<PAGE>
 
   As filed with the Securities and Exchange Commission on February 19, 1999
 
                                                       Registration No. 333-
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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
 
                               ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ---------------
                             MUSICMAKER.COM, INC.
            (Exact Name of Registrant as Specified in its Charter)
 
        Delaware                     5961                   54-1811721
    (State or Other           (Primary Standard          (I.R.S. Employer
    Jurisdiction of               Industrial            Identification No.)
    Incorporation or         Classification Code
     Organization)                 Number)
 
                               ---------------
                              1831 Wiehle Avenue
                                   Suite 128
                            Reston, Virginia 20190
                                (703) 904-4110
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                   Registrant's Principal Executive Offices)
 
                               ---------------
                              Robert P. Bernardi
                          Co-Chief Executive Officer
                             musicmaker.com, Inc.
                              1831 Wiehle Avenue
                                   Suite 128
                            Reston, Virginia 20190
                                (703) 904-4110
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent For Service)
 
                               ---------------
                                  Copies to:
         John L. Sullivan, III                     Andrew J. Sherman
           Andrea S. Kaufman                        David J. Kaufman
            Erik J. Lichter                        Alan J. Schaeffer
   Venable, Baetjer and Howard, LLP              Katten Muchin & Zavis
         2010 Corporate Ridge               1025 Thomas Jefferson St., N.W.
               Suite 400                               Suite 700
           McLean, VA 22102                       Washington, DC 20007
            (703) 760-1600                           (202) 625-3790
                               ---------------
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement is effective.
 
  If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                               ---------------
                        CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
                                           Proposed
                                            Maximum
         Title of Each Class of            Aggregate   Amount of
            Securities to be               Offering   Registration
               Registered                  Price(2)       Fee
------------------------------------------------------------------
<S>                                       <C>         <C>
Common Stock, par value $0.01 per share   $30,000,000    $8,340
------------------------------------------------------------------
</TABLE>
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(1) Includes     shares of common stock which may be purchased by the
    underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
    to Rule 457 under the Securities Act of 1933, as amended.
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
 
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
 
                Subject to completion: dated February 19, 1999.
 
PROSPECTUS
 
                             musicmaker.com, Inc.
                                    [logo]
 
                               shares of common stock
 
                  $   per share initial public offering price
 
 
  This is our initial public offering. Prior to this initial public offering,
there has been no public market for our common stock. We expect our initial
public offering price to be between $    and $    per share. We have filed an
application for our common stock to be quoted on the Nasdaq National Market
under the symbol "MMKR."
 
                             Offering Information
 
<TABLE>
<CAPTION>
                                                                 Per share Total
<S>                                                              <C>       <C>
Initial public offering price...................................
Underwriting discounts/commissions..............................
Estimated offering expenses.....................................
Net offering proceeds to musicmaker.com, Inc....................
</TABLE>
 
  We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase a maximum of    additional shares to
cover over-allotments. Because the underwriters may chose not to exercise
their over-allotment option, the calculations in the table above do not
account for such exercise.
 
                                ---------------
 
             Investing in our common stock involves certain risks.
      See "Risk Factors" section beginning on page 5 of this prospectus.
 
                                ---------------
 
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
 
Ferris, Baker Watts                                       Fahnestock & Co. Inc.
     Incorporated
<PAGE>
 
  MUSICMAKER(TM), MUSIC CONNECTION(TM), MUSICMAGIC(TM) and CD KIT(TM) are
trademarks of musicmaker.com, Inc. Musicmaker.com, Inc. has applied for
federal trademark registration for each of the marks above. All other
trademarks or service marks appearing in this prospectus are the property of
their respective holders.
 
 
 [Picture of musicmaker.com website and custom CDs and descriptive language to
                            be filed by amendment.]
<PAGE>
 
                               Prospectus Summary
 
  You should read this summary together with the more detailed information and
financial statements and related notes thereto appearing elsewhere in this
prospectus, including the information under "Risk Factors." Unless otherwise
indicated, all information reflects: a one-for-3.85 reverse stock split
effected on    , 1999; the automatic conversion of all outstanding shares of
preferred stock and all outstanding convertible notes into shares of our common
stock; and the automatic conversion of all outstanding preferred stock warrants
into common stock warrants upon completion of this offering.
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, Inc. format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
 
  .  Creedence Clearwater    .  The Beach Boys           .  Ziggy Marley
      Revival
                             .  Miles Davis              .  Johnny Cash
  .  Jerry Lee Lewis
                             .  John Coltrane            .  Dionne Warwick
  .  Little Richard  
                             .  The Yardbirds with       .  Muddy Waters
  .  Frank Zappa                 Eric Clapton
                                                         .  The Blues Brothers
  .  Taylor Dayne            .  Blondie                  
                                                         .  The Kinks
  .  The Ramones             .  Kansas                   
                                                         .  The Band
 
  We believe that the multimedia features available through the interactive
environment of the Internet make it an ideal medium for promoting, marketing
and selling our custom CDs and digitally downloaded music.
 
  Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs and digital
downloads:
 
  .  Growth in sales of CD singles.
 
  .  Growth of the Internet as a viable retail medium.
 
  .  Increasing affluence of the over 30 generation.
 
  .  Continued prominence of classic rock albums.
 
  .  Record label desire to diversify distribution methods while protecting
     intellectual property rights.
 
 
                                       1
<PAGE>
 
  We sell our custom CDs through our website as well as the websites of other
prominent music retailers, including Platinum Entertainment, Inc., Trans World
Entertainment Corporation and N2K Inc. (musicboulevard.com). Additionally, we
have a marketing alliance with The Columbia House Company, a leading record and
video club, jointly owned by Sony Music Entertainment, Inc. and Time Warner
Inc. This alliance currently allows us to exclusively market our custom CDs to
Columbia House's 15 million members, including those without Internet access,
through Columbia House's websites and direct marketing campaigns.
Musicmaker.com has recently entered into a similar marketing alliance with
Audio Book Club, Inc., a direct marketer of audio books through the Internet
and club member catalogs, and intends to seek additional alliances with music
and non-music retailers.
 
  Our management team has significant experience in both the music and
technology industries. Our officers and directors include the former Chairman
and Chief Executive Officer of PolyGram Records, Inc. and President of Mercury
Records Corporation, the former President of Warner Music Media and RCA Direct
Marketing, Inc./BMG Direct Marketing, Inc., as well as the co-founder of
PictureTel Corporation.
 
  We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
 
  .  Offer a new way to buy licensed, customized music.
 
  .  Offer most extensive selection of music for custom compilation and
     digital downloading.
 
  .  Increase website traffic through industry alliances and multiple
     hyperlinks.
 
  .  Create strong brand awareness.
 
  .  Establish genre-specific user communities.
 
  .  Capitalize on cross-selling opportunities.
 
  .  Leverage technologies for additional formats.
 
  .  Expand international presence.
 
  Musicmaker.com, Inc. is a Delaware corporation incorporated on April 23,
1996. Our principal executive office is located at 1831 Wiehle Avenue, Suite
128, Reston, Virginia 20190, and our telephone number is (703) 904-4110. Our
World Wide Web site is www.musicmaker.com. The information on our website is
not incorporated by reference into this prospectus.
 
                                       2
<PAGE>
 
                                  The Offering
 
<TABLE>
<S>                             <C>
Common stock offered by
 musicmaker.com...............
 
Common stock outstanding after
 this offering(1).............
 
Use of proceeds...............  .  Pay advances to record labels in connection
                                   with acquiring additional music content.
                                .  Expand advertising, marketing and
                                   promotional efforts with existing and future
                                   strategic marketing partners.
                                .  Maintain and upgrade technological systems.
                                .  Fund working capital and general
                                   corporate purposes. See "Use of Proceeds."
 
Proposed Nasdaq National
 Market symbol................  "MMKR"
</TABLE>
--------
(1) Does not include:
 
 .      shares of common stock underlying outstanding warrants issued to Ferris,
   Baker Watts, Incorporated and Fahnestock & Co. Inc., as representatives of
   the underwriters, or 595,855 shares of common stock underlying outstanding
   common stock warrants, or 247,039 additional shares reserved for issuance
   pursuant to our stock option plan.
 
   Includes:
 
 .  532,182 shares of common stock underlying stock options outstanding as of
   the date of this prospectus pursuant to our stock option plan and 728,725
   shares of common stock underlying warrants issued upon conversion of the
   outstanding preferred warrants. See "Management--Stock Option Plan."
 
                                       3
<PAGE>
 
                             Summary Financial Data
 
  The following table summarizes our financial data. You should read this
information together with our consolidated financial statements and notes
thereto appearing elsewhere in this prospectus.
 
Consolidated Statement of Operations Data:
 
<TABLE>
<CAPTION>
                                       Period from
                                      April 23, 1996
                                      (inception) to Year ended December 31,
                                       December 31,  ------------------------
                                           1996         1997         1998
                                      -------------- -----------  -----------
<S>                                   <C>            <C>          <C>
Net sales............................   $   8,355    $    13,432  $    74,028
Cost of sales........................       2,590          2,955       46,821
                                        ---------    -----------  -----------
Gross profit.........................       5,765         10,477       27,207
Total operating expenses.............     370,410      2,060,677    4,699,789
                                        ---------    -----------  -----------
Loss from operations.................    (364,645)    (2,050,200)  (4,672,582)
Net interest (expense) income........      (2,667)       (33,957)      17,815
                                        ---------    -----------  -----------
Net loss.............................   $(367,312)   $(2,084,157) $(4,654,767)
                                        =========    ===========  ===========
Pro forma basic and diluted net loss
 per share (1)(2):                                                $     (1.73)
                                                                  ===========
Pro forma weighted average shares
 outstanding (1)(2):                                                2,863,521
                                                                  ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                At December 31, 1998
                                      -----------------------------------------
                                                                   Pro Forma
                                        Actual    Pro Forma (1) As Adjusted (3)
                                      ----------  ------------- ---------------
<S>                                   <C>         <C>           <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...........  $  972,954   $2,286,579        $
Working capital ....................    (287,767)   1,025,858
Total assets........................   3,233,963    4,435,193
Debt, long-term portion.............     726,786      214,286
Convertible preferred stock.........   3,434,700          --
Total stockholders' (deficit) equity
 ...................................  (2,312,668)   2,835,762
</TABLE>
--------
(1) Pro forma to give effect to:
  . A one-for-3.85 reverse stock split to be effected, on     , 1999.
 
  .  The automatic conversion, upon the completion of the offering, of all
     outstanding shares of preferred stock into 819,199 shares of common
     stock.
 
  .  The automatic conversion of all outstanding convertible notes into
     415,584 shares of common stock ($512,500 of convertible notes
     outstanding at December 31, 1998 and $1,487,500 of convertible notes
     issued in January 1999).
 
  .  The write-off of all capitalized loan fees related to the convertible
     notes ($112,395 capitalized at December 31, 1998 and $173,875
     capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
    financial statements.
(3) Adjusted to give effect to reflect the sale of      shares of common stock
    offered hereby at an assumed initial public offering price of $    per
    share (the midpoint of the range) and the application of the net proceeds
    of this offering. See "Use of Proceeds" and "Capitalization."
 
 
                                       4
<PAGE>
 
                                 RISK FACTORS
 
  You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before making any investment
decision. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties, not presently known to us,
or currently considered immaterial by our management, may also materially
affect our future business, financial condition and results of operations. As
a result of any of the risks we encounter, our business, financial condition
and results of operations could be materially adversely affected. In addition,
any such adverse effect could cause the trading price of our common stock to
decline and you may correspondingly lose all or some portion of your
investment in us.
 
We have a limited operating history, have incurred losses and may continue to
realize losses. We also have an accumulated deficit that may continue to
increase.
 
  We began commercial operations in November 1997. Accordingly, we have a
limited operating history and we face all of the risks and uncertainties
encountered by early stage companies in new, unproven and rapidly evolving
markets. Among other things, our business will require:
 
  .  Expanding the content available in our online music library.
 
  .  Increasing awareness of the musicmaker.com brand.
 
  .  Increasing our customer base.
 
  .  Attracting and retaining talented management, technical, marketing and
     sales personnel.
 
  If we are unable to achieve any of these goals, or other requirements for
the successful growth of an early stage Internet commerce company, our
business, financial condition and results of operations may be materially
adversely affected.
 
  We have had net losses in each period since we began operations. We
anticipate that such losses may continue for the foreseeable future as our
operating expenses continue to increase. We reported a net loss of $4,654,767
and $2,084,157 for the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, we had an accumulated deficit of $7,106,236. There
can be no assurance that we will ever achieve profitable operations or
generate significant revenue with our current products and strategy. See
"Summary Financial Data," the consolidated financial statements appearing
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
We do not have a license agreement with any major record label and currently
rely solely on independent record labels for our music content.
 
  In order to build our music library, we must negotiate and enter into
license agreements with record labels. We rely upon our license agreements
with over 85 record labels, all of which are typically smaller, independent
labels. In order to achieve significant commercial success, we believe we need
to enter into a license agreement with at least one of the five major record
labels. Together, the five major record labels below accounted for
approximately 80% of the music sold in 1997:
 
  .  BMG Entertainment
 
  .  EMI
 
  .  Universal Music Group
 
  .  Sony Music Entertainment
 
  .  Warner Music
 
We may not be able to negotiate additional agreements and obtain additional
licenses on favorable terms, if at all. Our inability to secure licenses for
additional song titles or to obtain commercially popular music titles in a
 
                                       5
<PAGE>
 
timely fashion may have a material adverse effect upon our business, financial
condition and results of operations.
 
  In addition, we may encounter difficulty in making the minimum payments
required under our existing and any future license agreements with record
labels. Our failure to make such minimum payments could have material adverse
effects on our relationships with record labels, including, but not limited
to, cancellation of our license agreements. Any difficulties in obtaining, or
maintaining rights to music content could materially affect our business,
financial condition and results of operations. See "Business--Music Content."
 
We need to develop the musicmaker.com brand.
 
  Our future success and growth significantly depend upon our promotion and
favorable consumer perception of the musicmaker.com brand. Increased
recognition and awareness of the musicmaker.com brand will largely depend upon
our advertising and promotional efforts, our strategic marketing alliances,
and our continued provision of a high quality product and high level of
customer service. There can be no assurance that these efforts will result in
increased brand recognition or if such increased brand recognition is
obtained, that we will experience a corresponding increase in the sale of our
custom CDs. See "Business--musicmaker.com Strategy."
 
Our business depends on continued growth of online commerce.
 
  Purchasing products and services over the Internet is a new and emerging
market. Our future revenues and profits are substantially dependent upon
widespread consumer acceptance and use of the Internet and other online
services as a medium for commerce. Rapid growth of the use of the Internet and
other online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce. Demand for and market acceptance of recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there are few proven products and services. For us to
grow, consumers who have historically used traditional means of commerce will
instead need to purchase products and services online, and as a result the
custom CD market may not be viable without the growth of Internet commerce.
 
We depend upon maintenance and continued improvement of the Internet's
infrastructure.
 
  The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and
security, and the timely development of complementary products, such as high-
speed modems, to provide reliable Internet access and services.
 
  The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could face such outages
and delays in the future. Outages and delays are likely to affect the level of
Internet usage, the level of traffic on our website and the number of
purchases on our website. In addition, the Internet could lose its viability
as a mode of commerce due to delays in the development or adoption of new
standards to handle increased levels of activity or due to increased
government regulation. The adoption of such new standards or government
regulation may also require us to incur substantial compliance costs.
 
