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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2003.

OR

Commission File Number: 000-32373

Roxio, Inc.

(Exact name of Registrant as specified in its charter)

455 El Camino Real, Santa Clara, California 95050

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 367-3100

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of February 13, 2004, there were 33,535,158 shares of the Registrant’s Common Stock outstanding, par value $0.001.

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ROXIO, INC.

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Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Quarterly Report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Quarterly Report was filed with the Securities and Exchange Commission (“SEC”). We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. Many important factors that could cause such a difference are described in this Quarterly Report under the caption “Risk Factors”, which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this Quarterly Report.

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PART I. FINANCIAL INFORMATION

ROXIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ROXIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ROXIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ROXIO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION

Basis of presentation

The unaudited condensed consolidated financial statements have been prepared by Roxio, Inc., a Delaware company (“Roxio”), pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Roxio believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in Roxio’s annual report on Form 10-K for the year ended March 31, 2003.

The condensed consolidated financial statements reflect all adjustments, which include only normal, recurring adjustments, that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full year.

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

Reclassification

Certain reclassifications have been made to prior year balances in order to conform to the current period presentation, namely the separate presentation of restructuring charges on the statements of operations, deferred revenue on the balance sheet, and the reclassification of the disclosure for sales returns reserves from accounts receivable to accrued liabilities.

Restricted cash

At December 31, 2003, Roxio has $6.7 million of restricted cash. The restricted cash serves as collateral for our $5.0 million line of credit and for an irrevocable stand by letter of credit that provides financial assurance that Roxio will fulfill its obligation to Entrust, Inc, its lessor. The cash is held in custody by the issuing bank and is restricted as to withdrawal or use.

Stock-based compensation

Roxio accounts for stock-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, Amendment of SFAS No. 123.” Under APB No. 25, compensation expense is recognized based on the difference, if any, on the measurement date between the fair value of Roxio’s common stock and the amount an employee must pay to acquire the common stock. The compensation expense is recognized over the periods the employee performs the related services, generally the vesting period of four years. Roxio accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires that such equity instruments are recorded at their fair value on the measurement date, which is typically the date of grant.

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The following table illustrates the effect on net loss and earnings per share if Roxio had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):

Roxio uses the straight-line method to amortize its SFAS No. 123 pro forma stock-based compensation expense over the vesting period, which is generally four years for stock options, and over the applicable purchase period, which ranges from six months to two years, for employee stock purchase plan (“ESPP”) stock purchase rights.

Pro forma information regarding net loss and net loss per share is required by SFAS No. 123. This information is required to be determined as if Roxio had accounted for its employee stock options and ESPP under the fair value method of SFAS No. 123, as amended by SFAS No. 148.

The fair value of stock option and ESPP stock purchase rights was estimated on the date of grant using the Black-Scholes model. The following table sets forth the weighted-average assumptions used to calculate the fair value of the stock options and ESPP stock purchase rights.

The fair value of stock option and ESPP stock purchase rights was estimated on the date of grant using the Black-Scholes model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Roxio uses projected volatility rates, which are based upon historical volatility rates trended into future years. Because Roxio’s employee

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stock options and ESPP stock purchase rights have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing option-pricing models do not necessarily provide a reliable single measure of the fair value of our options and purchase rights. Under the Black-Scholes option-pricing model, the weighted average fair value of stock options at date of grant was $4.28 and $5.37 per share for options granted during the three and nine months ended December 31, 2003, respectively. The weighted average fair value of stock options at date of grant was $2.49 and $3.92 per share for options granted during the three and nine months ended December 31, 2002, respectively. The weighted average fair value of purchase rights under ESPP was $4.33 per share during each of the three and nine months ended December 31, 2003. The weighted average fair value of purchase rights under ESPP was $2.11 per share during the three and nine months ended December 31, 2002.

Treasury Stock

Roxio accounts for treasury stock under the cost method.

NOTE 2—BUSINESS ACQUISITION AND DIVESTITURE

Acquisition

In May 2003, Roxio acquired substantially all of the ownership of Napster, LLC, provider of an online music service formerly known as Pressplay. Napster, LLC was not affiliated with Napster, Inc. Pressplay served as the foundation for Roxio’s online music service which was launched on October 29, 2003 under the Napster brand. In consideration of the acquisition, Roxio exchanged $12.5 million in cash, issued 3.9 million shares of Roxio’s common stock valued at $23.5 million and obligated itself to pay up to $12.4 million in contingent payments based on Roxio’s future cash flows from the Napster business. The common stock issued was valued in accordance with the provisions of Emerging Issues Task Force (“EITF”) No. 99-12, “Determination of the Measurement Date for the Market Price of Acquiror Securities Issued in a Purchase Business Combination” using the average of the market values of Roxio’s common stock for five days prior to the date of the consummation of the acquisition. Roxio incurred approximately $1.9 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were included as part of the purchase price of the transaction.

