault
will establish this joint venture or that, if established, this joint venture
will be successful and provide us with desired international presence or
branding. We may be unable to complete suitable business partnerships and
acquisitions on commercially reasonable terms, if at all. We expect to face
competition for business partnership and acquisition candidates and
sponsorships. This competition could impair our ability to successfully pursue
these aspects of our business strategy.

Business partnerships or acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. If we acquire a
company, we could face difficulties assimilating that company's personnel 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, AND OUR STOCK PRICE MAY FALL IF OUR
PERFORMANCE DOES NOT MEET ANALYSTS' OR INVESTORS' EXPECTATIONS.

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

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<PAGE> 12

WE EXPECT NET LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY, WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.

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.

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

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<PAGE> 13

the mp3 format could significantly affect the future viability of our brand name
and our ability to generate revenues.

IF WE FAIL TO COLLECT ACCURATE AND USEFUL DATA ABOUT OUR CONSUMERS, POTENTIAL
ADVERTISERS MAY NOT ADVERTISE ON OUR WEBSITE, WHICH MAY RESULT IN REDUCED
ADVERTISING REVENUES.

We plan to use consumer data to expand, refine and target our marketing and
sales efforts. We collect most of our data from users who report information to
us as they conduct transactions on our 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.

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

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<PAGE> 14

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 AND AS A RESULT WE MAY NOT HAVE THE INFORMATION WE NEED TO RECORD
TRANSACTIONS AND MEET OUR ACCOUNTING AND REPORTING OBLIGATIONS, WHICH IN TURN
COULD AFFECT OUR ABILITY TO RUN OUR BUSINESS EFFICIENTLY OR PROFITABLY.

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

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

If the security measures that we use to protect personal information are
ineffective, we may lose visitors to our 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.

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<PAGE> 15

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.

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

WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE THESE ASSETS,
THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE REVENUE, MAY
DECREASE.

Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position,
and we try to protect it. However, our efforts may be inadequate. We do not have
a registered trademark for the "MP3.com" name and may not be able to prevent
others from using "mp3" or "MP3.com." Use of the "MP3.com" name by others could
dilute our brand identity and confuse the market. In addition, our ability to
conduct our business may be harmed if others claim we violate their intellectual
property rights. For example, Sightsound.com, Inc. has asserted that many online
music providers, including MP3.com, violate patent rights that it allegedly owns
covering the sale of music over the Internet through

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<PAGE> 16

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.

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.

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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.

THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES, AND IF A LIQUIDATION WERE TO OCCUR YOU MAY RECEIVE
SIGNIFICANTLY LESS THAN YOUR FULL PURCHASE PRICE FOR THE SHARES.

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
$22.06 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. As a result of this dilution, common stockholders purchasing stock in
this offering may receive significantly less than the full purchase price that
they paid for the shares purchased in this offering in the event of a
liquidation.

APPROXIMATELY FIFTY-EIGHT MILLION, OR 86.5%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.

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, we will have outstanding 66,637,623 shares of
common stock. The 9,000,000 shares offered for sale through the underwriters
will be freely tradable unless purchased by our affiliates or covered by a
separate lock-up agreement with the underwriters. Of the remaining 57,637,623
shares of common stock outstanding after this offering, 34,536,187 shares will
be eligible for sale in the public market beginning 181 days after the date of
this prospectus. The remaining 23,101,436 shares will become available at
various times thereafter upon the expiration of one-year holding periods or, in
the case of the 3,347,233 shares we have offered to Arkaro Holding B.V., upon
the expiration of a lock-up agreement. See "Shares Eligible for Future Sale." We
also intend to register up to 7,913,813 additional shares of our common stock
after this offering for issuance under 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 including "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of these terms or other comparable 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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USE OF PROCEEDS

We estimate that our net proceeds from the offering will be approximately
$326.5 million after deducting the estimated underwriting discount and
commissions and estimated offering expenses ($361.6 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. A
portion of the net proceeds may also be used for strategic partnerships,
including joint ventures, or to acquire or invest in complementary 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. 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." Pending these uses, the net proceeds of this offering will
be invested in short term, interest-bearing, investment grade securities.

We have no current plan for a significant portion of the proceeds of this
offering, and our management will retain broad discretion in the allocation of
the net proceeds of this offering.

The principal reasons for this offering include:

- establishing MP3.com as a public company;

- increasing the visibility and brand recognition of our products and
services;

- positioning our company to be better able to take advantage of strategic
opportunities in the future;

- making a trading market available to our existing stockholders; and

- providing us with capital sufficient to enable us to implement our
business plan.