Our business model is novel and unproven.
 
  Musicmaker.com is based on a novel and unproven business model. It is
impossible to predict the degree to which consumers will use the
musicmaker.com service and the level of consumer acceptance for our custom
CDs. It is also difficult to anticipate the level of acceptance of our
distribution model by additional record labels, specifically major record
labels. We will be successful only if consumers and record labels respond
favorably to our business model and our custom CDs and digitally downloaded
music.
 
 
                                       6
<PAGE>
 
  Factors influencing consumers' acceptance of our custom CDs and digitally
downloaded music include:
 
  .  Our ability to consistently provide high quality custom CDs and
     digitally downloaded music at competitive prices.
 
  .  Our maintenance of a user-friendly ordering process and a high level of
     customer service.
 
  .  Consumers' desire to conduct online commerce, specifically their demand
     for custom CDs.
 
  Factors influencing record labels' acceptance of our business model include:
 
  .  The belief that sales of custom CDs and digitally downloaded music will
     enable record labels to gain market exposure for artists and titles in
     their back catalogs and generate incremental revenue without disrupting
     existing distribution channels or retail pricing structures.
 
  .  The belief that musicmaker.com will be able to assist in the protection
     of record label's intellectual property rights.
 
  Should we encounter difficulty with any of the factors above, or other
factors associated with consumer or record label acceptance of our business
model, it is possible that we will not achieve profitability. See "Business--
musicmaker.com Strategy."
 
The online music industry is extremely competitive.
 
  The market for online commerce is extremely competitive and we believe such
competition will continue to grow and intensify. Our most visible custom
compilation competitors currently include Custom Revolutions, Inc., CDuctive,
and amplified.com. Although our primary focus is on sales of custom, rather
than pre-recorded music CDs, we may ultimately compete with existing online
websites that provide sales of pre-recorded music on the Internet. Such online
competitors may include N2K, CDnow, Inc., Amazon.com, Inc., barnesandnoble.com
inc., Columbia House and BMG Music Service. We do not believe that any of
these competitors currently offer customized music compilations to their
customers. However, CDnow purchased SuperSonic Boom, a custom compilation
provider, in June 1998.
 
  We also face significant competition in the growing market to provide
digitally downloaded music, specifically for music files in MP3 format.
Digitally downloaded music can currently be found on the websites of existing
online music retailers, artists and record labels as well as catalogs of songs
provided by internet portals such as Lycos. We expect the competition to
provide MP3 files to intensify with further entry by additional record labels,
artists and portals, including those with greater resources and music content
than musicmaker.com. Recently, the five major record labels announced that
they have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods."
 
  Our ability to effectively compete in the online music industry will depend
upon, among other things:
 
  .  Our ability to expand the list of song titles available from our online
     music library.
 
  .  Our continued promotion of the musicmaker.com website and brand.
 
  .  Our maintenance and improvement of the technical systems upon which our
     operations rely.
 
  .  Our ability to attract and retain experienced management, technical,
     marketing and sales personnel.
 
  .  Our ability to provide a high quality, easy to use mechanism by which
     users can customize and purchase music at a reasonable price.
 
  Our failure in connection with any of the factors above, would materially
adversely affect our ability to compete.
 
 
                                       7
<PAGE>
 
  In addition to competition encountered on the Internet, we face competition
from traditional music retail chains and megastores, mass merchandisers,
consumer electronics stores, music clubs, and a number of small custom
compilation start-up companies. We could also face competition from record
companies, multimedia companies and entertainment companies that seek to offer
recorded music either directly to the public or through strategic ventures and
partnerships.
 
  Many of our current and potential competitors in the Internet commerce and
music businesses have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger existing customer bases than musicmaker.com. For example, should record
labels decide to compete with us by offering their own custom CDs over the
Internet or by making their music available for digital downloads, we would be
at a significant disadvantage from a music library selection standpoint. We
expect that such competitors may be able to respond more quickly to new or
emerging technological change, competitive pressures and changes in customer
demand. As a result of their advantages, our competitors may be able to limit
or curtail our ability to successfully compete in the industry. The
competitive pressures that we encounter in the industry could materially
adversely affect our business, financial condition and operating results. See
"Business--Competition."
 
We are significantly dependent upon certain existing and future marketing
alliances.
 
  We believe that future marketing of our custom CDs is heavily dependant upon
existing strategic marketing alliances. We anticipate that our ability to
distribute print advertisements, promote the musicmaker.com brand name and
ultimately sell custom CDs would be materially adversely affected by
contractual difficulties associated with, or the termination of, our existing
marketing alliances.
 
  We especially rely upon our current marketing alliance with Columbia House.
Columbia House may terminate our alliance upon not less than thirty days
notice if Mr. Puthukarai ceases to be musicmaker.com's President and Chief
Operating Officer and Columbia House deems his replacement incompatible with
their interest, or Columbia House determines after the first six
musicmaker.com promotional mailings to its members that its financial returns
do not justify continuing the relationship. Columbia House may choose to enter
into non-exclusive marketing agreements with our competitors if they offer a
significant repertoire of music unavailable through musicmaker.com. Our
alliance with N2K is subject to renegotiation as a result of its proposed
merger with CDNow, which acquired a custom compilation provider in June 1998.
 
  Our future success and development of the musicmaker.com brand name is also
heavily dependant upon our ability to enter into additional marketing
alliances and hyperlink arrangements with music and entertainment companies,
Internet service providers, and Internet search engines. There is no assurance
that we will be able to develop future strategic alliances on terms favorable
to us, if at all. Our inability to enter into such alliances in the future
could materially adversely affect the promotion of our musicmaker.com brand
and our custom CDs. See "Business--Marketing."
 
Growth of musicmaker.com may challenge our business operations.
 
  Since beginning commercial operations in November 1997, we have rapidly
expanded our operations. While we anticipate continued expansion of our
operations for the foreseeable future, such growth may place considerable
strain on our existing resources and technology, as well as our management,
technical, marketing and sales personnel. In order to adequately manage our
growth, it will be necessary to continue to implement our strategy and to
assess and upgrade the systems and resources which support our operations. If
we are unable to manage our growth effectively, our business, financial
condition and results of operations may be materially adversely affected. See
"Business--musicmaker.com Strategy."
 
We may encounter security risks associated with business on the Internet.
 
  We are potentially vulnerable to computer break-ins, "hackers," credit
fraud, viruses and other similar disruptive problems caused by our customers
or unauthorized third parties. These disruptions could result in interruption,
delay or possible cessation of service to our customers. Unauthorized activity
on our network or website could also result in potential misappropriation of
proprietary information or customer data. Such misappropriation could cause us
to incur significant litigation expense to assert our proprietary rights or
defend possible claims of misuse of, or failure to secure, consumers' personal
information.
 
                                       8
<PAGE>
 
  Consumers currently use their credit cards to make online purchases. We rely
on licensed encryption and authentication technology to secure transmission of
confidential information, including credit card numbers. It is possible that
advances in computer capabilities and technology could result in a compromise
or breach of the technology we use to protect customer transaction data. Such
security concerns of our business, and the online industry generally may deter
customers and potential customers from using the Internet as a means of
commerce. Security breaches could also expose us to potential liability to
customers, record labels and others and could inhibit the growth of the
Internet as a merchandising medium.
 
Our industry may encounter changes in music distribution methods.
 
  New digital distribution channels for music could radically alter the
established order of artists, publishers, distributors, retailers and media
companies that use current music distribution methods. Early adopters are
currently performing market trials with high quality, open format MP3
downloaded music files--some posted legally by artists or record labels on
their own websites, others posted illegally on sites that have pirated
intellectual property owned by the major and independent labels. A portable
device, the Rio, that plays MP3 downloaded music files recently became
available to consumers.
 
  In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which uses IBM software, will allow
approximately 1,000 cable subscribers in San Diego to download music from a
library of 1,000 album titles and several hundred song titles provided by the
major record labels. The market trial is viewed by many as the first step
taken by the major record companies to consider the sale of digital music
online.
 
  A task force of recording companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, is attempting
to develop standards by which songs available in digital format can be
disseminated without infringing upon copyright or other intellectual property
rights. We have made a business decision to provide licensed music content
over the Internet by licensing content from labels in a traditional manner to
ensure compliance with existing copyright laws. The acceptance and integration
of any of these new methods of music distribution, without sufficient
protection of intellectual property or industry uniformity, could materially
adversely affect our business, financial condition and results of operations.
Increased availability of high bandwidth capacity could further alter existing
distribution methods.
 
We may not be able to keep up with technological advancements.
 
  The market for providing custom CDs and digitally downloaded music on the
Internet, and for Internet commerce generally, is characterized by rapid
change, evolving industry standards and the frequent introduction of new
technological products and services. The introduction of new technology,
products, services or standards may prove to be too difficult, costly or
simply impossible to integrate into our existing systems. Such innovations
could render our existing or any future products and services obsolete. Our
ability to remain competitive will also depend heavily upon our ability to
maintain and upgrade our technology products and services. Any difficulty
keeping pace with technological advancements could hurt growth of our
business, retention of our customers and may materially adversely affect our
business, financial condition and results of operations.
 
Risk of our system failure.
 
  Our business heavily depends upon our ability to maintain our computer and
telecommunications equipment in effective working order. The scalability
features of our storage and fabrication systems have not been tested in actual
operations and may not be able to handle a large increase in customer demand
or a significant increase in our online music library. The strain associated
with increased demands upon our systems may result in reduced quality of our
customer service and products or potential system failure. Any interruption,
damage to, or failure of our systems could have a material adverse effect on
our business, financial condition and results of operations.
 
  Substantially all of our computer and telecommunications operations are
located at our facility in Reston, Virginia. We currently do not maintain a
redundant website or co-hosting arrangement nor do we have an off-site back-up
of our music library. In the event of a catastrophic loss at our Reston
facility resulting in damage to, or destruction of, our computer and
telecommunications systems, we would have a material interruption in our
business operations.
 
                                       9
<PAGE>
 
We depend upon intellectual property rights and risk having such rights
infringed.
 
  We consider our trademarks, trade secrets and similar intellectual property
to be a valuable part of our business. To protect such intellectual property
rights, we rely upon copyright, trademark, patent and trade secret laws, as
well as confidentiality agreements with our employees and consultants. There
can be no assurance that our use of such contracts and the application of
existing law will provide sufficient protection from misappropriation or
infringement of our intellectual property rights. It is possible that others
will develop and patent technologies that are similar or superior to that of
musicmaker.com. It is also possible that third parties will obtain and use our
content or technology without authorization.
 
Musicmaker.com's year 2000 risks.
 
  The year 2000 issue is the result of computer programs written using year
identifiers consisting of two digits, rather than four. Use of two digits to
identify years may cause certain systems to recognize a date using "00" as the
year 1900, rather than the year 2000. The year 2000 issue could result in
system failures, or miscalculations causing disruption to the operations of
many businesses. We have not verified that the companies doing business with
us are year 2000 compliant. Significant uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance. Any year
2000 compliance problem of musicmaker.com, our current and any future
strategic marketing partners, our vendors or our users could have a material
adverse effect on our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 System Costs."
 
We may be exposed to liability for content retrieved from our website.
 
  Our exposure to liability from providing content on the Internet is
currently uncertain. Due to third party use of information and musical content
downloaded from our website, we may be subject to claims for defamation,
negligence, copyright, trademark or patent infringement or other theories
based on the nature and content of such materials. Our exposure to such
liability, particularly for claims not covered by insurance, or in excess of
any insurance coverage, could have a material adverse effect on our business,
financial condition and results of operations.
 
We depend upon the services of key personnel.
 
  Our future success depends heavily upon the continued service and industry
relationships of our key senior management personnel, including, but not
limited to:
 
  .  Robert P. Bernardi, our Chairman of the Board of Directors and Co-Chief
     Executive Officer.
 
  .  Devarajan S. Puthukarai, our President, Co-Chief Executive Officer and
     Chief Operating Officer.
 
  .  Irwin H. Steinberg, our Vice Chairman of the Board of Directors and a
     consultant to musicmaker.com.
 
  Any departure by key senior management personnel may have a material adverse
effect upon our business, financial condition and results of operations. See
"Risk Factors--We are significantly dependent upon certain existing marketing
alliances," "Business--Marketing" and "Management."
 
We depend upon hiring and retaining qualified employees.
 
  Our current and future operations significantly depend upon our ability to
attract, retain and motivate highly qualified, managerial, technical,
marketing and sales personnel. Competition for such personnel is intense,
particularly in the Northern Virginia employment market. There can be no
assurance that we will be able to retain our existing employees or attract,
retain and motivate highly qualified personnel in the future. Such personnel
difficulties could impair growth of our business, promotion of our
musicmaker.com brand and products, and materially adversely affect our
business, financial condition and results of operations.
 
 
                                      10
<PAGE>
 
Regulation of Internet domain names is uncertain.
 
  We currently hold the Internet domain name "musicmaker.com." Domain names
generally are regulated by Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to
change. Regulatory bodies could establish additional top level domains,
appoint additional domain name registrars or modify the requirements for
holding domain names. As a result, we may not acquire or maintain the
musicmaker.com domain name in all of the countries in which we conduct or
expect to conduct business. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks
and other proprietary rights.
 
Our industry may be subject to increased government regulation.
 
  As commerce conducted on the Internet continues to evolve, federal, state or
foreign agencies may adopt regulations or impose new taxes intended to cover
our business operations. Such efforts may seek to regulate areas including
user privacy, pricing, content and consumer protection standards for our
products and services. Compliance with such regulations could hinder our
growth or prove to be prohibitively expensive. It is also possible that the
introduction of such regulations could expose companies involved in Internet
commerce, or the provision of content over the Internet, to significant
liability. If enacted, such government regulation could materially adversely
affect the viability of Internet commerce, generally, as well as our business,
financial condition and results of operations.
 
Certain existing investors own a large percentage of musicmaker.com's voting
securities.
 
  Following the completion of this offering, our executive officers, directors
and their affiliated entities together will beneficially own approximately
of our outstanding shares of common stock (   if the underwriters'
overallotment option is exercised in full). As a result, these stockholders
will exercise significant control over all matters requiring stockholder
consent. Matters typically submitted to our stockholders for a vote include
the election of our directors, mergers or consolidations, and any sale of all,
or substantially all of our assets. The concentrated holdings of the
stockholders noted above may result in delay or deterrence of possible changes
in our control, which may reduce the market price of our common stock. See
"Principal Stockholders."
 
We may encounter risks associated with international expansion.
 
  We intend to expand our business into international markets. In the event
that we conduct any such expansion, we will encounter many of the risks
associated with international business expansion, generally. Such risks
include, but are not limited to, language barriers, changes in currency
exchange rates, political and economic instability, difficulties with
regulatory compliance and difficulties with enforcing contracts and other
legal obligations. See "Business--musicmaker.com Strategy."
 
Shares eligible for future sale.
 
  We will have     shares of common stock outstanding after this offering. The
common stock sold in this offering will be freely tradable except for any
shares purchased by "affiliates" as that term is defined in Rule 144,
promulgated under the Securities Act of 1933, as amended. Our common stock
sold prior to the offering and certain other securities sold prior to the
offering, including securities automatically converting into common stock upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144. In addition the following securities are outstanding and,
upon exercise of certain purchase rights and issuance of common stock therefor
unless registered, may only be sold pursuant to Rule 144 or an exemption from
registration.
 
 .  Under our stock option plan, options to purchase 532,182 shares of common
   stock are issued and outstanding and upon exercise, the underlying common
   stock may be freely traded subject to certain limitations imposed by Rule
   701 of the Securities Act. An additional 247,039 shares of common stock are
   reserved for issuance under our stock option plan.
 
                                      11
<PAGE>
 
 .  595,855 common stock warrants outstanding, 728,725 common stock warrants to
   be issued upon conversion of the outstanding preferred warrants and
   common stock warrants to be issued to the representatives in connection
   with this offering. The holders of the warrants may sell shares of common
   stock acquired upon exercise no earlier than six months from the date of
   issuance, pursuant to, and as limited by, Rule 144.
 
  Stockholders holding approximately  or  % of our outstanding common stock
have agreed not to offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any
musicmaker.com securities currently held without prior written consent of
Ferris, Baker Watts, Incorporated for a period of 180 days. Further sales of
common stock under Rule 144 or otherwise, and the introduction of such shares
into the public market could materially adversely affect the market price of
our common stock. See "Shares Eligible for Future Sale."
 
Our management will have broad discretion in applying the net proceeds of this
offering.
 
  Assuming an initial offering price of $   and after deducting underwriting
discounts and commissions and other expenses of the offering, we will receive
net proceeds of $   . We have not yet determined the specific dollar amount of
net proceeds to be allocated to any of the possible uses indicated in "Use of
Proceeds." Accordingly, our management will have broad discretion in applying
the net proceeds of the offering. See "Use of Proceeds."
 
Investors purchasing common stock in this offering will experience immediate
and substantial dilution.
 
  The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after this offering. Accordingly, if you purchase common
stock in this offering, you will incur immediate dilution of approximately
$   , or    % in the pro forma net tangible book value per share of common
stock from the price you pay for the common stock. To the extent that
outstanding options and warrants are exercised or additional securities are
issued, there will be further dilution to the investors in this offering. See
"Dilution" and "Shares Eligible for Future Sale."
 
Tax uncertainties of our business.
 
  It is possible that the current tax moratorium limiting the ability of state
and local governments to impose taxes on Internet based transactions could
fail to be renewed prior to October 2001. Failure to renew this legislation
would allow states to impose new taxes on Internet based commerce. Should
states impose a requirement that online vendors collect taxes for all products
shipped to each state, collection of such sales tax could create additional
administrative burdens on our operations and slow the growth of Internet
commerce. The imposition of such taxes could materially adversely affect our
ability to become profitable in the future.
 
There has not been a public market for our common stock and its market price
is likely to fluctuate.
 
  Prior to this offering there has been no public market for our common stock.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "MMKR." There can be no assurance, however, that an active trading
market will develop, or, if developed, that such a market will be maintained.
 
  The market price of our common stock is likely to be volatile. As a result,
you may not be able to resell your shares at or above the initial public
offering price and could lose all or some portion of your investment. This
volatility may result from factors including:
 
  .  Variations in our quarterly operating results.
 
  .  Increase or decrease in orders placed for our products.
 
  .  Changes in estimates prepared by analysts for musicmaker.com or online
     commerce generally.
 
  .  Any announcement of technological innovations.
 
  .  The introduction of new competitors or changes in customer preferences.
 
  .  The general condition of companies engaged in Internet commerce.
 
  .  Other events or factors affecting the market for our common stock and
     the stock market generally.
 
                                      12
<PAGE>
 
  The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price
of common stock for many companies engaged in industries similar to
musicmaker.com. The factors above could materially adversely affect the market
price of our common stock.
 
We may have fluctuations in our quarterly results.
 
  We expect to experience significant fluctuations in our future quarterly
operating results caused by a variety of factors, many of which are outside of
our control. Factors affecting our quarterly results may include:
 
  .  Any announcement, or introduction of new or enhanced websites, products,
     services and strategic alliances by us, our alliance partners or our
     competitors.
 
  .  Any changes to our current product offering, increases or decreases in
     our song library or that of our competitors.
 
  .  Seasonality of music purchases.
 
  .  Level of customer satisfaction, including our ability to retain existing
     customers and attract new customers.
 
  .  Price competition or changes in our current licensing arrangements.
 
  .  Increases or decreases in the use of the Internet, generally, and
     consumer acceptance of the Internet for retail commerce purposes.
 
  .  Our ability to upgrade or respond to technological advances in a timely
     and cost effective manner with minimal disruption to our operations.
 
  .  Technical difficulties, system downtime or Internet disruptions.
 
  .  General economic conditions and conditions specific to Internet commerce
     and the music industry.
 
  As a result of these and other factors, period-to-period comparisons of our
results of operations may not be meaningful and should not be relied upon as
an indication of our future performance. As a result of any of the factors
above, our operating results could be below expectations of investors and
market analysts, and the market price of our common stock could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
Anti-takeover effects of our Charter and Bylaws.
 
  Our Charter and Bylaws contain provisions that could discourage potential
acquisition proposals and might delay or prevent a change in control of
musicmaker.com. These provisions could make musicmaker.com less attractive to
potential acquirers. These provisions could also result in our stockholders
being denied a premium for, or receiving less for, their shares than they
otherwise might have been able to obtain in a takeover attempt. See
"Description of Securities."
 
Our stockholders may have difficulty in recovering monetary damages from
directors.
 
  Our Charter contains a provision which eliminates personal liability of our
directors for monetary damages to be paid to us and our stockholders for
breach of certain fiduciary duties. As a result of this provision, our
stockholders may be unable to recover monetary damages against our directors
for their actions that constitute a breach of certain fiduciary duties,
negligence or gross negligence. Inclusion of this provision in our Charter may
also reduce the likelihood of derivative litigation against our directors and
may discourage lawsuits against our directors for breach of their duty of care
even though such claims might have been successful and benefited stockholders.
See "Description of Securities."
 
                                      13
<PAGE>
 
We may require additional capital or financing in the future.
 
  We anticipate that the proceeds of this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital needs for at least the next 12 months. Beyond that period, we
may need to raise additional funds. We cannot be certain that we will be able
to obtain such funds on favorable terms, if at all. If we decide to raise such
funds by issuing additional equity securities, purchasers in this offering may
experience additional dilution. Issuance of additional equity securities may
also involve granting preferences or privileges ranking senior to those
purchasers in this offering. If we cannot obtain sufficient funds, we may not
be able to grow our operations, take advantage of future business
opportunities or respond to technological developments or competitive
pressures. See "Dilution," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
We do not intend to pay dividends.
 
  We have never paid dividends on our common stock. We do not intend to pay
dividends and purchasers should not expect to receive dividends on our common
stock for the foreseeable future. See "Dividend Policy" and "Description of
Securities."
 
Warning regarding our use of forward-looking statements.
 
  This prospectus contains forward-looking statements. Such statements relate
to possible future events, our future performance and our future operations.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "anticipates," "believes," "expects,"
"plans," "future," "intends," and other similar expressions. These forward-
looking statements are only our predictions. Our actual results could and
likely will differ materially from these forward-looking statements for many
reasons, including the risks described below and appearing elsewhere in this
prospectus.
 
                                      14
<PAGE>
 
                                USE OF PROCEEDS
 
  Assuming an initial offering price of    and after deducting underwriting
discounts and commissions and other expenses of this offering, we will receive
net proceeds of     from the sale of     shares of our common stock in this
offering. We intend to use the net proceeds of this offering to pay advances
in connection with acquiring additional music content from record labels. We
also anticipate using net proceeds to expand our advertising, marketing and
promotional efforts with our existing and future strategic marketing partners.
Net proceeds may be used to support promotional inserts in direct mailings to
Columbia House and Audio Book Club members, website advertising and seasonal
product promotions. We intend to use net proceeds to maintain, back-up, and
upgrade the technological systems which support our operations. Although we do
not have any current plans to acquire any businesses, we may use a portion of
the net proceeds of the offering for such purposes. We have not yet determined
the amount of net proceeds to specifically allocate to each of the foregoing
purposes. As a result, management will have significant discretion in the
application of such proceeds. Allocation of net proceeds is further subject to
future events including general economic conditions, changes in
musicmaker.com's strategy and response to competitive pressures and consumer
preferences associated with the music industry and Internet commerce. Pending
use, we will invest the net proceeds of this offering in bank certificates of
deposit and other fully insured investment grade interest bearing securities.
See "Business--musicmaker.com Strategy" and "Risk Factors--Our management will
have broad discretion in applying the net proceeds of this offering."
 
                                      15
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth our capitalization as of December 31, 1998:
 
    .  On an actual basis.
 
    .  On a pro forma basis to reflect:
 
           .  A one-for-3.85 reverse stock split to be effected on       ,
              1999.
 
           .  The automatic conversion, upon the completion of the offering,
              of all outstanding shares of preferred stock into 819,199 shares
              of common stock.
 
           .  The automatic conversion of all outstanding convertible notes
              into 415,584 shares of common stock ($512,500 of convertible
              notes outstanding at December 31, 1998 and $1,487,500 of
              convertible notes issued in January 1999) and the issuance of
              252,104 shares of common stock after December 31, 1998.
 
    .  On a pro forma as adjusted basis, to reflect the receipt by
       musicmaker.com of the estimated net proceeds from the offering.
 
  The information below assumes an initial public offering price of $    as
reduced for underwriting discounts, commissions and expenses incurred in
connection with the offering.
 
<TABLE>
<CAPTION>
                                                 As of December 31, 1998
                                           -------------------------------------
                                                                      Pro Forma
                                             Actual      Pro Forma   As Adjusted
                                           -----------  -----------  -----------
<S>                                        <C>          <C>          <C>
Current portion of long-term obligation..  $    42,857  $    42,857
                                           ===========  ===========     ====
Convertible notes and long-term
 obligation..............................  $   726,786  $   214,286
Series A preferred stock.................    1,750,000          --
Series B preferred stock.................    1,684,700          --
Stockholders' (deficit) equity:
  Common stock, $0.01 par value;
   5,194,805 shares authorized; 2,707,954
   shares issued and outstanding on an
   actual basis; 3,942,737 shares issued
   and outstanding on a pro forma basis
   and     shares issued and outstanding
   on a pro forma as adjusted basis......       27,080       39,427
  Additional paid-in capital.............    4,766,488   10,188,841
  Accumulated deficit....................   (7,106,236)  (7,392,506)
                                           -----------  -----------     ----
Total stockholders' (deficit) equity ....   (2,312,668)   2,835,762
                                           -----------  -----------     ----
Total capitalization.....................  $ 1,848,818  $ 3,050,048
                                           ===========  ===========     ====
</TABLE>
 
                                      16
<PAGE>
 
                                   DILUTION
 
  The difference between the initial public offering price per share of common
stock and the as adjusted pro forma net tangible book value per share of
common stock after this offering constitutes the dilution to investors
purchasing common stock in this offering. Net tangible book value per share is
determined by dividing musicmaker.com's net tangible book value (total assets
less total liabilities) by the number of outstanding shares of common stock.
 
  At December 31, 1998, our net tangible book value was $    or $    per share
of common stock. After giving effect to the sale of the common stock offered
hereby, assuming an initial public offering price of $    and after deducting
the estimated underwriting discounts, commissions and offering expenses, our
net tangible book value as of December 31, 1998, would have been $    or $
per share. This represents an immediate increase in net tangible book value of
$    per share to the existing holders of common stock and an immediate
dilution to investors purchasing in this offering of $    per share. The
following table illustrates the per share dilution to investors purchasing in
this offering:
 
<TABLE>
   <S>                                                                       <C>
   Assumed initial public offering price per share..........................
     Net tangible book value before offering................................
     Pro forma increase attributable to new investors.......................
     Net tangible book value after offering.................................
   Pro forma dilution to investors purchasing in offering...................
</TABLE>
 
  The following table summarizes as of December 31, 1998, on the pro forma
basis described above, the number of shares of capital stock purchased from
musicmaker.com, the total consideration paid to musicmaker.com and the average
price per share paid by existing stockholders and by investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $  , before deducting the estimated underwriting discount and
commissions and estimated offering expenses:
 
<TABLE>
<CAPTION>
                         Shares Purchased       Total Consideration       Average
                         -------------------    ----------------------     Price
                         Number     Percent      Amount      Percent     Per Share
                         --------   --------    ----------  ----------   ---------
<S>                      <C>        <C>         <C>         <C>          <C>
Existing stockholders...                      %  $                     %   $
New investors...........                                                   $
                          --------    --------   ----------   ---------    ----
  Total.................                   100%  $                  100%
                          ========    ========   ==========   =========    ====
</TABLE>
 
  The table above excludes the following:
 
  .  595,855 common stock warrants issued and outstanding, 728,725 common
     stock warrants to be issued upon conversion of the oustanding preferred
     stock warrants, and    common stock warrants to be issued to the
     representatives in connection with this offering; and
 
  .  532,182 options issued as of January 31, 1999 under our stock option
     plan.
 
  To the extent that any of these options or warrants are exercised, there
would be further dilution to investors purchasing in the offering. See
"Capitalization," "Management--Stock Option Plan" and Notes 5 and 9 of the
notes to the consolidated financial statements.
 
                                DIVIDEND POLICY
 
  We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends, if any, in the future will be at the sole
discretion of the Board of Directors.
 
                                      17
<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The following selected financial data should be read in conjunction with the
consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the period from April 23, 1996 (inception) to December
31, 1996 and the years ended December 31, 1997 and 1998, and the consolidated
balance sheet data at December 31, 1997 and 1998 are derived from the
consolidated financial statements of musicmaker.com that have been audited by
our independent auditors, and are included elsewhere in this prospectus.
 
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                     ------------------------
                                      Period from
                                    April 23, 1996
                                    (inception) to
                                   December 31, 1996    1997         1998
                                   ----------------- -----------  -----------
<S>                                <C>               <C>          <C>
Net sales.........................     $   8,355     $    13,432  $    74,028
Cost of sales.....................         2,590           2,955       46,821
                                       ---------     -----------  -----------
Gross profit......................         5,765          10,477       27,207
Operating expenses:
  Sales and marketing.............           --            7,780      929,661
  Operating and development.......        64,029         692,041    1,435,690
  General and administrative......       306,381       1,360,856    2,334,438
                                       ---------     -----------  -----------
Total operating expenses..........       370,410       2,060,677    4,699,789
                                       ---------     -----------  -----------
Loss from operations..............      (364,645)     (2,050,200)  (4,672,582)
Net interest (expense) income.....        (2,667)        (33,957)      17,815
                                       ---------     -----------  -----------
Net loss..........................     $(367,312)    $(2,084,157) $(4,654,767)
                                       =========     ===========  ===========
Basic and diluted net loss per
 share(2).........................     $   (0.44)    $     (1.20) $     (2.13)
                                       =========     ===========  ===========
Weighted average shares
 outstanding(2)...................       830,076       1,734,328    2,186,488
                                       =========     ===========  ===========
Pro forma basic and diluted net
 loss per share(1)(2):                                            $     (1.73)
                                                                  ===========
Pro forma weighted average shares
 outstanding(1)(2):                                                 2,863,521
                                                                  ===========
</TABLE>
 
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
                                                 At December 31, 1998
                                        ---------------------------------------
                                                                   Pro Forma
                                          Actual    Pro Forma(1) As Adjusted(3)
                                        ----------  ------------ --------------
<S>                                     <C>         <C>          <C>
Cash and cash equivalents.............. $  972,954   $2,286,579    $
Working capital........................   (287,767)   1,025,858
Total assets...........................  3,233,963    4,435,193
Debt, long-term portion................    726,786      214,286
Convertible preferred stock............  3,434,700          --
Total stockholders' (deficit) equity... (2,312,668)   2,835,762
</TABLE>
--------
(1) Pro forma to give effect to:
  .  A one-for-3.85 reverse stock split to be effected on      , 1999.
  .  The automatic conversion, upon the completion of the offering, of all
     shares of outstanding preferred stock into 819,199 shares of common
     stock.
  .  The automatic conversion of all outstanding convertible notes into
     415,584 shares of common stock ($512,500 of convertible notes
     outstanding at December 31, 1998 and $1,487,500 of convertible notes
     issued in January 1999).
  .  The write-off of all capitalized loan fees related to the convertible
     notes ($112,395 capitalized at December 31, 1998 and $173,875
     capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
    financial statements.
(3) Adjusted to give effect to reflect the sale of     shares of common stock
    offered hereby at an assumed initial public offering price of $    per
    share and the application of the net proceeds therefrom. See "Use of
    Proceeds" and "Capitalization."
 
