How humbling must it be to roll with this headline announcing your second-quarter results: "Napster Reports Record Revenue and Continues to Reduce Cash Burn."

Few companies will admit right off the top to burning through their greenbacks. Then again, Napster (NASDAQ:NAPS) has always lived by the burn. In the naughty days of music piracy, the file-sharing network was the top dog in illegal downloads that consumers burned at home onto dirt cheap recordable CDs.

The brand was then acquired by a major record label -- one of those entities that burns discs legally, and sometimes burns artists, too. Napster subsequently found its way to Roxio, a maker of popular CD-burning software, which in turn was eventually sold to Sonic Solutions (NASDAQ:SNIC).

Napster is trying to make it on its own now as a legitimate digital-music service. The good news is that its cash-rich balance sheet puts it in a position to burn cash. The bad news is that Napster is still burning it.

Napster posted a narrower-than-expected loss of $0.23 per share for its fiscal first quarter on a 34% spike in revenue. The service remains popular, with non-university subscriptions up a healthy 26% over the past year. However, Napster does see sequential weakness in the quarter ending in September.

The market isn't giving the company a whole lot of credit. Napster is carrying $2.27 a share in cash and is trading only a few ticks higher than that. Investors can't count on that as a sturdy foundation -- at least until the company stops burning cash -- but it may make for an intriguing speculation at this point.

The thing to watch over the next few quarters is the success of the free ad-supported version of Napster that the company rolled out three months ago. It was a gutsy call. It may cannibalize paying subscriptions. Then again, it may also help recruit new paying members by giving them a lo-fi free taste. It helps set Napster apart from richer rivals such as RealNetworks (NASDAQ:RNWK), Apple (NASDAQ:AAPL), and Yahoo! (NASDAQ:YHOO). It's working, too. The popularity of the new service now has Napster serving 60 million page views a month.

There is hope. There is risk. And, sadly, there is also burn.

Digital music is a high growth industry that is often explored as part of theRule Breakersnewsletter service.

Longtime Fool contributor Rick Munarriz loves his music. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks a day early.