MPEG layer 3 codec is royalty free, as long it's not used in a commercial ambit. Of course, due to the lack of this codec in Firefox, it's still an issue unless they include it...strager wrote:
It's a licensing issue, not a closed source / open source issue.

About the hit-circles... remember to maintain the proportion with the screen (as peppy said), that is, the circles should be inside a 4:3 area (proportional to a 640x480 pixel canvas). And think about the way to sync circles with music. One way (and I think it's the method osu! gets in sync with the music) is to get the current position of the song and determine with circles should be shown and how, instead to trying to force the song to move to a different position.
One thing more: according to the difficulty, the circles must stay in screen a little bit after the moment they should be clicked. They shouldn't vanish immediately.
It's a fast developing project!! I'm really surprised with the results given in a week!!
(And before I forget it: http://osu.ppy.sh/?p=faq&n=2&c=7 [Scoring section]. No need to get worried about it ATM, though. Just a reminder.)