                                      18
<PAGE>
 
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
  The following discussion of the financial condition and results of operations
of musicmaker.com should be read in conjunction with the consolidated financial
statements and the related notes thereto and other financial information
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Musicmaker.com's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
factors set forth under "Risk Factors" and appearing elsewhere in this
prospectus.
 
Overview
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
 
<TABLE>
<S>  <C>
</TABLE>
  .  Creedence Clearwater Revival  .  The Beach Boys       .  Ziggy Marley
                      
  .  Jerry Lee Lewis               .  Miles Davis          .  Johnny Cash   
                           
  .  Little Richard                .  John Coltrane        .  Dionne Warwick 
                           
  .  Frank Zappa                   .  The Yardbirds with   .  Muddy Waters
                                      Eric Clapton
  .  Taylor Dayne                  .  Blondie              .  The Blues Brothers
                           
  .  The Ramones                   .  Kansas               .  The Kinks
                 
                                                           .  The Band
 
  Musicmaker.com was incorporated in April 1996 ("Inception"). On July 31,
1996, musicmaker.com acquired the technology to produce its custom CDs. See
"Certain Transactions." During the remainder of 1996 and through the year ended
December 31, 1997, musicmaker.com's operating activities consisted of
recruiting personnel, developing the technological infrastructure necessary to
create custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. Musicmaker.com
launched its website in October 1997 and shipped its first custom CD in
November 1997. In 1998, musicmaker.com established several strategic alliances
with leading online and offline music marketers. See "Business--Marketing."
 
  Since commercial operations primarily began in the fourth quarter of 1997,
musicmaker.com has sold over 5,000 custom CDs. Through July 1998, all of
musicmaker.com's net sales had been derived from the sale of custom CDs through
its own website and print promotions. In August 1998, musicmaker.com began
selling its custom CDs through a marketing alliance with N2K. In October 1998,
musicmaker.com began selling its custom CDs through marketing alliances with
Platinum and Columbia House. See "Business--Marketing."
 
  Net sales are primarily derived from custom CDs offered over the Internet and
through advertising campaigns and individual songs downloaded directly from
musicmaker.com's website. Net sales are net of sales
 
                                       19
<PAGE>
 
discounts, and include shipping and handling charges. Customer accounts are
settled by directly charging a customer's credit card. Net sales are
recognized upon shipment of the CD from musicmaker.com's production site in
Reston, Virginia. For digitally downloaded songs, net sales are recognized
upon execution of the order.
 
  Cost of sales principally consist of content costs, production and shipping
costs, and credit card receipt processing costs. Content costs will include
royalty payments based on actual sales. Production costs include jewel cases,
CD trays and CD inserts. Musicmaker.com expects that its cost of sales will
increase significantly as it enters into additional licensing agreements to
further expand and develop its music library.
 
  Sales and marketing expenses consist primarily of advertising and
promotional expenditures, including payroll and related expenses.
Musicmaker.com expenses all advertising costs as incurred. Musicmaker.com
expects sales and marketing expenses to increase significantly as it endeavors
to increase its customer base, drive traffic to its website and enhance brand
name awareness.
 
  Operating and development expenses are expensed as incurred and consist
primarily of initial royalty payments and content development costs. To
establish its music library, musicmaker.com made advance royalty payments
pursuant to licensing agreements with certain record labels. These payments
have been classified as operating and development expenses due to management's
belief that minimal net sales will be generated during the one year period
following the payment of these advances. Musicmaker.com is required to make
additional annual advance payments for up to two years. Should these initial
arrangements generate significant revenues, future advances will be classified
as cost of sales. With respect to future licensing arrangements,
musicmaker.com intends to pay royalties based on actual sales which would be
included in cost of sales. Musicmaker.com expects that in the future,
operating and development costs will consist primarily of payroll and related
expenses for website and system development as well as expenses associated
with website hosting and Internet operations. Musicmaker.com's operating and
development expenses have increased significantly since Inception, and are
expected to continue to increase with our growth.
 
  General and administrative expenses consist primarily of legal and
professional fees, payroll costs and related expenses for officers and
administrative personnel, as well as other expenses associated with corporate
functions.
 
  Musicmaker.com has an extremely limited operating history upon which to base
an evaluation of its business and prospects. Musicmaker.com has yet to achieve
significant net sales and its ability to generate significant net sales in the
future is uncertain. Further, in view of the rapidly evolving nature of
musicmaker.com's business and its very limited operating history,
musicmaker.com has little experience forecasting net sales. Therefore,
musicmaker.com believes that period-to-period comparisons of our financial
results are not necessarily meaningful and you should not rely upon them as an
indication of future performance.
 
  To date, musicmaker.com has incurred substantial costs to create, introduce
and enhance its services, to acquire content, to build brand awareness and to
grow its business. As a result, musicmaker.com has incurred operating losses
since Inception. In addition, musicmaker.com expects significantly increased
operating expenses in connection with an increase in the size of its staff,
expansion of its marketing efforts, and an increase in its research and
development efforts to assist in musicmaker.com's planned growth. To the
extent that increases in operating expenses precede or are not followed by
increased net sales, musicmaker.com's business, financial condition and
results of operations will be materially adversely affected. See "Risk
Factors--We have a limited operating history, have incurred losses and may
continue to realize losses. We also have an accumulated deficit that may
continue to increase."
 
  Musicmaker.com's business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early years, particularly companies in new and rapidly evolving markets such
as electronic commerce. See "Risk Factors--We depend on continued growth of
online commerce" and "We depend on maintenance and continued improvement of
the Internet's infrastructure." In addition, musicmaker.com's net sales depend
substantially upon the level of activity on its website and the success of its
Columbia House print promotions. Although musicmaker.com has experienced
growth in its operations, there can be no assurance that musicmaker.com's net
sales will continue at its current level or rate of growth.
 
                                      20
<PAGE>
 
Results of Operations
 
 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  Net Sales.  Net sales for the year ended December 31, 1998 were $74,028
compared to $13,432 for the year ended December 31, 1997. The generation of
net sales resulted from development of our customer base, expansion of our
music library and the formation of strategic alliances with Columbia House,
N2K and Platinum which provided Internet traffic and access to additional
customer bases.
 
  Cost of Sales.  Cost of sales for the year ended December 31, 1998 were
$46,821 compared to $2,955 for the year ended December 31, 1997. For the
period ended December 31, 1998 content costs accounted for $10,258 or 22% of
cost of sales and production costs accounted for $32,086 or 69% of cost of
sales. Postage and mailing and credit card costs accounted for $2,383 and
$2,095, respectively for the year ended December 31, 1998, or a combined 9% of
cost of sales. Cost of sales for the year ended December 31, 1997 consisted
entirely of production costs of $2,955.
 
  Operating and Development Expenses. Operating and development expenses were
$1,435,690 for the year ended December 31, 1998 compared to $692,041 for the
year ended December 31, 1997. This increase was primarily attributable to
expenses associated with obtaining content as well as enhancing the features
and functionality of our website and related systems.
 
  Sales and Marketing Expenses.  Sales and marketing expenses were $929,661
for the year ended December 31, 1998 compared to $7,780 in the year ended
December 31, 1997. Sales and marketing expense for the year ended December 31,
1998 consisted primarily of print advertising, expenditures incurred in the
development of our strategic alliances and increases in sales and marketing
personnel.
 
  General and Administrative Expenses. General and administrative expenses
were $2,334,438 for the year ended December 31, 1998 from $1,360,856 for the
year ended December 31, 1997. This increase was primarily due to increases in
the number of personnel and corporate facility expenses necessary to support
the growth of our business and operations.
 
  Interest Expense/Income.  Interest income for the year ended December 31,
1998 was $17,815 compared to interest expense of $33,957 for the year ended
December 31, 1997. The 1997 interest expense was attributable to convertible
notes which were converted to common stock in June 1997. Musicmaker.com did
not have any interest expense associated with debt during the year ended
December 31, 1998.
 
 Year Ended December 31, 1997 Compared to Inception Period from April 23, 1996
to December 31, 1996
 
  Net Sales.  Net sales were $13,432 for the year ended December 31, 1997
compared to $8,355 for the period from Inception through December 31, 1996
(the "Inception Period"). Net sales in the Inception Period consisted of
certain product sales from musicmaker.com's subsidiary which was dissolved in
early 1999. The increase in net sales was principally due to growth in
musicmaker.com's customer base and expansion of its music library.
 
  Cost of Sales.  Cost of sales were $2,955 for the year ended December 31,
1997 compared to $2,590 for the Inception Period.
 
  Operating and Development Expenses. Operating and development expenses were
$692,041 for the year ended December 31, 1997 compared to $64,029 for the
Inception Period. This increase was primarily attributable to costs incurred
to obtain content and to enhance the features and functionality of
musicmaker.com's website and related systems.
 
  Sales and Marketing Expenses. Sales and marketing expenses were $7,780 for
the year ended December 31, 1997. There were no sales and marketing expenses
for the Inception Period.
 
                                      21
<PAGE>
 
  General and Administrative Expenses. General and administrative expenses
were $1,360,856 for the year ended December 31, 1997 compared to $306,381 for
the Inception Period. This increase was primarily due to increases in the
number of personnel and corporate facility expenses necessary to support the
growth of musicmaker.com's business and operations.
 
Liquidity and Capital Resources
 
  Net cash used in operating activities totaled $3,519,777 for the year ended
December 31, 1998 as compared net cash used in operating activities of
$1,101,275 for the year ended December 31, 1997. Net cash used in operating
activities for the year ended December 31, 1998 was primarily attributable to
the net loss of $4,654,767 offset by accrued compensation to related parties
of $30,665, an increase in accounts payable and accrued expenses of $297,250,
and an increase in long-term obligations of $257,143. Net cash used in
operating activities for the year ended December 31, 1997 was primarily
attributable to the net loss of $2,084,157, offset by an increase to accrued
compensation payable to related parties of $543,634, the issuance of stock and
warrants for services for $150,500, and an increase in accounts payable and
accrued expenses of $207,776.
 
  Cash used in investing activities was $217,961 and $299,755 for the years
ended December 31, 1998 and 1997, respectively. The increase from the year
ended December 31, 1997 to December 31, 1998 included the purchase of computer
equipment and software for $177,954, the purchase of leasehold improvements of
$36,823 and furniture and other office equipment of $3,184.
 
  Net cash provided by financing activities was $3,308,710 and $2,390,940 for
the year ended December 31, 1998 and December 31, 1997, respectively. Net cash
provided by financing activities, for the year ended December 31, 1998 was
through the issuance of outstanding preferred stock for $1,568,033 and the
issuance of common stock for $1,344,302. The net cash provided by financing
activities for this period also included the net proceeds from the issuance of
convertible notes of $396,375. Net cash provided by financing activities, for
the year ended December 31, 1997, was primarily through the issuance of
outstanding preferred stock for $1,700,000, issuance of common stock for
$440,940 and proceeds from the issuance of convertible notes of $250,000.
 
  On January 8, 1999, musicmaker.com signed a lease line agreement which
provides leasing for computer and related equipment as well as CD fabrication
equipment up to $200,000 between the signing of the agreement and June 8,
1999. Any equipment leased under this agreement will have a 24 month lease
term, and at the end of the lease term musicmaker.com will either be obligated
to buy the equipment at 10% of the original equipment cost or extend the lease
term for an additional 24 months. Borrowings under this lease line agreement
require payments due in advance with a monthly rental factor of .0498 for
months one through 24. The actual monthly rental will be determined by
multiplying the cost of the equipment by the applicable monthly rental factor,
plus any monthly maintenance charges. We will provide the lessor with a first
security interest in the equipment leased under this agreement for the
duration of the term of the lease. Musicmaker.com also signed the first lease
under this agreement which will have a monthly rental payment of $8,261. As
part of the lease line agreement, musicmaker.com issued a warrant to purchase
6,234 shares of its common stock at $4.81 per share which expires on January
8, 2009.
 
  On February 12, 1999, musicmaker.com signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. Borrowings
under this line of credit bear interest at Imperial Bank's prime rate of
interest plus 2%. The line of credit is secured by a blanket security interest
on all of our assets including general intangibles excluding previously leased
equipment. The line also has certain financial covenants, including minimum
net worth and liquidity ratios. At February 15, 1999, we did not have any
outstanding balances under this line of credit. Interest on any balance
outstanding is payable monthly with principal and all accrued interest due six
months from the date of the loan. In the event that equipment and software
purchases under the line are termed out, equal payments of principal and
interest will be due monthly for 24 months, starting on the first month
following the initial six month maturity. If the term of the credit facility
is extended, Imperial Bank will have the right to purchase warrants equal to
4% of the commitment amount.
 
                                      22
<PAGE>
 
  Musicmaker.com anticipates that it will have negative cash flows for the
foreseeable future. It is estimated that musicmaker.com will need to provide
for items such as computer storage, production equipment, distribution
equipment, hardware and software for computer systems, and furniture and
fixtures. Musicmaker.com expects to fund its purchase of such capital
equipment with its working capital, which will include the proceeds from this
offering.
 
  As of December 31, 1998, musicmaker.com had approximately $973,000 in cash
and cash equivalents. Musicmaker.com believes that the net proceeds from its
prior financings, this offering, and cash flows from operations, will be
adequate to satisfy its operations, working capital and capital expenditure
requirements for at least the next 12 months, although musicmaker.com may seek
to raise additional capital during that period. There can be no assurance that
such financing will be available on acceptable terms, if at all, or that such
financing will not dilute shares held by musicmaker.com's stockholders. See
"Risk Factors--We may require additional capital or financing in the future."
 
Year 2000 System Costs
 
  Computer systems, software packages and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."
 