Roxio accounted for the acquisition of Napster, LLC, formerly known as Pressplay, using the purchase method of accounting. The results of operations and the estimated assets acquired and liabilities assumed have been included in Roxio’s financial statements from the date of acquisition. The preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired is summarized below. The preliminary allocation was based on an independent appraisal and estimate of fair value.

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The identifiable intangible asset is amortized on a straight line basis over its estimated useful life of one year. In accordance with SFAS No. 142, goodwill is not amortized but is tested at least annually for impairment.

Developed technology and in-process research and development (“IPR&D”) was identified and valued through analysis of data provided by Napster, LLC, formerly known as Pressplay, concerning development efforts, their stage of development, the time and resources needed to complete them, if applicable, their expected income generating ability and the associated risks. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the developed technology. No amount was allocated to either developed technology or IPR&D related to the online music distribution platform due to the high costs and expenses associated with the online music distribution platform and the early stage of development of the market and the associated risks.

Unaudited pro forma results

The following unaudited consolidated pro forma results of operations for Roxio assume Napster, LLC, formerly known as Pressplay, had been acquired at the beginning of each of the periods presented.

Divestiture

In April 2003, Roxio sold its GoBack product line and related tangible and intangible assets to Symantec. Cash consideration of $10.2 million was due at the date of the sale with a further $2.8 million held in escrow. This escrow is subject to claims for certain potential contingencies. This escrow will be paid to Roxio, net of claims, if any, at the one-year anniversary date of the close of the transaction. A total of $1.1 million of the escrow amount was recognized as consideration at the time of the transaction. The remainder will be recognized at the one-year anniversary date of the close of the transaction upon satisfaction of the conditions specified in the purchase agreement. In the quarter ended June 30, 2003, Roxio recorded a gain of $10.6 million from the sale of the GoBack product line.

NOTE 3—BALANCE SHEET DETAIL

Content advances are advances paid to third-party content providers as part of an agreement to make content available to Roxio. These balances are being expensed as the advances are recovered in accordance with the terms of the related agreements, generally based on usage. Advances that are not recovered by the end of their contractual terms are non-refundable. The recoverability of these balances is subject to regular review by management.

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NOTE 4—LONG-TERM INVESTMENTS

In August 2002, Roxio made a strategic investment of $3.0 million in YesVideo, a company specializing primarily in video-to-DVD conversion services. Because Roxio owns less than 19.9% of YesVideo, does not have significant influence over YesVideo’s operating and financial policies, and is not represented on YesVideo’s board of directors, the investment is accounted for using the cost method of accounting.

NOTE 5—OTHER INTANGIBLE ASSETS AND GOODWILL

The gross carrying amounts and accumulated amortization of intangible assets are as follows:

Amortization of capitalized website development costs of approximately $37,000 and $260,000, for the three and nine months ended December 31, 2003, respectively, and approximately $111,000 and $334,000 for the three and nine months ended December 31, 2002, respectively, was included in sales and marketing expense.

Amortization of capitalized website development costs of approximately $8,000 and $95,000, for the three and nine months ended December 31, 2003, respectively, and approximately $44,000 and $131,000 for the three and nine months ended December 31, 2002, respectively, was included in general and administrative expense.

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The estimated remaining future amortization expense for intangible assets is as follows:

Changes in the carrying amounts of goodwill are as follows:

During the nine months ended December 31, 2003, Roxio increased goodwill by $34,407 in connection with the acquisition of Napster, LLC, formerly known as Pressplay, as it adjusted certain estimates made by management at the acquisition date. The adjustment primarily reflects the adjustments to long-term assets and various liability accounts.

In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” Roxio annually evaluates the carrying value of goodwill and adjusts the carrying value if the asset’s value has been impaired. In addition, Roxio periodically evaluates if there are any events or circumstances that would require an impairment assessment of the carrying value of the goodwill between each annual impairment assessment.

NOTE 6—RESTRUCTURING

In the three months ended June 30, 2003, Roxio recorded a restructuring charge of $1.5 million. The restructuring charge was primarily due to the reorganization of Roxio’s European operations and the finalization of its consolidation of technical support in its Canadian facility. The restructuring charge included $1.0 million of severance and benefits related to the involuntary termination of approximately 60 employees, $362,000 of equipment write-offs, and $115,000 of miscellaneous expense.