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 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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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 (giving effect to the three-for-two common stock split);

-- the conversion of 1,000,000 shares of convertible Series A preferred
stock issued during April 1999 for $2,000,000 into 1,500,000 shares of
common stock (giving effect to the three-for-two common stock split);

-- The conversion of 100,000 shares of convertible Series A preferred
stock issued in April 1999 for $200,000 with a deemed fair value of
$569,000 (the $369,000 difference will be charged to expense during the
second quarter of 1999) into 150,000 shares of common stock (giving
effect to the three-for-two common stock split);

-- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 for $2,498,496 into 658,653 shares of
common stock (giving effect to the three-for-two common stock split);

-- the conversion of 4,182,578 shares of Series C preferred stock issued
in June 1999 for $45,004,539 into 6,273,867 shares of common stock
(giving effect to the three-for-two common stock split);

-- the three-for-two split in our common stock that occurred on July 16,
1999;

-- the issuance and exercise of warrants to purchase 658,653 shares of
common stock for $219,551 with a deemed fair value of $2,191,000;

-- the exercise of stock options to purchase 2,417,437 shares of common
stock for $4,322,160 from April 1, 1999 to July 15, 1999;

-- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000;

-- 89,285 shares of common stock we will issue in a private placement
pursuant to an agreement with Boutit, Inc. entered into on May 12, 1999
for a deemed fair value of $2,500,000; and

-- our donation of 100,000 shares of common stock to the MP3.com
Foundation with a deemed fair value of approximately $767,000; and

- On a pro forma as adjusted basis, giving effect to our sale of the common
stock in this offering 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; 54,290,390 shares issued outstanding pro forma
(unaudited); 300,000,000 shares authorized; and
66,637,623 shares issued and outstanding, pro forma as
adjusted(2)............................................. 31,695 54,290 66,638
Additional paid in capital................................ 16,351,763 76,519,064 402,989,240
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) (2,899,166) (2,899,166)
----------- ----------- ------------
Total stockholders' equity................................ 10,359,317 69,406,063 395,888,587
----------- ----------- ------------
Total capitalization................................ $10,359,317 $69,406,063 $395,888,587
=========== =========== ============
</TABLE>

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

(2) Does not include 7,913,813 shares of common stock reserved under our stock
benefit plans, of which 4,967,613 shares were covered by outstanding options
at a weighted average exercise price of $1.20 per share as of July 15, 1999.
See "Description of Capital Stock," "Management -- 1998 Equity Incentive
Plan" and "Management -- Employee Stock Purchase Plan."

18
<PAGE> 20

DILUTION

As of March 31, 1999, our pro forma net tangible book value was
approximately $69.4 million, or $1.28 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
(giving effect to the three-for-two common stock split);

- the conversion of 1,000,000 shares of convertible Series A preferred stock
issued during April 1999 for $2,000,000 into 1,500,000 shares of common
stock (giving effect to the three-for-two common stock split);

- The conversion of 100,000 shares of convertible Series A preferred stock
issued in April 1999 for $200,000 with a deemed fair value of $569,000
(the $369,000 difference will be charged to expense during the second
quarter of 1999) into 150,000 shares of common stock (giving effect to the
three-for-two common stock split);

- the conversion of 439,103 shares of convertible Series B preferred stock
issued during April 1999 for $2,498,496 into 658,653 shares of common
stock (giving effect to the three-for-two common stock split);

- the conversion of 4,182,578 shares of Series C preferred stock issued in
June 1999 for $45,004,539 into 6,273,867 shares of common stock (giving
effect to the three-for-two common stock split);

- the three-for-two split in our common stock that occurred on July 16,
1999;

- the issuance and exercise of warrants to purchase 658,653 shares of common
stock for $219,551 with a deemed fair value of $2,191,000;

- the exercise of stock options to purchase 2,417,437 shares of common stock
for $4,322,160 from April 1, 1999 to July 15, 1999;

- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000

- 89,285 shares of common stock we will issue in a private placement as part
of our agreement with Boutit, Inc. entered into on May 12, 1999 for a
deemed fair value of $2,500,000; and

- our donation of 100,000 shares of common stock to the MP3.com Foundation
with a deemed fair value of approximately $767,000.

After giving effect to our sale of common stock in this offering, 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 $395.9 million, or
$5.94 per share. This represents an immediate increase in net tangible book
value of $4.66 per share to existing stockholders and an immediate dilution of
$22.06 per share to new investors. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $28.00
Pro forma net tangible book value per share before the
offering................................................ $1.28
Increase per share attributable to new investors.......... 4.66
-----
Pro forma net tangible book value per share after this
offering.................................................. 5.94
------
Dilution per share to new investors......................... $22.06
======
</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...................... 54,290,390 81.5% $ 65,257,793 15.9% $ 1.20
New investors.............................. 12,347,233 18.5% $345,722,524 84.1% 28.00
---------- ----- ------------ ------
Total............................. 66,637,623 100.0% $410,980,317 100.0%
========== ===== ============ ======
</TABLE>

The discussion and tables above assume no exercise of stock options
outstanding as of July 15, 1999. As of July 15, 1999, there were options
outstanding to purchase a total of 4,967,613 shares of common stock, with a
weighted average exercise price of $1.20 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.

19
<PAGE> 21

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.

