Napster Reports Record Sales of $28.4 Million in the Third Quarter; Expects to End Fiscal Year at Record Subscriber Levels

Napster Reports Record Sales of $28.4 Million in the Third Quarter; Expects to End Fiscal Year at Record Subscriber Levels

LOS ANGELES, Feb. 8 /PRNewswire-FirstCall/ -- Napster (NASDAQ:NAPS) today reported financial results for its fiscal third quarter ended December 31, 2006.

Net revenue for the third quarter of fiscal 2007 was a record $28.4 million, up 21% from $23.5 million in the third quarter of fiscal 2006. Net revenue for the third quarter of 2007 includes $2.4 million of non-recurring revenue, including prepaid card breakage, with no associated cost of revenue. Net loss for the third quarter of fiscal 2007 was $9.5 million, or $0.22 per basic and diluted share, compared to net loss of $17.0 million, or $0.40 per basic and diluted share, in the third quarter of fiscal 2006.

"Napster's third quarter delivered record revenue, strong subscriber growth and a dynamic and highly successful launch of Napster Japan," said Chris Gorog, Napster's chairman and chief executive officer. "We are very pleased with our strategic acquisition of AOL's music subscription business, which should increase our subscriber base by more than 50 percent when AOL's subscribers are transitioned to Napster in late March. We also expect a healthy funnel of additional new subscribers as Napster becomes AOL's exclusive music subscription provider going forward. Our partnerships with wireless carriers now give us access to over 140 million consumers and the opportunity to attach to the growing global ecosystem of Windows-based music enabled cell phones. We believe Napster is one of the best-positioned companies in digital music to take advantage of this new phenomenon."

Napster's total worldwide paid subscriber base, including university and Japanese subscribers, increased by approximately 48,000 to 566,000 as of December 31, 2006.

Napster ended the third fiscal quarter with a total of $80.9 million of cash, cash equivalents and short-term investments.

Corporate Highlights

The Company also announced today that it has appointed Ross Levinsohn to its Board of Directors. Levinsohn brings more than 15 years of Internet and media experience to Napster's Board. Most recently Levinsohn was President of News Corporation's Fox Interactive Media (FIM) where he led FIM's acquisitions of Intermix, MySpace.com, Scout.com, IGN and six other companies. Prior to joining Fox, Levinsohn held senior executive positions at leading Internet properties including AltaVista and CBS Sportsline.

Additionally, Napster recently:

-- Announced the launch of Napster Mobile on au/KDDI, the second
largest mobile network in Japan with over 20 million mobile phone
subscribers. Napster had previously announced the launch of Napster
Mobile on iMode, NTT DoCoMo's mobile Internet platform, the largest
mobile network in Japan.
-- Announced it will become the exclusive music subscription provider
integrated into AOL Music, replacing AOL Music Now(R). AOL's more
than 350,000 music subscribers have been offered a switch to
Napster, and the migration of AOL music subscribers is expected to
be completed by March 31, 2007.
-- Reported that its subscribers downloaded 500 million songs and over
700 million music streams in calendar 2006.
-- Partnered with Virgin Digital to exclusively market Napster to
Virgin Digital's customers in the U.S. currently using Virgin's paid
music subscription service and paid and free Internet radio
products.
-- Announced that Napster Mobile celebrated its first European launch
debuting on Telefonica's O2 mobile network in Ireland.

Business Outlook

"Revenue is expected to be in excess of $26 million in the fourth fiscal quarter, and we expect operating expenses to decline on a sequential basis. Looking ahead, the expected addition of several hundred thousand subscribers migrating from AOL will result in record subscriber levels at the end of our fiscal year. We will see the revenue impact of the new subscriber influx when we report our June quarter, as the migration of the majority of AOL subscribers is expected to occur very late in the March quarter," said Nand Gangwani, Napster's chief financial officer.

Conference Call Information

The Napster third-quarter teleconference and webcast is scheduled to begin at 2:00 p.m. PST on Thursday, February 8, 2007. To participate on the live call, analysts and investors should dial 800-218-0713 at least ten minutes prior to the call. Napster will also offer a live and archived webcast of the conference call, accessible from the "Investor Relations" section of the company's Web site at http://investor.napster.com/ .

About Napster

Napster, the pioneer of digital music, offers the ultimate interactive music experience. With an expanding roster of offerings including free, Web- based music listening and sharing, subscription and portable subscription services, and an advanced mobile music platform, Napster creates better ways to discover, share, acquire and enjoy music -- anytime, anywhere. Napster is headquartered in Los Angeles, with offices in Frankfurt, London, New York, San Diego, San Jose and Tokyo.