In the three months ended September 30, 2003, Roxio recorded a restructuring charge of approximately $557,000. The restructuring charge was primarily due to the reorganization of Roxio’s Canadian, Japanese and domestic operations. The restructuring charge included $542,000 of severance and benefits related to the involuntary termination of approximately 37 employees, $75,000 of downward adjustment to the restructuring accrual in the first quarter ended June 30, 2003 due to lower actual costs than originally estimated for certain severance benefits, and $90,000 of equipment write-offs. Approximately $49,000 of restructuring charge related to severance and benefits was unpaid at the end of the third quarter ended December 31, 2003 and has been recorded in accrued liabilities.

In the three months ended December 31, 2003, Roxio recorded a restructuring charge of approximately $4.4 million. The restructuring charge was primarily in connection with the reorganization of Roxio’s European and domestic operations. The restructuring charge included $2.0 million of unused lease facilities write-offs, $1.2 million of equipment write-offs, $806,000 of severance and benefits related to the involuntary termination of approximately 50 employees, and $274,000 of miscellaneous legal, audit, and tax expenses. Approximately $28,000 of restructuring charge related to severance and benefits and $225,000 related to miscellaneous expenses were unpaid at the end of the third quarter ended December 31, 2003 and have been recorded in accrued liabilities.

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The following table sets forth Roxio’s restructuring accrual established at December 31, 2003:

NOTE 7—SHORT-TERM AND LONG-TERM DEBT

Short-term debt consists of the following:

Long-term debt consists of the following:

In January 2002, Roxio entered into a three-year agreement with a bank to provide a $15.0 million revolving line of credit, collateralized by substantially all of its assets. The line of credit also included a financial covenant that required Roxio to maintain a minimum balance of cash, cash equivalents and short-term investments of $25 million. In November 2003, the line of credit was amended reducing the credit facility to $5.0 million and the maturity date to April 30, 2004 and requiring Roxio to maintain a minimum deposit account of $6.0 million. As of December 31, 2003, Roxio was in compliance with all such covenants. The line of credit bears interest either at a fixed rate of LIBOR plus 1.75% per annum or at a variable rate of prime plus 0.5% per annum. At December 31, 2003, the revolving line of credit was reclassified from non-current liability to current liability.

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NOTE 8—REVENUE RECOGNITION

Roxio recognizes revenues in accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition in Financial Statements,” and American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition.”

For month-to-month subscribers of Roxio’s online music division, the monthly service billing is recognized as billed. For subscription sales greater than one month, customers pay in advance for an annual plan or a nine-month plan. These revenues and associated credit card costs are recognized and deferred based on the time frame over which the subscription is available for those users. Revenues from sales of individual songs or albums by download are recognized at the time the music is delivered, digitally, to the end user. Revenues from pre-paid cards are deferred until tracks are downloaded by the end users.

Roxio sells all of its consumer software products through original equipment manufacturers (“OEMs”), through distributors and direct to end users.

For software product sales to OEMs, revenues are recognized based on reported product shipments from OEMs to their customers provided that all fees are fixed or determinable, evidence of an arrangement exists and collectibility is probable. For arrangements in which all elements are not delivered at the point of reported product shipment, revenues are deferred and amortized over the fulfillment period.

For software product sales to distributors, revenues are recognized upon product shipment to the distributors or receipt of the products by the distributor, depending on the shipping terms, provided that all fees are fixed or determinable, evidence of an arrangement exists and collectibility is probable. Roxio’s distributor arrangements provide distributors with certain product rotation rights. Additionally, Roxio permits its distributors to return products in certain circumstances, generally during periods of product transition. End users additionally have the right to return their product within 30 days of the purchase. Roxio establishes allowances for expected product returns in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists” and SAB 104. These allowances are recorded as a direct reduction of revenues and as an accrued liability. For direct software product sales to end users, revenues are recognized upon shipment by Roxio to the end users provided all appropriate revenue recognition criteria have been met. Roxio utilizes mail-in rebates (“MIRs”) as a marketing tool to promote its products and acquire new end users. Estimated redemption of MIRs is recorded as a direct reduction to revenues and is accrued at the date the related revenues are recognized. Estimates are based upon historical redemption rates and current market factors.

Costs related to post-contract customer support (“PCS”) are accrued at the date the related revenues are recognized. As no separate charge is made for the PCS, the expense is not significant, the PCS is available for a period of less than one year and updates are both minimal and infrequent, Roxio does not ascribe any value to the PCS or defer any portion of revenue for it.

NOTE 9—NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of warrants issued in connection with the strategic relationship agreement with Virgin Holding Inc. and warrants issued in connection with the purchase of certain assets of Napster, Inc. in November 2002, and common stock issuable upon exercise of stock options, computed using the treasury stock method.

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The following is a reconciliation of the shares used in the computation of basic and diluted net loss per share: