Analyst Conference Summary

conference date: August 1, 2007 @ 2 PM PT
for quarter ending: June 30, 2007 (1st quarter fiscal 2008)

Forward-looking statements

Overview: Had a solid quarter of revenue growth, was able to reduce customer acquisition costs, and so managed its first cash flow positive quarter ever.

Basic data:

Revenues were $32.3 million, up 11% sequentially and up 15% from $28.1 million year-earlier.

Net loss was $4.2 million, up sequentially from a loss of $8.5 million and up from a loss of $9.8 million year-earlier.

Cash ended at $67.1 million, with $600,000 positive cash flow.

Guidance:

Guiding to over $30 million in revenue, with positive cash flow, for September quarter (fiscal Q2) which covers the usual summer doldrums. Increased net loss of $0.16. Then expects an uptick to at least $33 million in December quarter, with continued positive cash flow.

Conference Highlights:

$2 million EBITDA loss (I think that is their best ever)

They reported subscriber base was down 2.5% at the end of the quarter, a regular summer phenomena.

Today announced Napster would be pre-loaded on certain Toshiba notebooks with 1 month free trial (Napster is probably paying for this).

European 16% of revenues, down from 19% in fiscal Q4 due to AOL subscriber acquisition.

770,000 paid worldwide subscriber base. College-related dropoff partly compensated by new cell phone subscribers.

27% gross margin, flat sequentially.

Operating expense was $14.2 million. Cost of revenues was $23.5 million.

Subscriber acquisition cost is now at an all-time low.

142 full time employees, up by 4 sequentially.

Believes iPhone launch is spurring digital music capabilities on cell phones, and that the iPhone will only have 3% of market. By end of 2007 most new phones will be music phones and will be Napster compatible. Already seeing transition in Japan. Wireless subscribers in Japan already outnumber PC only subscribers in Japan.

Napster now has 9 cellular carriers. Expects to pick up more, in particular in Europe.

Expects to make a major Motorola announcement this fall.

Getting good subscriber pick up from AOL music. Circuit City partnership will be ready for back to school and winter selling seasons.

Q&A:

What was cut out of marketing spend? Generally not doing paid advertisements. Doing partner marketing with contingent payments.

AT&T? Current attach rates are what we expected and will increase going forward. It is a numbers game. We have 4 handsets available today, but will have several times that in the fall.

Expects to see significant cell phone revenues later this year.

AOL sub count at end of quarter? Won’t be breaking that out. AOL deal is living up to our expectations.

RealNetworks price increase? Pay close attention to our competitors. No plans for changing our pricing at this time.

Broader market for Napster? In next year expect 20 million Napster-enabled cell phones over the next 9 months.

Bounty costs? Can’t give specifics. We pay once we get a trial or paid subscriber; varies a bit between partners; way cheaper than ads.

Mobile subscriber numbers? Won’t break out details, but well less than 40,000.

When might you be profitable? Want to get to profitability more that expanding market share at any cost. But with music phone expansion we believe top-line growth will grow substantially.

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