  Musicmaker.com may realize exposure and risk if the systems it relies upon
to conduct day-to-day operations are not year 2000 compliant. The potential
areas of exposure include electronic data exchange systems operated by third
parties with whom musicmaker.com transacts business, certain products
purchased from third parties and computers, software, telephone systems and
other equipment used internally. To minimize the potential adverse effects of
the year 2000 problem, musicmaker.com established an internal project team
comprised of all functional disciplines. This project team has begun a three-
phase process of identifying internal systems (both information and non-
information technology systems) that are not year 2000 compliant, determining
their significance in the effective operation of musicmaker.com, and
developing plans to resolve the issues where necessary. Musicmaker.com has
been communicating with its suppliers and others with whom it does business to
coordinate year 2000 readiness. The responses received by musicmaker.com to
date indicate that steps are currently being taken to address this concern.
However, if such third parties are not able to make all systems year 2000
compliant, there could be a material adverse impact on musicmaker.com.
 
  After initial review of musicmaker.com's principal transaction processing
software through which nearly all of musicmaker.com's business is transacted,
management has determined musicmaker.com to be year 2000 compliant and, as
such, does not anticipate any material adverse operational issues to arise.
Musicmaker.com plans to complete the year 2000 compliance assessment by the
end of the first quarter 1999 and implement corrective solutions before the
end of the third quarter 1999. Based on current estimates, management expects
that musicmaker.com's future costs in connection with its year 2000 compliance
project will not exceed $10,000; however, future anticipated costs are
difficult to estimate with any certainty and may differ materially from those
currently projected based on the results of phase one of musicmaker.com's year
2000 project. The anticipated costs associated with musicmaker.com's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement musicmaker.com's future contingency plans.
Musicmaker.com has not yet developed a contingency plan in the event that any
non-compliant critical systems are not remedied by January 1, 2000, nor has it
formulated a timetable to create such contingency plan. Upon completion of our
review, if systems material to musicmaker.com's operations have not been made
year 2000 compliant in a timely manner, the year 2000 issue could have a
material adverse effect on musicmaker.com's business, financial condition and
results of operations.
 
 
                                      23
<PAGE>
 
                                    BUSINESS
 
Overview
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
 
  .  Creedence Clearwater Revival
                              .  The Beach Boys           .  Ziggy Marley
                              .  Miles Davis              .  Johnny Cash
  .  Jerry Lee Lewis
                              .  John Coltrane            .  Dionne Warwick
  .  Little Richard
                              .  The Yardbirds with Eric Clapton
                                                          .  Muddy Waters
  .  Frank Zappa
                              .  Blondie                  .  The Blues
  .  Taylor Dayne                                            Brothers
                              .  Kansas                   .  The Kinks
  .  The Ramones
                                                          .  The Band
 
Industry Background
 
  Historically, the music industry has benefited from advances in technology,
such as the introduction of the CD in 1983. During the last ten years much of
the industry's growth resulted from consumers replacing existing record or tape
music collections with CDs. According to the Record Industry Association of
America, nine of the top ten selling albums were produced before 1982 and
include such established artists as The Eagles, Pink Floyd, Billy Joel,
Fleetwood Mac, Led Zeppelin, The Beatles, Boston and AC/DC.
 
  According to the Record Industry Association of America, domestic music sales
grew from $6.2 billion in 1988 to $13.7 billion in 1998. Of the $13.7 billion
in total sales, full length CDs continue to account for the greatest dollar and
unit volume, such sales increased by approximately 13% from 1997 to 1998.
 
  Musicmaker.com believes that substantial growth opportunities exist for sales
of music over the Internet. According to Jupiter Communications, LLC, total
online sales of pre-recorded music are projected to increase from $37.0 million
in 1997 to $1.4 billion in 2002. Musicmaker.com believes that while the
Internet provides an additional, price competitive distribution channel for
pre-recorded music, the potential exists to use the Internet as a value-added
method of distribution. Internet based retailers have certain other advantages
over traditional retail channels. Musicmaker.com estimates that music retail
stores generally stock between 10,000 and 39,000 of the available 200,000 CDs
and tend to carry a greater percentage of hit releases, often at the expense of
differing music genres and back titles from the libraries of record labels.
Additionally, online retailers are open 24 hours and Internet users and their
purchases can be tracked to provide demographic information for use in direct
marketing or other targeted programs.
 
  We believe that the demographic profile of consumers of recorded music has
aged along with the general population. According to the Record Industry
Association of America, domestic purchases of recorded music by
 
                                       24
<PAGE>
 
those age 30 and over have increased from approximately 32% of the U.S. sales
in 1988 to approximately 48% of sales, or approximately $5.9 billion, in 1997.
We believe that the Internet represents an attractive retail and promotion
medium for customers in this age group as they are less "hits-driven" than
younger age groups, typically can afford to buy more titles at one time, often
own PCs and generally have credit cards, which are usually used to make
electronic payments. Despite the fact that those age 30 and over represent the
largest segment of the United States population and have the highest level of
disposable income, this group currently spends the smallest percentage of its
disposable income on music purchases. We attribute this phenomenon to the
allocation of most retail shelf space and promotional budgets to new releases,
which are typically targeted at younger audiences. We believe that a
significant opportunity exists in remarketing older titles to the 30 and over
age group. We believe that this group will be attracted to the flexibility of
our custom CDs.
 
  One of the latest technological innovations in the music industry has
centered on digital distribution, the downloading of compressed music files
over the Internet to a PC. Such music files can be stored to a PC or on a CD
using a read/write CD-ROM drive. Recently, MP3, a non-streaming compression
technology, has proliferated over the Internet, allowing users to freely
distribute songs, without making royalty payments to the music label or to the
artist holding the rights to such music. Certain factors, including bandwidth
constraints, a limited selection of music, difficulties with industry
acceptance, the required purchase of a specialized MP3 player and the lack of
portability associated with downloaded music, have limited the growth of MP3
to date. Nevertheless, MP3's ability to freely copy and transfer music and the
potential subsequent loss of revenue is of substantial concern to the music
industry.
 
  In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which utilizes IBM software, will
allow approximately 1,000 cable subscribers in San Diego to download music
from a library of 1,000 album titles and several hundred song titles provided
by the major record labels. The market trial is viewed by many as the first
step taken by the major record companies to consider the sale of digital music
online.
 
  Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs:
 
  .  Growth in sales of CD singles.
 
  .  Growth of the Internet as a viable retail medium.
 
  .  Increasing affluence of the over 30 generation.
 
  .  Continued prominence of classic rock albums.
 
  .  Record label desire to diversify distribution methods while protecting
     intellectual property rights.
 
MUSICMAKER.COM STRATEGY
 
  We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
 
  Offer a new way to buy licensed, customized music.  Through our proprietary
technology, we offer consumers a new method for customizing, digitally
downloading and purchasing music over the Internet. Unlike many online
retailers, we do not use the Internet simply to distribute products that can
be purchased elsewhere. Rather, our website and proprietary production
technology provide the ability to create a novel product--the
custom CD--that could not previously be mass marketed. We have implemented new
technology for digital downloading to help protect the intellectual property
rights of record labels.
 
  Offer most extensive selection of music for custom CD compilation and
digital downloading.  We intend to offer consumers the most extensive
collection of music available for use in custom CDs and digital downloading.
We have entered into exclusive and non-exclusive license agreements with more
than 85 music labels and currently have a music library of more than 150,000
songs. We intend to significantly expand our existing music catalog through
the development of content relationships with additional record labels,
including major labels.
 
  Increase website traffic through industry alliances and multiple
hyperlinks. We seek to establish strategic alliances with global music and
media companies to attract additional users to the musicmaker.com website. We
 
                                      25
<PAGE>
 
are currently the exclusive provider or a featured retailer of custom CDs for
Columbia House, N2K, Platinum, Audio Book Club and Trans World. We intend to
continue to expand the number and depth of our marketing alliances and
affiliate programs to drive traffic and increase the number of third party
hyperlinks to musicmaker.com.
 
  Create strong brand awareness.  We currently promote our brands through
online and traditional media, special event driven promotions and artist-
specific offerings. We intend to enhance brand awareness of our website by
advertising and co-marketing as well as through strategic relationships
whereby other websites designate musicmaker.com as their online music retailer
for custom CDs.
 
  Establish genre-specific user communities.  By collecting information about
our customers, we are able to target demographic user groups, thereby
providing advertisers and sponsors with access to highly defined audiences.
This segmentation will enable advertisers and sponsors to customize their
messages through banner advertisements, event and program sponsorships and
music recording promotions. We intend to provide our advertisers and sponsors
with quantitative feedback on the effectiveness of their programs.
 
  Capitalize on cross-selling opportunities.  We intend to generate additional
revenue by drawing users to our website and providing hyperlinks to music
related merchandise sites offering posters, clothing and books. We intend to
generate cross-selling opportunities by establishing hyperlinks between artist
and fan club websites, placing posts in music related news groups and securing
reviews and event notices in appropriate online directories.
 
  Leverage technologies for additional formats. We intend to provide
additional products to consumers which may include custom music on mini-disc,
custom music videos on DVD, audio books on CD and software on CD-ROM. By
leveraging our existing technology to a variety of formats, we believe that we
will effectively increase the content and marketability of our products.
 
  Expand international presence.  We intend to capitalize on the global nature
of music and the Internet by building an international user base. We intend to
create local language versions of, and culture specific music content for,
musicmaker.com. We also intend to expand our international presence through
localized websites in countries with a demand for international music.
 
Music Content
 
  We have licensed music from record labels to expand and diversify our online
music library. We have focused primarily on independent record labels, which
represent approximately 20% of the $40 billion recorded music industry, and
have entered into content licenses with over 85 independent record labels.
 
  Our music collection currently contains more than 150,000 tracks licensed
from independent record labels including:
 
<TABLE>
<S>  <C>
</TABLE>
 .  The All Blacks B.V.                .  Nimbus Communications International
    (Roadrunner)                          Limited
                                       .  Platinum Entertainment, Inc.
 .  Alligator Records
                                       .  Prestige Records, Ltd.
 .  Brunswick Record Corp.
                                       .  Reachout International Records,
 .  Cakewalk LLC (32 Records              Inc. (ROIR)
    Jazz)                              .  Rounder Records Corp.
 .  Del-Fi Records
                                       .  Storyville Records
 .  Fantasy Records, Inc.
                                       .  Sun Entertainment Corporation
 .  HNH International Limited
    (Naxos)                            .  Surrey House Music
 .  Koch International L.P.
                                       .  VelVel Records LLC
 .  Lightyear Entertainment, L.P.
                                       .  Viceroy Entertainment Group
 .  Minnesota Mining and
    Manufacturing Company (3M)
 
  Our music library contains significant catalogs of blues, jazz, classical,
rock (including heavy metal and punk), country, rhythm and blues, pop, gospel
and oldies. Set forth below is a sampling of the artists contained in our
music library, organized by music genre, for which we have licensed at least
ten songs.
 
                                      26
<PAGE>
 
                         Sample Artists by Music Genre
 
Blues       .Marcia Ball              Jazz         .  Louis Armstrong
            .Elvin Bishop                          .  Chet Baker
            .Blues Brothers and Friends            .  Count Basie
            .Roy Buchanan                          .  Dave Brubeck
            .Otis Clay                             .  John Coltrane
            .Albert Collins                        .  Miles Davis
            .Buddy Guy                             .  Bill Evans
            .John Lee Hooker                       .  Stan Getz
            .Lightnin' Hopkins                     .  Dizzy Gillespie
            .Elmore James                          .  Billie Holiday
            .Albert King                           .  Charles Mingus
            .Brownie Mc Ghee                       .  Thelonious Monk
            .Roomful of Blues                      .  Charlie Parker
            .Memphis Slim                          .  Cole Porter
            .Muddy Waters                          .  Art Tatum
            .Junior Wells
            .Johnny Winter
 
Rock        .Atlanta Rhythm Section   Country      .Bellamy Brothers
            .The Band                              .Johnny Cash
            .Big Star                              .Roy Clark
            .Savoy Brown                           .Patsy Cline
            .Creedence Clearwater Revival          .The Gatlin Brothers
            .The Guess Who                         .Crystal Gayle
            .Kansas                                .Merle Haggard
            .The Kinks                             .Ronnie McDowell
            .Alvin Lee                             .Roger Miller
            .Alan Parsons                          .Juice Newton
            .Paul Rodgers                          .Billy Joe Royal
            .The Troggs                            .Conway Twitty
            .Bill Wyman
            .The Yardbirds with Eric Clapton
            .Frank Zappa
 
Metal       .  Annihilator            Soul/R & B   .  Barbara Acklin
            .  Biohazard                           .  Booker T. & The MG's
            .  Crimson Glory                       .  Cameo
            .  Deicide                             .  Gene Chandler
            .  King Diamond                        .  The Chi-lites
            .  Life of Agony                       .  George Clinton
            .  Machine Head                        .  Dramatics
            .  Motorhead                           .  The Gap Band
            .  Obituary                            .  Isaac Hayes
            .  Sepultura                           .  Etta James
            .  Type O Negative                     .  The Persuasions
                                                   .  Jackie Wilson
 
                                       27
<PAGE>
 
                   Sample Artists by Music Genre (Continued)
 
Rock 'n     .  Jerry Lee Lewis          Pop         .The Beach Boys
Roll        .  Carl Lee Perkins                     .Peter Cetera
            .  Ritchie Valens                       .Roger Daltrey
                                                    .Taylor Dayne
                                                    .The Foundations
                                                    .KC & The Sunshine Band
                                                    .The Vogues
                                                    .Dionne Warwick
 
Reggae      .Black Uhuru                Alternative .Circle Jerks
            .Dennis Brown                           .The Fleshtones
            .Culture                                .In The Nursery
            .Marcia Griffiths                       .The Legendary Pink Dots
            .The Heptones                           .Marine Girls
            .Gregory Isaacs                         .The Moon Seven Times
            .The Paragons                           .Plastic Noise Experience
            .Lee "Scratch" Perry                    .Television
            .Yellowman
 
 
Folk        .  The Burns Sisters        Bluegrass   .Bela Fleck
            .  Ramblin' Jack Elliott                .The Bluegrass Album Band
            .  John Fahey                           .J.D. Crowe & The New
            .  David Grisman                        South
            .  Peter Keane                          .The Freight Hoppers
            .  Leo Kottke                           .John Hartford
            .  John McCutcheon                      .The Johnson Mountain Boys
            .  Tom Paxton                           .The Nashville Bluegrass
            .  Tony Rice                            Band
            .  Dave Van Ronk                        .Doc Watson
            .  Cheryl Wheeler
 
Punk        .The Buzzcocks              Easy Listening
                                                    .Ronnie Aldrich
            .The Dickies                            .Arthur Ferrante
            .The Dictators                          .Nick Ingman Orchestra
            .UK Subs                                .Intimate Broadway
                                                    .Peter Nero
                                                    .  The Royal Philharmonic
                                                       Orchestra
                                                    .  Pat Valentino
 
Techno
            .  Chosen Few
            .  Fear Factory
            .  Front Line Assembly
            .  Intermix
            .  Technohead
 
  We intend to significantly expand and diversify our existing music catalog
through the development of content relationships with additional record labels.
 
 
                                       28
<PAGE>
 
Downloading of Music on the Internet
 
  Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately five million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
 
  We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
 
Marketing
 
  Our marketing strategy is designed to build brand awareness, attract repeat
users and direct traffic to our website through hyperlinks with strategic
partner websites. We use a combination of advertising and promotion, both
traditional and online, to accomplish these objectives.
 