20
<PAGE> 22

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 142 employees
on June 30, 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> 23

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.
No Limit will also become a stockholder of MP3.com at the closing of this
offering. As part of our agreement, we will issue 89,285 shares of our common
stock 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 of
these promotions 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. In May 1999, we entered into a limited services
agreement with Tori Amos. This agreement terminates after the "5 1/2 Weeks" tour
in September 1999. Under this agreement, we issued 22,500 shares of common stock
to Ms. Amos in exchange for her services. As a result of the grant and issuance
to Atlas/Third Rail and Ms. Amos, we recorded deferred marketing costs of
$2,302,000. We will

22
<PAGE> 24

account for the warrants based on the fair value provisions of FAS 123. We will
amortize the value of the warrants and common stock to sales and marketing
expense as follows: approximately $365,000 in the second quarter of 1999 (when
the 5 1/2 Weeks tour was announced) and approximately $1,937,000 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 approximately
$767,000. 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 $31.7 million in the second and third quarters of
1999 to reflect additional option grants at exercise prices less than the deemed
fair value of common stock on the grant date through July 15, 1999. The deferred
compensation is being amortized over the vesting period of the options, which is
generally four years.

23
<PAGE> 25

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.

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.

Selected Second Quarter 1999 Results

Revenues for the three months ended June 30, 1999 were $1,912,000, an
increase of $1,664,000 when compared to same period in 1998 of $248,000. The
increase in net revenues was mostly attributable to a significant increase in
advertising revenues and the sale of CDs. The advertising revenue increase was
directly associated with a significant increase in online banner and sponsorship
advertisements and the sale of new offline advertising in the form of
sponsorship CD samplers and artist services that were introduced during the
second quarter of 1999.

The net loss for the three months ended June 30, 1999 was $6,344,000 or
$0.22 per basic and diluted share, compared to a net loss of $23,000, or $0.00
per basic and diluted share, during the same period in 1998. The increase in the
net loss was primarily due to increased costs related to a rapid expansion of
our business and size of our company. These costs include salaries and benefits,
equipment depreciation, branding and marketing costs, a donation of shares of
our common stock to the MP3.com Foundation, and legal and accounting expenses.
Additionally, amortization of deferred compensation and other stock based
compensation for the second quarter of 1999 and 1998 was $2,811,000 and $99,000,
respectively.

The following tables contain selected unaudited financial information for
the three months ended June 30, 1999 and 1998. This information has been
prepared on the same basis as our audited financial statements and, in the
opinion of management, includes all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results of financial
performance for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net revenues.................................. $ 1,911,548 $ 247,612
Income (loss) from operations................. (6,589,726) 28,298
Net loss...................................... (6,343,825) (23,289)
Net loss per share, basic and diluted......... $ (0.22) $ (0.00)
Weighted average shares used in net loss per
share, basic and diluted................... 28,838,154 26,178,750
</TABLE>

24
<PAGE> 26

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1999 1998
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents..................... $57,027,027 $ 39,509
Working capital............................... 57,635,432 132,469
Total assets.................................. 67,361,356 463,355
Total stockholders' equity.................... 63,018,020 194,706
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Overview

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 minimum liquidity ratio of two times current
liabilities plus all bank debt or six months historical cash spending.
Currently, due to our cash balance after the sale of Series C convertible
preferred stock, we do not believe the debt covenants will place limitations on
our growth strategy. 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.

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.

25
<PAGE> 27

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.

Recent Events

In July 1999, we entered into an agreement with Groupe Arnault, which
committed to purchase an aggregate of $150 million in advertising, promotion and
marketing services from us over the next three years, including $5 million in
1999, $40 million in 2000, $70 million in 2001 and $35 million in the first half
of 2002. Under the agreement, we received pre-payments from Groupe Arnault
totaling $45 million in July 1999. The remaining amounts owed under the
agreement will be secured by an irrevocable letter of credit to be executed in
July 1999. In addition, Groupe Arnault will have an exclusive right for 90 days
after this offering to negotiate the terms of a joint venture with us covering
the territories of Europe and Asia.

The agreement obligates Groupe Arnault to purchase guaranteed specific
quarterly amounts of advertising, promotion and marketing services. We will
recognize revenue in the period we deliver the mutually agreed-upon advertising,
promotion and marketing services. In the event Groupe Arnault does not purchase
the quarterly amount specified in the agreement, or purchases an amount less
than the quarterly amount specified in the agreement, the unpurchased amount
will be recognized as revenue in the related quarter, as there will be no
remaining obligations due by us to Groupe Arnault with respect to such amount.

In a separate agreement, we offered Arkaro Holding B.V., a subsidiary of
Groupe Arnault, the opportunity to purchase registered shares of common stock
directly from us in this offering totaling five percent of our outstanding
capital stock after this offering. If Arkaro Holding B.V. accepts this offer, we
will sell Arkaro Holding B.V. 3,347,233 shares of stock in this offering at the
initial public offering price. Should Arkaro Holding B.V. decide not to accept
this offer, the agreement between us and Groupe Arnault will still remain in
effect.

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
that will focus on providing downloadable music for affiliated radio stations
across the U.S. We will contribute approximately $14 million to the joint
venture over the next year.

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<PAGE> 28

exploring the possible lease of additional facilities, although we do not
anticipate occupying these facilities until the first half of 2000.

Future Capital Requirements

We believe that our cash and cash equivalent balances, funds available
under our existing line of credit, revenues from the agreement with Groupe
Arnault, 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.

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.

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 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.

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<PAGE> 29

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 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 are currently reviewing our vendors' year 2000 compliance plans and
statements, and we expect to complete the assessment of our primary software and
hardware suppliers by the end of July 1999.

If we determine that any of our Internet service providers, third party
vendors or third party suppliers are not year 2000 compliant and cannot resolve
all significant year 2000 issues by August 1999, we intend to select and
implement alternate providers no later than September 1999.

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<PAGE> 30

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 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.

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<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

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<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. There
are also competitive formats which may receive more widespread industry and
consumer acceptance and that have different and additional features including
SDMI and proprietary audio formats from companies like Microsoft Corporation and
AT&T Corp. See "Risk Factors -- Development of new standards for the electronic
delivery of music may diminish our brand identity and disrupt the way we do
business." 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. Although the
traditional music industry has not embraced the mp3 format (see "-- Intellectual
Property"), 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.

Our Growth May Not Track Industry Growth

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, our business may not grow as much as, and to the
extent that, use of the Internet becomes more widespread. However, we believe
rapid and widespread growth may be possible.

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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 the 10% to 15% 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

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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 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 18,000 artists
and 120 independent labels that have posted more than 100,000 songs on MP3.com.
Since we began offering services, we have digitally delivered more than 44
million songs to consumers visiting our site. In June 1999:

- we added over 125 new artists and 660 new songs on average each day;

- visitors to our website viewed over 57 million webpages, listened to or
downloaded over 10 million songs and conducted over 5.5 million music
searches;

- we estimate that more than 315,000 consumers per day on average visited
our website and listened to approximately 330,000 songs; and

- we sold on average over 320 DAM CDs per day.

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
including 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

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increase the number of new artists using our website. These new artists may
include those artists who are signed to exclusive contracts with record
companies, who need to obtain the consent of those record companies to post
music on our website, and to whom we may be required to pay increased royalties
in order to facilitate the receipt of their consent. 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 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 32%
of our online artist community. Although our historical revenues from export
sales have been insignificant, approximately 19% of our DAM CD customers during
June 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.

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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:

<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 100,000+ songs by 18,000+ 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.O.E.: Alien Orbiter Explorer" to
"ZZZZRA."
- - 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 the first quarter of 1999,
Cyberian Outpost, Inc. and Alexa Internet accounted for approximately 14% and
13%, respectively, of our net revenues. We are currently not providing any
advertising services for Cyberian. Our agreement with Alexa is a month-to-month
advertising agreement. Under this agreement we receive a specified amount for
each download of Alexa software by our customers. Revenues under this agreement
are not expected to be a significant portion of our total revenues in subsequent
periods.

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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. This
agreement does not provide for any early termination. Tickets.com has the right
to renew this agreement for a second year.

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, based on an agreed upon rate, for the display of Xing banner advertisements
to our website visitors a minimum number of times each month. If we fail to
display Xing's banner advertisements the required minimum number of times in any
month, Xing may, at its option, elect to receive additional impressions in
future periods or pay a reduced amount based upon the number of impressions
actually delivered. This agreement does not provide for any early termination.

In May 1999 we entered into a 26-month advertising insertion order with
Bill Gross' Idealab!. Under this agreement, Idealab! pays us, based on an agreed
upon rate, for the display of Idealab! banner advertisements to our website
visitors. We are required to deliver a target number of impressions during each
month of the term of this agreement. In the event we fail to provide at least
85% of this target number of impressions on an aggregate, ongoing basis,
Idealab! may terminate this agreement.

Revenues generated under the Tickets.com, Xing and Idealab! agreements are
expected to represent approximately 21% of our total revenues for the second
quarter of 1999.

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 including 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 18,000
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.

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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.

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 including 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

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$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.

The joint venture will be named MP3 Radio.com, and will focus on providing
downloadable music for affiliated radio stations across the U.S. 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 long as Cox Interactive Media
holds at least 5% of our outstanding common stock and the joint venture
continues.

RELATIONSHIP WITH GROUPE ARNAULT

In July 1999, we entered into an agreement with Groupe Arnault, which has
committed to purchase an aggregate of $150 million in advertising, promotion and
marketing services from us over the next three years, including $5 million in
1999, $40 million in 2000, $70 million in 2001 and $35 million in the first half
of 2002. Groupe Arnault is a French corporation with interests in diverse
companies such as LVMH Moet Hennessy Louis Vuitton and others. It is intended
that our services under this agreement will primarily be used with LVMH brands
or brands of a similar quality of other entities in which Groupe Arnault
affiliates have investments.

Under the agreement, we received pre-payments from Groupe Arnault totaling
$45 million in July 1999. The remaining amounts owed under the agreement will be
secured by an irrevocable letter of credit to be executed in July 1999. In
addition, Groupe Arnault will have an exclusive right for 90 days after this
offering to negotiate the terms of a joint venture with us covering the
territories of Europe and Asia. We cannot guarantee that we and Groupe Arnault
will establish this joint venture or that, if established, this joint venture
will be successful and provide us with desired international presence or
branding.

In a separate agreement, we offered Arkaro Holding B.V., a subsidiary of
Groupe Arnault, the opportunity to purchase registered shares of common stock
directly from us in this offering totaling five percent of our outstanding
capital stock. If Arkaro Holding B.V. accepts this offer, we will sell Arkaro
Holding B.V. 3,347,233 shares of stock in this offering at the initial public
offering price.

