Analyst Conference Summary

conference date: February 6, 2008 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2007 (3rd quarter fiscal 2008)

Forward-looking statements

Overview: Record revenues, but that includes $3 million of non-recurring revenue.

Basic data:

Revenues of $32.8 million were up sequentially 4% from $31.6 million and were up 15% from year-earlier.

Net loss for the quarter was $2.8 million, improved sequentially better from a $5.1 million loss and far better than the loss of $9.5 million year-earlier.

EPS (earnings per share) loss was $0.06, improved sequentially from a $0.12 loss and also beating a $0.22 loss year-earlier.

Guidance:

Fiscal Q4 is expected to be relatively flat sequentially excluding breakage revenue, with revenues between $29 to $31 million. Net loss of $6.5 million due to non-recurance of breakage revenue.

Fiscal 2008 full year revenue is expected to exceed $125 million, up about 17% from fiscal 2007. Expects to be cash flow positive in fiscal 2008.

Conference Highlights:

Cash flow was positive $0.9 million. Third straight quarter of positive cash flow. Subscribers were down 1% sequentially to 743,000.

Expects exciting year due to change to MP3 format for paid downloads in calendar Q2 2008. In the market subscription streaming users buy as many paid downloads as other users. This should level the playing field.

Operating expenses were a record low, $13.2 million. R&D was up slightly to $2.4 million. Sales and marketing was down $400,000 sequentially to $4.5 million because a one-time expense did not recur. G&A expense was $5.4 million. Cost of revenue was $32.8 million. Gross margin was $9.9 million.

Other income at $0.6 million was up due to higher cash balance and foreign currency benefit. One-time breakage income was about $3 million.

EBITDA was negative of $600,000.

139 full time employees.

$69.3 million cash and equivalents.

Revenue growth was mainly in subscribers and cell phones.

Delays in delivery of compatible devices was the cause of the slight decline in subscribers.

27% normalized gross margin (excluding breakage revenue). Last quarter was 28%, year-ago was 24%.

Mobile has gotten off slower than we expected. Napster OTA compatible devices were not as available as expected (only 1 device was availabe in 2007), particularly in U.S., and large carrier launches that were delayed. In Q1, however, we should see a dramatic expansion of addressible devices. Soon to be in (compatible with) millions of units. So should ramp over 2008. Carrier partners have 200 million customers currently. Trial rates and conversions to paid subscriptions are good.

On PC side we have made enourmous improvements. Now our biggest source of new customers is people who type in "www.napster.com" which is a zero-cost acquisition for us. We have reduced advertising spend by 85% from last year, yet had more subscription trials in Q3. This is why we have been cash flow positive. As we scale we have a profit making model. Napster-to-Go may become an upsell to people who are just paying for the new MP3 downloads. We have a technological advantage over most competitors and anyone trying to enter the field.

Q&A:

MP3s a-la-cart affect on margin? We don't know how download sales will affect margins, we are assuming neutral for now.

Over the Air (OAT) timeline? First generation had very heavy DRM that was difficult for handset manufacturers to support. In Q1 fiscal 2009 we will have a lighter DRM that is already supported by many market devices.

Yahoo shut down? It eliminates a player, so it will be good for us in that way. Just leaves 2 players standing.

Revenue guidance and price increase? Not predicting a decline in subscriptions. We expect a short term bump in cancellations with price increase, to be mitigated by top line revenue.

AT&T subscription model? Do not have a timeline for that yet. We have done it in Japan with Docomo, but we are trying to get AT&T products off ground right now. OTA track packs are what AT&T likes, customers like it, it should kick in over 2008.

Any particular cell phones we should be looking for new DRM? OTA phones will be in market by our fiscal Q1, and any OTA phone should be compatible with our service by then. Addressable devices should number in the millions in 2008. We'll know more specifics next quarter.

Failure for downloads to be compatible with iPods has been a killer of enthusiasm. MP3 downloads will open up the iPod market to us.

Japan mobile number of subscribers? We are getting more cell phone subscribers than PC subscribers in Japan. Not releasing numbers yet.

MP3 launch? We intend to have a day when we launch it for all songs. Still working on pricing issues with labels.

Price increase date? Went into effect on February 1, so customers will see it on bills.

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