 Marketing Alliances
 
  To promote our custom CDs and establish musicmaker.com as the premier brand
for custom CDs, we have entered into marketing alliances with major music
marketing companies including Columbia House, N2K, Platinum and Trans World.
We have recently entered into a marketing alliance with Audio Book Club and
intend to seek additional alliances with music and non-music retailers. These
strategic alliances are intended to drive traffic to our website, increase the
number of websites where our custom CDs can be purchased, and co-promote our
products through direct mail campaigns. Through marketing alliances,
musicmaker.com seeks to be the exclusive custom CD provider featured on a
partner's website or in other promotional materials or activities. We believe
that such alliances provide access to a targeted customer base, such as
customers who purchase music or music related merchandise online.
 
  The Columbia House Company Alliance.  We are currently the exclusive
marketer and featured retailer of custom CDs for Columbia House, a leading
record and video club, jointly owned by Sony Music Entertainment, Inc. and
Time Warner Inc. We provide our custom CD compilation services to Columbia
House's 15 million club members through website and direct mail promotions.
 
  Columbia House displays and promotes musicmaker.com's custom CDs on
ColumbiaHouse.com, its club website and TotalE.com, its non-club website that
offers music, videos, DVDs, computer software and other related merchandise to
the general public. Columbia House also provides a hyperlink directly to a co-
branded musicmaker.com and Columbia House website.
 
  We will also market our custom CDs through a series of print promotion
campaigns in conjunction with the Columbia House's direct mail program.
Through these direct promotion campaigns, we can market our products to all of
Columbia House's members, including those without Internet access.
Musicmaker.com can include promotional inserts in at least six Columbia House
direct mailings per year. The inserts will promote both the co-branded and
musicmaker.com websites and allow club members to purchase custom CDs using a
mail-in form.
 
                                      29
<PAGE>
 
  Our marketing alliance with Columbia House expires in September 2001. Under
this alliance, we may not sell custom CDs through any other music club without
prior consent of Columbia House. Additionally, we have exclusive rights to
offer our custom CDs to Columbia House's members unless and until one of our
competitors offers a significant repertoire of music content unavailable
through musicmaker.com. Columbia House and musicmaker.com share the profits
net of certain expenses from custom CD sales originating from Columbia House
members and from users referred from their websites. The allocation of net
profits is calculated based upon the terms of the musicmaker.com license
agreement covering each of the selected song titles.
 
  If during the term of the Columbia House alliance, Sony or Warner
exclusively allow Columbia House club members to create custom CDs using music
from their libraries, Columbia House is required to use musicmaker.com as its
custom CD provider. Columbia House may terminate our alliance upon not less
than thirty days notice if Mr. Puthukarai ceases to be musicmaker.com's
President and Chief Operating Officer and Columbia House deems his replacement
incompatible with their interest, or Columbia House determines after the first
six musicmaker.com promotional mailings to its members that its financial
returns do not justify continuing the relationship. We anticipate mailing our
first promotional insert to Columbia House members in the second quarter of
1999. Columbia House received 129,870 warrants for common stock exercisable at
$4.62 per share prior to September 1, 2001 as part of this marketing alliance.
 
  Platinum Entertainment, Inc. Alliance.  We are the exclusive marketer of
custom CDs and digitally downloaded music for Platinum, the largest
independent music label in the United States with artists such as Peter
Cetera, Roger Daltry, Crystal Gayle and Dionne Warwick. Platinum displays and
promotes our custom CDs on their PlatinumCD.com website which has a direct
hyperlink to musicmaker.com. Musicmaker.com also has exclusive license rights
to Platinum's entire music catalog of approximately 13,000 songs.
 
  We have a marketing alliance and license agreement with Platinum that
expires in September 2003. We currently have exclusive rights to Platinum's
music content and to offer custom CDs on Platinum's website. After the first
two years of our alliance, however, Platinum may elect to provide its library
on a non-exclusive basis to other custom compilation providers. Net profits
from the sale of custom CDs under the alliance are allocated based upon the
song titles selected, from which website customer orders originate and the
exclusivity of the alliance. Under this alliance, we may not use music content
licensed from Platinum for sale of custom CDs through an automated kiosk.
 
  Under our marketing and music content alliance with Platinum we intend to
offer approximately 13,000 songs and 1,300 albums in MP3 format beginning in
the second quarter of 1999.
 
  Audio Book Club, Inc. Alliance.  We have an exclusive marketing alliance
with Audio Book Club, a provider of direct to consumer marketing of audio
books with over 1.3 million audio users and buyers. Under this arrangement,
musicmaker.com will be the exclusive provider of custom CDs through the
AudioBookClub.com and BooksAloud.com websites and through print promotions in
direct mailings to members.
 
  Our marketing alliance with Audio Book Club expires in January 2002, with
three-year renewals to be negotiated with terms no less favorable than the
current arrangement. Under this alliance, musicmaker.com will promote its
custom CDs:
 
 .  On Audio Book Club's websites.
 
 .  By participating in at least six direct mailings to club members per year.
 
 .  By sponsoring annual Valentine's Day and Christmas promotions.
 
Net profits of sales to Audio Book Club members will be allocated based upon
the license arrangements covering the songs selected. Audio Book Club may
terminate the marketing alliance upon 30 days' notice after the first six
months of the relationship.
 
 
                                      30
<PAGE>
 
  Trans World Entertainment Corporation Alliance.  We have a non-exclusive
marketing alliance with Trans World, one of the largest music retailers in the
United States operating approximately 520 specialty retail music and video
stores including approximately 320 mall locations under the names Record Town,
Saturday Matinee, and F.Y.E., and approximately 200 freestanding stores under
the names Coconuts Music and Movies, Planet Music, Strawberries and Waxie
Maxie's. Under this alliance, musicmaker.com and Trans World will establish a
co-branded, co-promoted marketing campaign to sell our custom CDs over the
Internet through Trans World's TWEC.com website.
 
  Our marketing alliance with Trans World is for a one-year term, renewable
from year to year, and begins upon activation of the link between
musicmaker.com and TWEC.com. This alliance requires musicmaker.com to accept
any music content owned or licensed and offered by Trans World for inclusion
in custom CDs. Musicmaker.com and Trans World will divide the gross revenues
received from orders under the alliance based upon the license arrangement
covering the content included on custom CDs.
 
  N2K Inc. Alliance.  Musicmaker.com markets its custom CDs with N2K, a major
Internet retailer of music CDs. Musicmaker.com and N2K establish co-branded
websites through which N2K customers can purchase our custom CDs from select
genres and artist or occasion--specific music libraries. In 1998, the first
two joint promotions, featuring Miles Davis and Christmas music compilations,
were launched.
 
  Musicmaker.com has agreed to offer N2K the right of first negotiation,
except with respect to Columbia House, for any genre, artist or occasion-
specific promotions. Musicmaker.com and N2K allocate proceeds from the sale of
promotional custom CDs based upon the website from which the order originates
and the shipping option chosen by the customer. The terms of our relationship
with N2K are subject to continued renewal and renegotiation as a result of a
merger between N2K and CDnow.
 
 Affiliate Program
 
  We intend to position our website as part of an interconnected online music
network through our affiliate program. This program will allow customers who
visit affiliate websites to hyperlink to musicmaker.com through banner ads and
other prominent displays. Musicmaker.com will allocate a portion of revenue
from sales of custom CDs to the referring affiliate.
 
 Merchandising and Consumer Programs
 
  Insider's Club.  Our Insider's Club membership program awards members a free
song(s) on custom CDs after a specified number of purchases. This club allows
us to collect user demographics, foster repeat purchases, and attempt to
capture a greater portion of a member's purchases of custom CDs and digitally
downloaded music. Consumers joining the Insider's Club submit personal and
credit profiles to eliminate time and effort required for the collection of
billing and shipping information.
 
  Special Promotional Sales.  We intend to produce and license custom CDs to
marketers for use as promotional items. We will have specialized sales
personnel who will target large companies for custom-made, promotional CD
products.
 
  Targeted Consumer Marketing.  We collect information on website visitors and
customers such as point of origin, advertisement banner clicks, destination
after leaving the musicmaker.com website, genres searched, previous purchases
and geographic location. Additional customer specific marketing data is
obtained through the musicmaker.com Insider's Club. This information is used
to develop advertising strategies and marketing campaigns and serves as the
basis for our one-to-one marketing efforts. We intend to deploy push-marketing
programs consisting of targeted e-mails, which may include discount coupons
and information regarding new releases and special sales and promotions. We
have also developed a Music Advisor program based on "intelligent agent"
software licensed from Net Perceptions, Inc. that compares consumers'
interests based upon past purchases and other activities and provides
personalized recommendations. Musicmaker.com believes that such personalized
measures are important in building and maintaining customer loyalty and in
positioning musicmaker.com as a preferred source of custom CDs and digitally
downloaded music.
 
                                      31
<PAGE>
 
 Pricing
 
  We price our custom CDs to be competitive with pre-recorded CDs sold in
retail locations. A five song custom CD is priced at $9.95 with each
additional song priced at $1.00, plus an additional charge for shipping and
handling. Songs digitally downloaded to a consumer's PC are priced at $1.00
per song.
 
 Electronic Kiosks
 
  We intend to offer our custom CDs through stand-alone, touch screen, user-
friendly kiosks placed in strategic locations in 1999. We intend to place
these kiosks in retail music stores, university bookstores, national movie
theater chains, major book chains, convenience stores, computer store chains,
video chains, and other places frequented by potential music purchasers. With
the musicmaker.com proprietary kiosk system, a consumer can select up to 20
songs from a library of music stored locally in the kiosk. The custom CD is
fabricated on a proprietary recording system housed within the kiosk and
delivered automatically to the consumer within approximately five minutes of
placing the order. We believe that the presence of these kiosks in strategic
locations will further promote musicmaker.com as the premier brand for custom
CDs.
 
Technology
 
  Our technology enables us to rapidly manufacture and ship custom CDs that
are equivalent in sound quality to pre-recorded CDs. This process technology
consists of a distributed storage and high speed CD fabrication system running
across a high speed fiber local area network managed and controlled by
proprietary software we developed.
 
  We store and maintain our digital library of music titles in uncompressed
(wav) format on storage arrays of hard drives. Each array consists of up to
eight 36 gigabytes magnetic hard disk drives that holds approximately 288
gigabytes of digital information, or approximately 10,000 songs. Music data is
typically received in digital format on pre-recorded CDs or DAT. Certain older
titles are converted to DAT from analog format prior to being transferred to
the arrays for permanent digital storage.
 
  The array architecture is scalable and additional arrays can be added to
accommodate an increase in our online music library. Using this method, our
configuration can manage up to terabytes of musical data (or millions of songs
of storage capability). We believe that the array configuration is a cost-
effective storage method as it can scale to store additional data as
necessary; provide search and retrieval functions up to 100 times faster; and
provide a more reliable search, retrieval, and delivery capability than
alternative systems including CD jukeboxes and optical jukeboxes. Such
alternative systems do not scale as easily or effectively and also contain
fragile moving parts. Our arrays are complemented by a magnetic tape backup
system, and each array can be re-recorded in approximately 15 minutes.
 
 Database Management
 
  Our system uses a software program to manage the vast amount of digital
music and customer information stored in the arrays. This program enables the
system to:
 
  .  Scan the stored musical data by artist, title, music genre or key word.
 
  .  Retrieve the music from the arrays.
 
  .  Deliver the information to the fabrication units that produce the custom
     CDs.
 
The software runs on our workstations' PCs that are linked to several magnetic
storage arrays. These PCs run in parallel on our high speed network. As a
result, any PC on the system can find musical information contained in any
array. The database is maintained on a Sun Microsystems, Inc. server and UNIX
operating system. The workstations and PCs that run our web, storage, and news
audio servers are built to our specifications.
 
 CD Fabrication
 
  Our CD fabrication units automatically write musical information to a CD as
well as print song titles, artist names, graphics, pictures and other
personalized information on the CD. Based on an average CD selection of ten
songs, the custom CD can be produced in five minutes, or eight times as fast
as manual fabrication. Musical information is received by the fabrication
unit, sits in a queue and is assigned a consumer order number so that a
customer can check on the status of their order online. A single CD
fabrication unit is capable of producing up
 
                                      32
<PAGE>
 
to 1,500 CDs in a 24 hour period. The present capacity of our three
fabrication units is approximately 4,500 CDs per 24 hour period. Our
production system is scalable and can grow to support production of tens of
thousands of CDs per day (or millions of CDs per year). The scalable feature
of the fabrication units does not involve any modification to our software.
 
 Fault Tolerance
 
  Our storage and production architecture uses redundant servers and a tape
storage system for backup, to minimize downtime due to system outages or
maintenance needs. The largest single point of failure in our storage system
is a single magnetic disk or 36 gigabytes (or approximately 1,000 songs), a
relatively small portion of our music library. Our architecture provides a
back-up system that allows continuous operation through redundant servers in
the event of occasional component failure. Even in the event of a complete
failure of an array, the system can redeposit the data digitally on the arrays
using high speed backup at a rate of approximately 4,000 songs per hour.
 
 
 musicmaker.com Website.
 
  Musicmaker.com's website is easy to use, graphical in design and allows
custom music selection of titles from our music library. The website has a
built-in full-text search engine to allow customers to search by artist,
title, genre and keyword to find and display appropriate songs or artists.
Furthermore, each song has a 30-second Real Audio sample track which customers
can listen to prior to making a song selection.
 
  The web site's personalization capabilities offer the option of printing a
40-character message on the CD surface itself, on the tray card and on the
sides (spines) of the jewel box. Musicmaker.com also provides the capability
for the customer to select an occasion-specific graphic (e.g., birthday cake,
rose, diploma, etc.) to be printed on the CD surface, or upload a digital
picture or graphic to the server for printing in color on the CD surface.
 
 Digital Downloading of Music over the Internet
 
  Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately 5.0 million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
 
  We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
 
Quality Assurance and Customer Service
 
  We believe that high levels of consumer service and support are critical to
retaining and expanding our user base. After a CD is manufactured, it is
loaded into our testing facilities where the music is sampled by computer to
assure quality. The system also monitors the production process real time
during fabrication, and performs error checking throughout. Custom CDs are
then shipped within 24 hours of order.
 
  Our representatives respond to inquiries regarding our products and register
consumers' credit card information over the phone. We believe that these
representatives are a valuable source of consumer feedback which we use to
improve our services. Customer service will be assisted by automated e-mails
which notify consumers about the status of their orders.
 
Competition
 
  The market for providing music (either pre-recorded CDs or custom CDs) on
the Internet is highly competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of
 
                                      33
<PAGE>
 
websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, we expect that
competition will continue to intensify.
 
  Currently, there are more than 100 music retailing websites on the Internet,
most of which sell pre-recorded music CDs which can be purchased in most
retail music stores. In addition to intense competition from Internet music
retailers, we also face competition from traditional retail stores, including
chains and megastores, mass merchandisers, consumer electronics stores and
music clubs. The most visible custom compilation competitors include Custom
Revolutions, Inc., CDuctive, and amplified.com. Additionally, the major record
labels, often with resources greater than musicmaker.com's, may decide to
enter the custom CD business directly and would as a result be potential
competitors.
 
  We also face significant and increasing competition in the growing market to
provide digitally downloaded music, specifically for music files in MP3
format. Competition to provide digitally downloaded music can currently be
found on the websites of existing online music retailers such as MP3.com and
GoodNoise Corporation, websites established by recording artists and websites
of record labels. Catalogs of songs available in MP3 format are also provided
by internet portals such as Lycos. We expect the competition to provide MP3
files to intensify with further entry by additional record labels, artists and
portals, including those with greater resources and music content than
musicmaker.com. Recently, the five major record labels announced that they
have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods" and
"Risk Factors--The online music industry is extremely competitive."
 
  We believe that our primary competitive advantages in providing music
entertainment products and services via the Internet are:
 
 .  Brand recognition.                    .  High quality custom CDs.
 
 
 .  Ease of use of our customization      .  Availability and high level of
   process.                                 consumer support.
 
 
 .  Competitive price of our custom       .  Technical expertise and
   CDs.                                     experience.
 
 
 .  Large online library of music         .  Music industry relationships
   available for custom CDs and             and experience.
   digital downloading.
 
 .  Scalable, cost-effective
   technology.
 
  Our success in this market will depend heavily upon our ability to provide
high quality, entertaining content, along with cutting-edge technology and
value-added Internet services. Other factors that will affect our success
include our continued ability to attract experienced marketing, sales and
management talent.
 
  Many of our current and potential competitors in the Internet and music
entertainment businesses have longer operating histories, significantly
greater financial and marketing resources, greater name recognition and larger
existing consumer bases than musicmaker.com. These competitors may be able to
respond more quickly to new or emerging technologies and changes in consumer
requirements and to devote greater resources to the development, promotion and
sale of their products or services than musicmaker.com. There can be no
assurance that we will be able to compete successfully against current or
future competitors.
 
  Given the large growth potential of this marketplace, we believe that
competitors will enter the marketplace. We believe, however, that we have a
significant first mover advantage. We have established preliminary music and
marketing alliances with significant music marketing companies and maintain a
strong foundation of technological and music industry expertise. We believe
that we will succeed in building a high level of brand awareness to establish
dominance prior to the market entrance of a significant competitor. See "Risk
Factors--The online music industry is extremely competitive."
 
EMPLOYEES
 
  We believe that our employees and their knowledge and capabilities are a
major asset of musicmaker.com. We have been successful in attracting and
retaining employees skilled in our core business competencies and intend to
continue to employ highly skilled personnel.
 
                                      34
<PAGE>
 
  As of January 31, 1999, we employed 15 full-time employees and consultants.
We believe that our relations with our employees are good. None of our
employees are covered by collective bargaining agreements.
 
  There is significant competition for employees with the managerial,
technical, marketing and sales skills required to operate our business. Our
success will depend in part upon our ability to attract, retain, train and
motivate highly skilled employees. See "Risk Factors--We depend upon hiring
and retaining qualified employees."
 
Intellectual Property and Proprietary Rights
 
  We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as contractual restrictions to protect our technology. It is our
policy to require that those persons with access to our proprietary technology
and information enter into confidentiality agreements with us upon the
commencement of their employment, consulting or other contractual
relationships.
 
  We seek to protect our storage and fabrication system under patents and our
brand names under trademarks as noted below. Except as noted below, we
presently have no other patents, trademarks or patent/trademark applications
pending. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or duplicate aspects of our production system or
to obtain and use information that we regard as proprietary. Policing
unauthorized use of our intellectual property is difficult, and there can be
no assurance that our efforts to protect our proprietary rights will be
adequate or that our competition will not independently develop and patent
similar or superior technology. In addition, the laws of some foreign
countries may not provide protection of our proprietary rights to as great an
extent as do the laws of the United States.
 
  There can be no assurance that third parties will not claim infringement by
us with respect to others' current or future patent or proprietary rights. We
expect that Internet music content providers will be increasingly subject to
infringement claims as the number of issued Internet related and business
model patents and music delivery websites increases and the functionality of
music delivery systems based upon new technologies trend toward a similar
appearance. Defending against any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require us to enter into additional royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, and could have a material adverse effect upon our
business, results of operations, and financial condition.
 
  Patents. We have been issued a notice of allowance for a patent application
by the U.S. PTO for a system for and method of producing custom CDs, which
resulting patent will expire in 2016. We own two related U.S. patent
applications currently pending in the U.S. PTO. We also own a pending
international counterpart patent application corresponding to the subject
matter of these U.S. patent applications. In addition, we have filed three
U.S. patent applications relating to kiosk technology and CD jewel cases.
 
  Trademarks. We own a number of trademarks based on our use of those marks in
commerce, and have applied to the U.S. PTO to federally register such marks as
well as others based on our intent to use them. We use the marks MUSIC
CONNECTIONTM and MUSICMAKERTM, in commerce, and have applied to register each
of these trademarks with the U.S. PTO. We have also filed two additional
trademark applications for CD KITTM and MUSICMAGICTM based on our intent to
use such marks. See "Risk Factors--We depend upon intellectual property rights
and risk having such rights infringed."
 
Property
 
  Our headquarters occupy approximately 4,500 square feet of general office
space. The monthly rent for this space is approximately $8,000. Our current
lease is set to expire in June 2005. We believe that our current leasehold
facilities are adequate for our intended use for the foreseeable future.
 
Legal Proceedings
 
  We are not currently a party to any pending lawsuits, nor do we know of any
potential claims which, in the aggregate, could have a material adverse effect
on our business, financial condition or results of operations. Certain aspects
of our business and potential changes with regard to government regulation of
Internet commerce may, however, increase our risk of liability. See "Risk
Factors."
 
                                      35
<PAGE>
 
                                  MANAGEMENT
 
  The following table sets forth certain information regarding our executive
officers and directors:
 
<TABLE>
<CAPTION>
   Name                      Age   Position
   ----                      ---   --------
   <C>                       <S>   <C>
   Robert P. Bernardi.......  46   Chairman of the Board of Directors and Co-Chief Executive Officer
   Devarajan S. Puthukarai..  55   Director, President, Co-Chief Executive Officer and
                                   Chief Operating Officer
   Irwin H. Steinberg.......  78   Director, Vice Chairman of the Board of Directors
   William Crowley..........  44   Vice President of Marketing and Sales
   Mark A. Fowler...........  38   Chief Financial Officer and Director of Finance and Administration
   Edward J. Mathias........  54   Director
</TABLE>
 
Executive Officers and Directors
 
  Robert P. Bernardi.  Mr. Bernardi is musicmaker.com's founder, Chairman of
the Board of Directors and Co-Chief Executive Officer. Mr. Bernardi has served
as a director since Inception. From 1990 to 1996, Mr. Bernardi was a co-
founder, Chairman of the Board of Directors and Chief Executive Officer of
TREEV, Inc. (formerly Network Imaging Corporation), a publicly-held software
company for which he continues to serve as a director. From 1988 to 1990, Mr.
Bernardi was an independent consultant in the document imaging and
telecommunications fields. From 1987 to 1988, Mr. Bernardi was a co-founder,
President and Chief Executive Officer of TranSwitch Corporation, a publicly-
held company that designed high-speed telecommunications chips. From March
1984 to December 1987, Mr. Bernardi was Chairman of the Board of Directors and
Chief Executive Officer of Spectrum Digital Corporation, a publicly-held
telecommunications equipment manufacturing company. From 1984 to 1987, Mr.
Bernardi was a co-founder and director of PictureTel Corporation, a publicly-
held manufacturer of full-motion video conferencing systems. Prior to 1984,
Mr. Bernardi held various executive management positions with MCI
Communications Corporation, Mobil Corporation, Booz, Allen & Hamilton, Inc.
and The MITRE Corporation. Mr. Bernardi earned a Bachelor of Science degree in
Physics and a Master of Science degree in Business and Economics from the
State University of New York at Stonybrook.
 
  Devarajan S. Puthukarai.  Mr. Puthukarai is musicmaker.com's President, Co-
Chief Executive Officer and Chief Operating Officer and has served as director
since April 1997. From 1991 to April 1997, Mr. Puthukarai was President of
Warner Music Media, a division of Warner Music Enterprises, a Time Warner Inc.
company engaged in the business of promoting new and upcoming artists. From
1984 to 1990, Mr. Puthukarai was President of RCA Direct Marketing Inc./BMG
Direct Marketing Inc., launching the country's first CD music club and
building the world's largest classical music club. Mr. Puthukarai earned his
Bachelor of Science and Bachelor of Law degrees from Madras University in
India. Mr. Puthukarai earned a Master of Business Administration degree from
the Indian Institute of Management, a Harvard/Ford Foundation school in
Ahemadabad, India.
 
  Irwin H. Steinberg.  Mr. Steinberg has been a musicmaker.com director and
Vice Chairman of the Board of Directors since January 1997. Mr. Steinberg also
serves as a consultant to musicmaker.com. From 1982 to the present, Mr.
Steinberg has been President of IHS Corporation, a consulting firm
specializing in the music industry. From 1975 to 1982, Mr. Steinberg was
Chairman and Chief Executive Officer of PolyGram Records, Inc. Mr. Steinberg
was co-founder of Mercury Records Corporation. From 1946 to 1975, Mr.
Steinberg was employed with Mercury Records Corporation where he progressed
from Chief Financial Officer to Executive Vice President to President, which
later position he held from 1968-1975. While employed by PolyGram Records,
Inc. and Mercury Records Corporation, Mr. Steinberg was a member of the RIAA.
Mr. Steinberg currently serves as an adjunct Professor at Columbia College of
the Arts, in Chicago, where he teaches graduate courses in music business. Mr.
Steinberg holds a Bachelors degree from the University of Chicago Business
School and a Masters degree from the California State University at Domingo
Hills.
 
 
                                      36
<PAGE>
 
  William Crowley.  Mr. Crowley has served as musicmaker.com's Vice President
of Marketing and Sales since August 1996. From 1995 to 1996, Mr. Crowley was a
Vice President at Warner Music Enterprises where he was responsible for
advertising, creative services and circulation marketing for its sampling
programs and roster of music magazines. From 1993 to 1995, Mr. Crowley was
Vice President at PolyGram Group Distribution, Inc. where he was responsible
for direct development of both music products and new channels of distribution
for PolyGram labels. From 1990 to 1993, Mr. Crowley was the Director of
Marketing and Product Development at Time Life Music where he was responsible
for new product and business activities for popular and classical music
products. From 1981 to 1990, Mr. Crowley was Director of Artists Repertoire
and Merchandising at BMG Direct Marketing, Inc. where he was responsible for
product selection and development, and merchandising and market research for
BMG music clubs. Mr. Crowley earned a Masters degree in Business
Administration from New York University and a Bachelors degree in Political
Science and Economics from Northwestern University.
 
  Mark Fowler.  Mr. Fowler has served as musicmaker.com's Chief Financial
Officer since January 1999 and as its Director of Finance and Administration
since April 1998. From 1995 to 1998, Mr. Fowler was the Controller at
BioReliance Corporation, a publicly-held international contract research
organization. From 1994 to 1995, Mr. Fowler was the Controller at Fusion
Lighting, Inc., an international research and development company. From 1991
to 1994, Mr. Fowler was the Controller at Excalibur Technologies Corporation,
a publicly-held software development firm. Prior to 1991, Mr. Fowler held
several positions, including a consultant position with Booz, Allen &
Hamilton, Inc. Mr. Fowler is a certified public accountant in the State of
Virginia. He earned a Bachelor of Science degree in Finance from Radford
University and is currently enrolled at the Johns Hopkins University pursuing
a Masters degree in Business Administration.
 
  Edward J. Mathias.  Mr. Mathias has served as a musicmaker.com director
since December 1996. Mr. Mathias is a Managing Director and assisted in
founding The Carlyle Group L.P., a Washington, D.C.-based merchant bank. Mr.
Mathias is also a special limited partner in Trident Capital, a partnership
focusing on business and information service companies. Mr. Mathias currently
serves as a director for Sirrom Capital Corporation, U.S. Office Products
Company, Inc., Condor Technology Solutions, Inc. and U.S.A. Floral Products,
Inc., each a publicly-held company. In addition, Mr. Mathias sits on a number
of advisory committees for private equity partnerships. From 1971 to 1993, Mr.
Mathias held various positions with T. Rowe Price Associates, Inc., an
investment management organization, most recently as a Managing Director. Mr.
Mathias has served on T. Rowe Price's Board of Directors and was a member of
its Management Committee for over ten years. Mr. Mathias holds a Masters
degree in Business Administration from Harvard Business School and a Bachelors
degree from the University of Pennsylvania.
 
  Musicmaker.com intends to appoint an additional independent director prior
to the consummation of this offering.
 
Classified Board of Directors and Executive Officers
 
  Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three classes of
directors, designated Class A, Class B and Class C directors, serving
staggered three year terms. With respect to the present Board (consisting of
five members), the term of the Class A director,      , will expire at the
2000 annual meeting of stockholders, the terms of the Class B directors,
Mr. Mathias and Mr. Steinberg, will expire at the 2001 annual meeting of
stockholders and the terms of the Class C directors, Mr. Bernardi and Mr.
Puthukarai, will expire at the 2002 annual meeting of stockholders. One
additional independent director will be designated prior to the completion of
this offering in order to fill the vacancy presently existing on the Board of
Directors. Directors will be elected at annual meetings of stockholders to
serve a three year term and until their respective successors are duly elected
and qualify, or until their earlier resignation, removal from office, or
death. The remaining directors may fill any vacancy on the Board of Directors
for an unexpired term.
 
  Executive officers are appointed by and serve at the discretion of the Board
of Directors.
 
                                      37
<PAGE>
 
Committees of the Board of Directors and Compensation
 
  The Board of Directors has designated an Audit Committee of the Board of
Directors, currently consisting of        and Mr. Mathias. The Audit Committee
is responsible for reviewing, along with our independent public accountants,
the scope of our accounting audits, as well as our corporate accounting
practices and policies. The Audit Committee shall also review our accounting
and financial controls, and be available to our independent public accountants
for any necessary consultation.
 
  The Board of Directors has also designated a Compensation Committee of the
Board of Directors, currently consisting of Mr. Bernardi, Mr. Mathias and
      . The Compensation Committee shall review the performance of our
management and recommend and approve the compensation of and the issuance of
stock options to certain executive officers and employees pursuant to our
stock option plan.
 
  Musicmaker.com directors currently do not receive a fee for their service on
the Board of Directors or any committee thereof. Directors receive
reimbursement to cover their reasonable expenses incurred in attending such
meetings. Directors are eligible to receive stock options under
musicmaker.com's stock option plan. Pursuant to the terms of his consulting
agreement, Mr. Steinberg, musicmaker.com's Vice Chairman of the Board,
receives compensation of $1,200 per meeting of the Board of Directors or any
committee.
 
Compensation Interlocks and Insider Participation
 
  The current members of the Compensation Committee are Mr. Bernardi, Mr.
Mathias and       . Accordingly, to date, the Compensation Committee,
including directors who are or were executive officers of musicmaker.com, has
made all determinations concerning compensation of musicmaker.com's executive
officers. During his term on the Compensation Committee, Mr. Bernardi has
agreed not to participate in decisions regarding his own compensation. The
Board of Directors has provided for the reconfiguration of the Compensation
Committee which, upon completion of this offering, will be composed of two
non-employee directors of musicmaker.com. See "--Committees of the Board of
Directors and Compensation" and "--Stock Option Plan."
 