OTHER SIGNIFICANT RELATIONSHIPS

We have signed a three year non-exclusive 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.
Under this agreement, we granted Atlas/ Third Rail a warrant to purchase 658,653
shares of common stock exerciseable at $0.33 per share. See "Management's
Discussion and Analysis of Financial Condition and Operating Results -- Sales
and Marketing." 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 exclusive, worldwide, on-demand streaming, digital distribution and
custom compilation rights to a number of No Limit master recordings. We also
obtained the right to distribute various No Limit merchandise. Some of the
artists represented by No Limit include

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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
in connection with the exercise of our digital distribution, custom compilation
or merchandise distribution rights. 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.
Under this agreement, we will issue 89,285 shares of our common stock in a
private placement concurrent with the closing of this offering. See
"Management's Discussion and Analysis of Financial Condition and Operating
Results -- Results of Operations."

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. We
are currently working with ASCAP to finalize the specific terms and conditions
of this license. 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.

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

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The Apache Group. We run our software on platforms from, among others, Intel
Corporation, Sun Microsystems, Inc., Cisco Systems, Inc. and Storage Technology
Corporation.

During June 1999, our website delivered over 57 million webpages and 10
million songs and conducted over 5.5 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.

COMPETITION

- Providers of online music content like 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

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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

- 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 these laws are adopted, we may
need to incur substantial costs to comply with these requirements or
change the way we do business.

- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over the
Internet. These include laws relating to

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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.

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

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

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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 the 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.

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.

EMPLOYEES

On June 30, 1999, we had 142 employees, including 72 in sales and
marketing, 51 in product development, and 19 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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MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information about our directors, executive
officers and key employees as of July 15, 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....................... 42 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........................ 42 Executive Vice President, Technology
David E. Easterly....................... 57 Director
Lawrence F. Probst III(1)............... 49 Director
Mark A. Stevens(1)(2)................... 39 Director
Theodore W. Waitt(1)(2)................. 35 Director

Key Employees
Joshua R. Beck.......................... 22 Chief Technical Officer
John R. Diaz............................ 48 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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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

46
<PAGE> 48

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.

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 as a Class III director following expiration of
the initial term of Mr. Easterly, as long as Cox Interactive Media holds at
least 5% of our outstanding common stock.

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 they incur by attending board and committee meetings.
All directors are eligible to participate in our 1998 Equity Incentive Plan.

47
<PAGE> 49

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.

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. We can terminate Mr.
Robertson's employment at any time. Mr. Robertson is eligible to participate in
our standard benefit programs available to all of our employees.

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, and
provides that Mr. Richards is eligible to participate in our standard benefit
programs available to all of our employees. Mr. Richards' employment is at-will.

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, or if Mr. Ouyang terminates his employment for good reason. 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. Mr. Ouyang is
entitled to participate in our standard benefit programs available to all of our
employees. Mr. Ouyang's employment is at-will.

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, and provides that Mr. Sheiner is
eligible to participate in our standard benefit programs available to all of our
employees. Mr. Sheiner's employment is at-will.

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, provides that we
will reimburse Mr. Alofs' living expenses up to $2,250 per month for a period of
twelve months. Mr. Alofs is also entitled to participate in our standard benefit
programs available to all of our employees. Mr. Alofs' employment is at-will.

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

48
<PAGE> 50

salary of $140,000, and provides that Mr. Dotson is entitled to participate in
our standard benefit programs available to all of our employees. Mr. Dotson's
employment is at-will.

As of July 15, 1999, the Company had issued the following options to its
executive officers:

<TABLE>
<CAPTION>
NUMBER PRICE NUMBER AGGREGATE
OF SHARES PER OF SHARES EXERCISE EXPIRATION SPECIAL
NAME GRANTED SHARE EXERCISED PRICE DATE VESTING PROVISIONS
---- --------- --------- --------- --------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robin D. Richards 2,437,500 $0.11 2,437,500 $260,000 1/17/09 - 100% upon termination
other than for cause
- 20% on IPO
- 100% on change of control

Paul L. H. Ouyang 480,000 $0.11 480,000 $ 51,200 2/27/09 - 100% upon termination
150,000 $0.33 150,000 $ 50,000 4/01/09 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 375,000 $0.11 60,937 $ 6,500 2/27/09 - 10% on IPO
112,500 $0.33 11,250 $ 3,750 4/01/09 - 100% on change of control

Paul S. Alofs 495,000 $0.67 -- -- 4/26/09 - 20% on earlier of IPO or
April 27, 2000
- remainder monthly over
next four years

Ronald D. Dotson 75,000 $1.00 -- -- 5/12/09 - none
75,000 $2.00 -- -- 6/9/09
</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, May 1999 and June 1999. A total of 12,750,000 shares
of common stock, as amended, has been authorized for issuance under to the 1998
Plan. When a stock award expires or is terminated before it is exercised, the
shares set aside for that award are returned to the pool of shares available for
future awards. Shares that are issued when an award is exercised and that are
subsequently repurchased by us will not return to the pool and will not become
available for future awards.

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. Under the guidelines 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 to specify
other terms of awards.

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<PAGE> 51

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,
that person's options generally may be exercised up to 12 months following
disability or 18 months following death.

The exercise price of options granted under the 1998 Plan is determined by
the administrator under the guidelines 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 50% 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 these
outstanding stock awards, then the vesting and exercisability of outstanding
awards will accelerate prior to the charge in control and the 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 July 15, 1999, we had issued and outstanding under the 1998 Plan
options to purchase 4,967,613 shares of common stock. The per share exercise
prices of these options ranged from $0.11 to $6.67.

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.

Under the Purchase Plan, employees who participate in an offering may have
up to 15% of their earnings for the period of that offering withheld. 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

50
<PAGE> 52

may provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to the change in control transaction.

The board has the authority to amend or terminate the Purchase Plan;
provided, however, that no amendment or termination of the Purchase Plan 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.

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 these 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. 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, including the federal
securities laws or state or federal environmental laws.

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<PAGE> 53

RELATED-PARTY 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 June 30, 1999, we had spent approximately
$138,000 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.

In July 1999, Groupe Arnault agreed to purchase an aggregate of $150
million in advertising, promotion and marketing services from us over the next
three years. In addition, we have offered Arkaro Holding B.V., a subsidiary of
Groupe Arnault, the opportunity to purchase shares of our common stock directly
from us in this offering totaling five percent of our outstanding capital stock
after the offering.

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<PAGE> 54

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 except
for 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 54,201,105 shares of common stock
outstanding as of July 15, 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 12,347,233 shares offered by this prospectus and the issuance of
89,285 shares in a private placement as part of our 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
67,987,623 shares of common stock will be outstanding after the completion of
this offering.

All share numbers in this section reflect the three-for-two split in our
common stock that took 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(1)................................... 25,337,010 46.7% 38.0%
Mark A. Stevens(2)........................................ 9,637,011 17.8 14.5
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
David E. Easterly(3)...................................... 6,273,867 11.6 9.4
Cox Interactive Media, Inc.
1400 Lake Hearn Dr., N.P.
Atlanta, GA 30319
Robin D. Richards(4)...................................... 2,148,302 4.0 3.2
Theodore W. Waitt......................................... 1,500,000 2.8 2.3
Lawrence F. Probst III.................................... 150,000 * *
All directors and officers as a group (10 persons)(5)..... 45,763,846 84.4% 68.6%
</TABLE>

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

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<PAGE> 55

(1) Includes 1,548,750 shares held in family trusts.

(2) Includes:

- 8,462,134 shares held by Sequoia Capital VIII, which represents 15.6% and
12.7%, respectively, 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;

- 255,000 shares held by Sequoia Capital Franchise Fund, which represents
less than 1% 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;

- 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;

- 45,000 shares held by Sequoia Capital Franchise Partners, 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 the shares listed above except to the extent of his
pecuniary interest in those shares.

(3) 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.

(4) Includes 472,500 shares held in family trusts.

(5) Includes:

- shares listed in footnotes 1, 2, 3 and 4 above;

- 630,000 shares held in a family trust; and

- 87,656 shares held by Steven G. Sheiner or issuable upon exercise of
options held by Mr. Sheiner exercisable within 60 days of July 15, 1999.
Excludes 40,827 shares issuable upon exercise of options exercisable upon
consummation of this offering.

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<PAGE> 56

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 300,000,000 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 July 15,
1999, after giving effect to the conversion of all outstanding preferred stock
into common stock upon the closing of this offering and 89,285 shares to be
issued to Boutit, Inc. in a private placement concurrent with the closing of
this offering, there were outstanding 54,290,390 shares of common stock held of
record by 100 stockholders and options to purchase 4,967,613 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. After the holders of preferred
stock, holders of common stock are entitled to receive dividends declared by the
board of directors out of funds legally available for dividends. In the event of
our liquidation, dissolution or winding up, holders of common stock are entitled
to share 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 (giving effect to
the three-for-two common stock split). 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 common stockholders 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 our
company. We have no present plans to issue any additional shares of preferred
stock.

REGISTRATION RIGHTS

Under 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 these registrable shares are
entitled to notice of the registration and entitled to include registrable
shares in that offering, provided that the underwriters of that offering have
the right to limit the number of shares included in the 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 the registration. We are not
obligated to effect more than two stockholder-initiated registrations. Further,
holders of registrable securities may require us to file no more than

55
<PAGE> 57

one registration statements on Form S-3 per year and no more than two in total.
We are not required to affect any registrations on Form S-3 unless the aggregate
price to the public is $500,000 or more.

We are required to bear substantially all costs incurred in these
registrations, other than underwriting discounts and commissions. The
registration rights described above 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 after
a resolution is 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 could adversely affect
the price of our common stock.

THE NASDAQ STOCK MARKET'S NATIONAL MARKET

Our common stock has been approved for listing 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.

56
<PAGE> 58

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 66,637,623 outstanding
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the 9,000,000
shares offered for sale through the underwriters will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters. If Arkaro Holding
B.V. accepts our offer to purchase 3,347,233 shares in this offering, 10% of
their shares would be eligible for sale in the public market beginning six
months after the date of this prospectus, with an additional 10% becoming
eligible at the beginning of each of the next five months. Arkaro Holding B.V.
would not be able to sell more than 20% of their shares in any month prior to
one year after the date of this prospectus. One year after the date of this
prospectus, all of Arkaro Holding B.V.'s remaining shares would be eligible for
sale.

The remaining 54,290,390 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;

- 34,536,187 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. Most of our stockholders 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 has 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 666,376 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 limited by 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 these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.

57
<PAGE> 59

Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under 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.

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 these 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 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, except with respect to Rule 144 volume limitations
that apply to our affiliates.

58
<PAGE> 60

UNDERWRITING

Under the underwriting agreement dated July 20, 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...................... 3,174,750
Hambrecht & Quist LLC....................................... 2,801,250
BancBoston Robertson Stephens Inc........................... 1,494,000
Charles Schwab & Co., Inc................................... 450,000
Barrington Research Associates.............................. 90,000
George K. Baum & Company.................................... 90,000
Bear, Stearns & Co. Inc..................................... 90,000
CIBC World Markets Corp..................................... 90,000
Crowell, Weedon & Co........................................ 90,000
Dain Rauscher Wessels a division of Dain Rauscher
Incorporated.............................................. 90,000
Invemed Associates, Inc..................................... 90,000
Klein Investment Group, L.P................................. 90,000
J.P. Morgan Securities Inc.................................. 90,000
TD Securities (USA) Inc..................................... 90,000
C.E. Unterberg, Towbin...................................... 90,000
Thomas Weisel Partners LLC.................................. 90,000
----------
Total............................................. 9,000,000
==========
</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 and
3,347,233 shares that may be issued to Arkaro Holding B.V. directly by us as
part of an agreement to offer such shares to them. 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 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 $1.18 per share. The
underwriters and the selling group members may allow a discount of $0.10 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
with respect to the shares to be issued under the underwriting agreement.

<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................... $1.96 $1.96 $17,640,000 $20,286,000
Expenses payable by us.... $0.18 $0.15 $ 1,600,000 $ 1,600,000
</TABLE>

59
<PAGE> 61

We will pay Credit Suisse First Boston Corporation a financial advisory fee of
approximately $937,000 for financial services performed as part of the
agreements with Groupe Arnault and Arkaro Holding B.V. We will not pay any
discount or commission to the underwriters for the 3,347,233 shares that may be
issued to Arkaro Holding B.V. directly by us as part of an agreement to offer
such shares to them.

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

Our officers and directors and most of our stockholders have agreed not
sell any shares of our common stock or other securities without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus. They also may not during this period
engage in some transactions that might lead to the transfer of their shares.
They will however be permitted to exercise stock options without consent.

At our request, the underwriters have reserved up to 1,850,000 shares of
common stock offered by this prospectus for sale at the initial public offering
price to artists and customers of MP3.com, consultants and others with whom we
do business, existing stockholders and friends of MP3.com. This group may
include entities related to Sequoia Capital that have expressed an interest in
acquiring up to 200,000 shares. 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 by this prospectus.

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 to those
liabilities.

Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the trading 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
included 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 the 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 these kinds of 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.

60
<PAGE> 62

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.

61
<PAGE> 63

LEGAL MATTERS

The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Cooley Godward LLP, San Diego, California. As of the
date of this prospectus, an investment fund created by Cooley Godward LLP owns
an aggregate of 48,701 shares of Series A preferred stock (convertible into
73,051 shares of common stock). O'Melveny & Myers LLP, Newport Beach, California
represents the underwriters, and the validity of the shares of common stock
offered in this prospectus will be passed upon for the underwriters by O'Melveny
& Myers LLP.

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 included in the
registration statement. For further information pertaining to us and the common
stock offered under this prospectus, reference is made to the registration
statement and the attached exhibits and schedules. Although required material
information has been presented in this prospectus, statements contained in this
prospectus as to the contents or provisions of any contract or other document
referred to in this prospectus may be summary in nature, and in each instance
reference is made to the copy of this contract or other document filed as an
exhibit to the registration statement, and each statement is qualified in all
respects by this 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 the SEC's 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.

After this offering, we will have to provide the information and reports
required by the Exchange Act and we 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, these 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;

- the three-for-two split in our common stock that occurred on July 16,
1999;

- the conversion of each outstanding share of preferred stock into one and
one-half shares of common stock (assuming the three-for-two common stock
split occurs) upon the closing of this offering;

- that we will issue 89,285 shares of common stock concurrent with the
closing of this offering in a private placement as part of 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.

62
<PAGE> 64

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> 65

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
July 16, 1999.

F-2
<PAGE> 66

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 300,000,000 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> 67

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) $ (0.03)
=========== ===========
Weighted average shares -- basic and diluted.............. 45,490,301 46,844,583
=========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 68

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> 69

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> 70

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 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
included, 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. MP3.com
generally invests its excess cash in money market funds and certificates of
deposit with a financial

F-7
<PAGE> 71
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
institution with a strong credit rating. These 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 these assets exceeds the future undiscounted cash flows
attributable to these assets. MP3.com assesses potential impairments to its
long-lived assets when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. Should an impairment
exist, the impairment loss would be measured based on the excess of the carrying
value of the asset over the asset's fair value or discounted estimates of future
cash flows. MP3.com has identified no such impairment losses. 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, including
the placement of buttons that provide users with direct links to the
advertiser's website. Sponsorship advertisement contracts are recognized evenly
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.