Safe Harbor Statement

Except for historical information, the matters discussed in this press release, in particular matters related to future revenue and operating expenses; increases in subscriber levels; the global ecosystem of Windows- based, music-enabled cellular phones; and our relationships with AOL and with wireless carriers and cellular phone manufacturers are forward-looking statements that are subject to certain risks and uncertainties such as decreased demand for our products and services; failure of our products to interoperate with the hardware products of our customers; intense competition; failure to maintain relationships with strategic partners; and general economic conditions; that could cause actual results to differ materially from those projected. Additional information on these and other factors are contained in Napster's reports filed with the Securities and Exchange Commission (SEC), including the Company's Quarterly Report on Form 10-Q as filed with the SEC on February 8, 2007, copies of which are available at the website maintained by the SEC at http://www.sec.gov/. Napster assumes no obligation to update the forward-looking statements included in this press release.

NOTE: Napster and Napster Mobile are either trademarks or registered trademarks of Napster, Inc. or its subsidiaries in the United States and/or other countries. All other trademarks are owned by their respective owners.

NAPSTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)

As of
December March 31,
31, 2006 2006
ASSETS
Current assets:
Cash and cash equivalents $33,131 $46,812
Short-term investments 47,774 49,812
Foreign currency conversion in transit - 7,545
Accounts receivable, net of allowance
for doubtful accounts of $14 at
December 31, 2006 and $7 at
March 31, 2006 2,210 1,042
Prepaid expenses and other current assets 3,829 6,182
Total current assets 86,944 111,393
Property and equipment, net 5,178 7,012
Goodwill 34,658 34,658
Investment in unconsolidated entity - 2,203
Other assets 192 275
Total assets $126,972 $155,541

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,434 $3,279
Income taxes payable 3,436 4,139
Accrued liabilities 19,827 16,745
Deferred revenues 7,316 12,824
Total current liabilities 33,013 36,987
Long-term liabilities
Deferred income taxes 3,317 2,622
Other long-term liabilities 107 159
Total liabilities 36,437 39,768

Stockholders' equity:
Common stock, $0.001 par value;
Authorized: 100,000 shares; Issued
and Outstanding: 44,926 shares at
December 31, 2006 and 43,826
shares at March 31, 2006 45 44
Additional paid-in capital 260,125 260,198
Deferred stock-based compensation - (2,934)
Accumulated deficit (169,698) (141,368)
Accumulated other comprehensive
income (loss) 63 (167)
Total stockholders' equity 90,535 115,773
Total liabilities and
stockholders' equity $126,972 $155,541

NAPSTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

Three Months Ended Nine Months Ended
December 31, December 31,
2006 2005 2006 2005

Revenues:
Service $28,030 $22,766 $81,436 $64,553
Product and license 342 766 512 3,359
Total revenues 28,372 23,532 81,948 67,912

Cost of revenues:
Service (1) 18,527 16,253 55,846 45,880
Product and license 1,302 974 1,631 4,039
Total cost of revenues 19,829 17,227 57,477 49,919

Gross margin 8,543 6,305 24,471 17,993
Service gross margin % 34% 29% 31% 29%
Product and license
gross margin % (281)% (27)% (219)% (20)%
Gross margin % 30% 27% 30% 26%

Operating expenses:
Research and development (1) 2,888 3,803 8,122 10,214
Sales and marketing (1) 9,173 15,449 28,170 42,112
General and administrative (1) 5,952 5,007 17,652 15,994
Amortization of
intangible assets - 316 - 1,264
Total operating expenses 18,013 24,575 53,944 69,584

Loss from operations (9,470) (18,270) (29,473) (51,591)

Other income, net 930 1,617 3,338 1,948

Loss before income
tax provision (8,540) (16,653) (26,135) (49,643)
Income tax provision (409) (291) (966) (839)
Loss from unconsolidated entity (1,323) (63) (1,991) (63)
Loss from continuing operations,
after income taxes (10,272) (17,007) (29,092) (50,545)
Income from discontinued
operations, net of tax effect 762 - 762 -
Net loss $(9,510) $(17,007) $(28,330) $(50,545)

Basic and diluted net loss per share:
Loss per share from
continuing operations $(0.24) $(0.40) $(0.67) $(1.18)
Income per share from
discontinued operations $0.02 $- $0.02 $-

Basic and diluted net loss
per share $(0.22) $(0.40) $(0.65) $(1.18)

Weighted average shares
used in computing net
loss per share
Basic and diluted 43,217 42,994 43,170 42,977

(1)Amounts reported include
stock-based compensation
expense as follows:
Cost of revenues $ 11 $3 $ 27 $7
Research and development 205 71 573 166
Sales and marketing 115 13 373 51
General and administrative 617 183 1,928 469
$948 $270 $2,901 $693

Source: Napster, Inc.

CONTACT: Dana M. Harris of Napster, +1-310-281-5000, or
dana.harris@napster.com; or Investors, Alex Wellins, alex@blueshirtgroup.com,
or Jennifer Jarman, jennifer@blueshirtgroup.com, both of The Blueshirt Group,
for Napster, +1-415-217-7722

Web site: http://www.napster.com/

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