Revenue derived from the sales of CDs and music-related merchandise are
recognized by MP3.com at their gross sales price upon shipment. The portion of
the sales price payable to artists as royalties is expensed to cost of revenues
and accrued at the time revenue is recorded.
F-8
<PAGE> 72
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

MP3.com computes net loss per share following SFAS No. 128, "Earnings Per
Share" and SEC Staff Accounting Bulletin No. 98. Under the provisions of SFAS
No. 128, basic net 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 these 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.

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

The following table sets 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>

F-9
<PAGE> 73
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dilutive common stock equivalents include common stock options and
preferred stock as if converted and restricted stock that has not yet fully
vested. Potentially dilutive securities 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.

PRO FORM STOCKHOLDERS EQUITY (UNAUDITED)

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 19,307,516
shares of common stock based on the shares of convertible preferred stock
outstanding at July 15, 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.

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.

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>

F-10
<PAGE> 74
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 some of its CD production 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.

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>

F-11
<PAGE> 75
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. LEASE COMMITMENTS (CONTINUED)
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 grants to
founders of MP3.com. During 1998, all of the shares reserved in the founders
plan were granted, and in December 1998 all of the shares were exercised at
$0.001 per share and some of these shares can be repurchased by MP3.com. Common
shares obtained by an early exercise of unvested options can be repurchased 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 could
be repurchased by MP3.com.

The equity incentive plan reserved 9,750,000 shares of common stock for
granting to employees and non-employees of MP3.com. Grants under the equity
incentive plan vest over four years with 25% of the shares vesting on the first
anniversary of the grant and 1/36 of the remaining shares vesting in equal
installments monthly for the following 36 months. As of December 31, 1998, there
were no stock options granted under the equity incentive plan.

F-12
<PAGE> 76
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY (CONTINUED)
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 corresponding to the grants of
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%; 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.

F-13
<PAGE> 77
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

The provision 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>

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>

F-14
<PAGE> 78
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)
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 1.0 million shares of Series A
convertible preferred shares at $2.00 per share for proceeds of $2.0 million
with no issuance costs for these proceeds. 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 share of common stock
and one and one-half shares of common stock assuming the three-for-two common
stock split occurs.

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 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 financial covenants. MP3.com
was in compliance with all financial 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, all of which were
exercised. 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.

In April 1999, MP3.com issued 100,000 shares of Series A convertible
preferred shares to a director at $2.00 per share for proceeds of $200,000. Each
share of Series A preferred stock is convertible, at the option of the preferred
shareholder, into common stock at the rate of one share of preferred stock to
one share of common stock and one and one-half shares of common stock assuming
the three-for-two common stock split

F-15
<PAGE> 79
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. RECENT EVENTS (CONTINUED)
occurs. The intrinsic value of $369,000 will be recorded as a compensation
expense in the second quarter of 1999.

In May 1999, MP3.com entered into an agreement with Tori Amos with terms
and conditions consistent with the agreement with Atlas/Third Rail except that
the agreement with Ms. Amos terminates after the "5 1/2 Weeks" tour in September
1999. As a result of the agreement with Ms. Amos, MP3.com issued 22,500 shares
of common stock to Ms. Amos in consideration for her services. As a result of
this issuance, MP3.com recorded deferred marketing costs of $111,000. MP3.com
will expense the $111,000 to sales and marketing expense in the third quarter of
1999 (during the 5 1/2 Weeks" tour promotion).

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.

MP3.com's stockholders approved the restatement of MP3.com's certificate of
incorporation to effect a three-for-two stock split effective July 16, 1999. The
Restated Certificate increased the authorized common stock to 300,000,000 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 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
(assuming the three-for-two common stock split occurs) 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 that will focus on providing downloadable music for affiliated radio
stations across the U.S. 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.

F-16
<PAGE> 80
MP3.COM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. RECENT EVENTS (CONTINUED)
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 $767,000.
The value will be charged to expense during the second quarter of 1999.

For the period from March 31, 1999 to July 15, 1999, MP3.com granted
additional options to purchase 4,654,300 shares of common stock at a weighted
average exercise price of $2.09 per share. Included in the 4,654,300 options are
450,000 options granted 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 1,967,437
shares of common stock and investors exercised warrants for 658,653 shares of
common stock.

In July 1999, MP3.com entered into an agreement with Groupe Arnault, which
has committed to purchase an aggregate of $150 million in advertising, promotion
and marketing services from MP3.com over a three-year period beginning October
1999, including $5 million in 1999, $40 million in 2000, $70 million in 2001 and
$35 million in the first half of 2002. Under the agreement, MP3.com received
pre-payments of $45 million in July 1999 representing advertising, promotional,
and marketing services to be delivered by MP3.com from October 1, 1999 through
December 31, 2000.

In July 1999, MP3.com entered into an agreement with Arkaro Holding B.V., a
subsidiary of Groupe Arnault, in which MP3.com offered Arkaro Holding B.V. the
opportunity to purchase five percent of MP3.com's outstanding shares of capital
stock as of the effective date of MP3.com's underwritten initial public offering
at the price per share offered to the public.

F-17
<PAGE> 81

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

- MP3.com. Where the world comes for music.
<PAGE> 82

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