Executive Compensation
 
  The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to musicmaker.com in all capacities during the
fiscal year ended December 31, 1998, by musicmaker.com's chief executive
officer and other executive officers whose salary and bonus for fiscal year
1998 exceeded $100,000 (the "Named Executive Officers").
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                                                                  Long-Term
                                                             Compensation Awards
                                                             -------------------
                                        Annual Compensation   Number of Shares
                                        --------------------     Underlying
      Name and Principal Position       Salary ($) Bonus ($)     Options (#)
      ---------------------------       ---------- --------- -------------------
<S>                                     <C>        <C>       <C>
Robert P. Bernardi.....................  $175,000       --         129,870
 Chairman of the Board of Directors and
 Co-Chief Executive Officer
Devarajan S. Puthukarai................  $250,000  $100,000        129,870
 President, Co-Chief Executive Officer
 and Chief Operating Officer
</TABLE>
 
 
                                      38
<PAGE>
 
  The following table sets forth information regarding the grant of options to
purchase musicmaker.com's common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998.
 
                             Option Grants in 1998
 
<TABLE>
<CAPTION>
                                                                       Potential Realizable Value
                                                                         at Assumed Annual Rates
                                                                             of Stock Price
                                                                         Appreciation for Option
                                       Individual Grants                        Term (1)
                         --------------------------------------------- ---------------------------
                         Number of  Percentage of
                         Securities Total Options
                         Underlying  Granted to   Exercise
                          Options   Employees in    Price   Expiration
          Name            Granted    Fiscal 1998  Per Share    Date         5%            10%
          ----           ---------- ------------- --------- ---------- ------------- -------------
<S>                      <C>        <C>           <C>       <C>        <C>           <C>
Robert P. Bernardi......   83,117       23.7%       $5.29      2003    $   1,960,000 $   3,960,000
                           46,753       13.3         4.81      2008        1,125,000     2,250,000
Devarajan S.
 Puthukarai.............   83,117       23.7         5.29      2003        1,960,000     3,960,000
                           46,753       13.3%       $4.81      2008    $   1,125,000 $   2,250,000
</TABLE>
--------
(1) Potential Realizable Value assumes that the common stock appreciates at
    the indicated annual rate (compounded annually) from the grant date until
    the expiration of the option term and is calculated based on the
    requirements promulgated by the Securities and Exchange Commission.
    Potential Realizable Value does not represent musicmaker.com's estimate of
    future stock price growth.
 
  The following table sets forth certain information regarding the number and
value of securities underlying options held by each of the Named Executive
Officers at the end of fiscal 1998. No options were exercised by any of the
Named Executive Officers during 1998.
 
             Aggregate Option Exercises and Year-End Option Values
 
<TABLE>
<CAPTION>
                                                  Number of Securities
                                                 Underlying Unexercised
                                              Options at December 31, 1998
                                              --------------------------------
                    Name                       Exercisable      Unexercisable
                    ----                      -------------    ---------------
<S>                                           <C>              <C>
Robert P. Bernardi...........................          20,780            109,090
Devarajan S. Puthukarai......................          20,780            109,090
</TABLE>
 
Employment Agreements and Consulting Agreements
 
  Mr. Bernardi and Mr. Puthukarai each have employment agreements with initial
terms through December 7, 2002. These agreements require that each commit
substantially all of his time and effort to furthering musicmaker.com's
interests and restrict competition with musicmaker.com during the term of the
agreement and for one year following termination. Under the employment
agreements, Mr. Bernardi and Mr. Puthukarai receive base salaries of $175,000
and $250,000 per annum, respectively. Each is eligible for payment of bonuses
and stock options as determined by the Compensation Committee of the Board of
Directors. Mr. Puthukarai is guaranteed a minimum annual bonus of $100,000.
Upon termination by musicmaker.com without cause, or termination by Mr.
Bernardi or Mr. Puthukarai upon certain non-compliance by musicmaker.com,
their respective employment agreements provide for payment of all accrued
salary, benefits and bonus plus a sum equal to the salary, benefits and bonus
that would have been received if the initial or any renewal term had been
completed, discounted by three percent. Each agreement is automatically
renewable on a year-to-year basis following expiration of the initial term,
and any renewal term unless certain notice of non-renewal is given by either
party. Should musicmaker.com decide not to renew their respective agreements,
Mr. Bernardi and Mr.
 
                                      39
<PAGE>
 
Puthukarai shall be entitled to a severance payment equal to one year's salary
and benefits, as in effect prior to termination.
 
  Under a consulting agreement between musicmaker.com and IHS Corporation, Mr.
Steinberg is required to provide consulting services to musicmaker.com for not
less than fifteen days in any given month. Mr. Steinberg seeks to obtain, on
musicmaker.com's behalf, additional license agreements and content
relationships with record labels in an effort to expand musicmaker.com's music
library. The Steinberg Consulting Agreement is non-exclusive; however, Mr.
Steinberg is restricted from providing consulting services to any of
musicmaker.com's competitors. For his services, Mr. Steinberg is paid a
minimum monthly payment of $9,000. Mr. Steinberg also receives compensation of
$1,200 per day in connection with his attendance at meetings of
musicmaker.com's Board of Directors or any committee thereof.
 
Key Man Insurance
 
  Musicmaker.com has applied for key man insurance covering Mr. Bernardi and
Mr. Puthukarai.
 
Stock Option Plan
 
  Musicmaker.com has adopted a stock option plan for the purpose of promoting
our long-term growth and profitability by (i) providing key people with
incentives to improve stockholder value and contribute to the growth and
financial success of musicmaker.com, and (ii) enabling musicmaker.com to
attract, retain and reward talented and skilled persons for positions of
substantial responsibility. Musicmaker.com has used stock options as a
significant component of compensation for our officers and key employees.
 
  The stock option plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
(including non-qualified options and incentive stock options pursuant to
Section 422 of the Internal Revenue Code) and stock appreciation rights
(including free standing, tandem and limited stock appreciation rights). Under
the stock option plan 779,221 shares of common stock are reserved for
issuance, representing  % of the shares of common stock expected to be
outstanding immediately subsequent to this offering. As of the date of this
prospectus, options to purchase a total of 532,182 shares of common stock were
outstanding, at exercise prices ranging from $0.385 to $5.29 per share. No
options have been exercised and no stock appreciation rights have been granted
to date.
 
  Subsequent to this offering, the stock option plan will be administered by
the Compensation Committee of the Board of Directors, which will include at
least two "disinterested persons," for purposes of Rule 16b-3 under the
Exchange Act, and "outside directors," within the meaning of Section 162(m) of
the Internal Revenue Code. The Compensation Committee will select the
participants and establish the terms and conditions of each option or other
rights granted under the stock option plan, including the exercise price, the
number of shares subject to options or other equity rights and the time at
which such options become exercisable. See "--Committees of the Board of
Directors and Compensation." The exercise price of all "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code,
granted under the stock option plan must be at least equal to 100% of the fair
market value of the option shares on the date of grant. The term of any
incentive stock option granted under the stock option plan may not exceed ten
years. Where the eligible stock option plan participant owns over 10% of the
total combined voting power of all classes of stock of musicmaker.com,
however, the exercise price must be at least equal to 110% of the fair market
value of the option shares on the date of grant and the term cannot exceed
five years.
 
  To the extent required to comply with Rule 16b-3 under the Exchange Act, if
applicable, and in any event in the case of an incentive stock option or stock
appreciation right granted with respect to an incentive stock option, no award
granted under the stock option plan shall be transferable by a grantee
otherwise than by will or by the laws of descent and distribution. Other terms
and conditions of each award are set forth in the grant agreement governing
that award and determined by the Compensation Committee.
 
                                      40
<PAGE>
 
Indemnification of Directors and Officers
 
  Musicmaker.com's Charter and Bylaws provide that it shall indemnify all of
its directors and officers to the full extent permitted by the Delaware
General Corporation Law (the "DGCL"). Under such provisions, any director or
officer who, in his or her capacity as such, is made or threatened to be made
a party to any suit or proceeding, may be indemnified if the Board determines
such director or officer acted in good faith and in a manner such director
reasonably believed to be in, or not opposed to, the best interests of
musicmaker.com. The Charter, Bylaws, and the DGCL further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under our Charter, Bylaws, any agreement, any vote of
stockholders or disinterested directors, or otherwise.
 
  Musicmaker.com has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of
musicmaker.com, or is or was serving at the request of musicmaker.com as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any expense, liability, or
loss incurred by such person in any such capacity or arising out of his status
as such, whether or not musicmaker.com would have the power to indemnify such
person against such liability under the DGCL.
 
                                      41
<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  In July 1996, we sold 551,948 shares of common stock to Mr. Bernardi, our
founder, Chairman of the Board of Directors and Co-Chief Executive Officer,
for nominal cash consideration in connection with musicmaker.com's formation.
 
  In July 1996, we acquired CD Kit, S.A. in exchange for 649,351 shares of
common stock, payable to the stockholders of CD Kit, S.A. In exchange we
received 8,000 shares of CD Kit, SA, all of its outstanding capital stock. In
connection with the acquisition of CD Kit, S.A., Bruno Costa-Marini and Jean
Francois Dockes, each a former stockholder of CD Kit, S.A., became the
beneficial owners of 285,714 and 188,312 of such shares of our common stock,
respectively.
 
  Between December 1996 and May 1997, musicmaker.com sold 12% convertible
notes to accredited investors for $650,000. The notes were convertible into
our common stock at $6.74 per share. Of these investors, Mr. Bernardi and Mr.
Mathias, one of our directors, participated in the offering, purchasing notes
and paying an aggregate consideration of $50,000 and $150,000, respectively.
These purchases were on the same terms as those applying to non-affiliated
investors participating in the convertible notes offering.
 
  In connection with a June 1997 private placement of securities, we converted
the principal and all accrued interest under the terms of the outstanding
convertible notes at a price of $3.85 per share, rather than $6.74 a share as
stated in the original offering. In connection with the conversion of the
notes and the private placement of our common stock, Mr. Bernardi and Mr.
Mathias received 13,815 and 41,446 shares of our common stock, respectively.
The conversion of the notes belonging to Mr. Bernardi and Mr. Mathias was
conducted on the same terms as that provided to non-affiliated investors
participating in the conversion. In addition to the common stock received upon
the conversion above, Mr. Bernardi purchased an additional 6,494 shares of
common stock in the June 1997 private placement at $3.85 per share.
 
  In October 1997, we issued 194,805 common stock warrants to Mr. Puthukarai,
musicmaker.com's President, Co-Chief Executive Officer and Chief Operating
Officer, as part of his compensation and in exchange for services previously
rendered to musicmaker.com. The warrants have an exercise price of $3.85 per
share and expire on October 15, 2007.
 
  In December 1997, musicmaker.com issued and sold 375,701 shares of our
Series A outstanding preferred stock, par value $.01, to Rho Management Trust
I, a venture capital firm. Mr. Bernardi and Mr. Puthukarai also purchased
51,948 and 12,987 shares of our Series A outstanding preferred stock,
respectively. The shares were purchased at a price of $3.85 per share.
Additionally, 715,622, 98,949 and 24,737 Series B outstanding preferred
warrants were issued to Rho, Mr. Bernardi and Mr. Puthukarai, respectively.
The Series B outstanding preferred warrants expire on December 8, 2002 and are
exercisable for Series B outstanding preferred stock, par value $.01 per
share, at an exercise price of $4.62 per share. We also issued 188,103, 26,009
and 6,502 Series C outstanding preferred warrants to Rho, Mr. Bernardi and Mr.
Puthukarai, respectively. The Series C outstanding preferred warrants expire
on December 8, 2001 and are exercisable for Series C outstanding preferred
stock, par value $.01 per share, at an exercise price of $5.78 per share.
Musicmaker.com received $1,696,450 in aggregate consideration from the
investors above in connection with this round of venture financing. In March
and June, 1998, holders of the Series B outstanding preferred warrants
exercised 364,654 warrants which were converted to Series B outstanding
preferred stock at $4.62 per share. Of the 364,654 warrants exercised, Mr.
Bernardi and Mr. Puthukarai received 41,229 and 10,307 shares of Series B
outstanding preferred stock, respectively. Mr. Bernardi and Mr. Puthukarai
received the shares above in exchange for their relinquishment of $133,334 in
accrued salary and $33,333 in accrued bonus, respectively. Rho received an
additional 305,903 shares of Series B outstanding preferred stock, in
connection with the exercise of the warrants.
 
  In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to
 
                                      42
<PAGE>
 
obtaining license agreements with record labels on behalf of musicmaker.com.
These warrants expire January 15, 2008. In August 1998, musicmaker.com issued
25,974 common stock warrants to four members of Mr. Steinberg's family as
record holders. The warrants were granted as compensation for consulting
services rendered to musicmaker.com by Mr. Steinberg and he is the beneficial
owner of such warrants. The warrants are convertible by the holders into
common stock at an exercise price of $4.62 per share and expire on August 15,
2008.
 
  In September 1998, we issued 259,741 shares of our common stock to Platinum
at a value of $1,650,000. In exchange for shares of our common stock and
pursuant to the terms of a stock exchange agreement, dated September 30, 1998,
and each of a licensing agreement and a marketing agreement of even date
therewith, we entered into a strategic marketing and content alliance under
which we market and sell our custom CDs on Platinum's website and have a
license to use their song library. We also received 111,457 shares of
Platinum's common stock, having an aggregate value of $750,000. In November
1998, an additional 83,116 shares of our common stock were issued to Platinum
in connection with, and as payment under, the stock exchange agreement noted
above. See "Business--Marketing."
 
  In December 1998, we loaned $81,519 to Mr. Puthukarai all of which was
outstanding at December 31, 1998, and all of which is currently outstanding.
The loan is to be repaid without interest and upon demand under a note held by
musicmaker.com. The funds were loaned for payment of federal and state income
taxes.
 
  We believe that the above-described transactions are as fair to
musicmaker.com as could have been obtained with unaffiliated parties. We
intend that all future transactions with officers, directors or principal
stockholders of musicmaker.com will be approved or ratified by a majority of
the Board of Directors, including a majority of the disinterested, independent
directors. We intend that such future transactions will be on terms no less
favorable to musicmaker.com than could be obtained from unaffiliated third
parties.
 
                                      43
<PAGE>
 
                            PRINCIPAL STOCKHOLDERS
 
  The following table sets forth certain information regarding shares of our
common stock beneficially owned as of January 31, 1999, and as adjusted to
reflect the offering by (i) each person or group known to musicmaker.com, that
beneficially owns more than five percent of our outstanding common stock;
(ii) musicmaker.com's directors and Named Executive Officers, and (iii) all of
musicmaker.com's executive officers and directors as a group. Beneficial
ownership is calculated in accordance with Rule 13d-3(d) under the Securities
Exchange Act of 1934. Shares of common stock subject to options and warrants
that are currently exercisable or are exercisable within 60 days of January
31, 1999, are deemed outstanding with respect to the person holding such
options but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated, each
person possesses sole voting and investment power with respect to the shares
identified as beneficially owned. Except as otherwise indicated in the table,
the address of the stockholders listed below is that of musicmaker.com's
principal executive office. See "Risk Factors--Certain existing investors own
a large percentage of our voting securities" and "Certain Transactions."
 
<TABLE>
<CAPTION>
                                                           Shares Beneficially
                          Shares Beneficially Owned          Owned After the
    Name and Address      Prior to the Offering (1)             Offering
    ----------------      -------------------------------- --------------------------
                             Number            Percent       Number        Percent
                          ---------------    ------------- ------------    ----------
<S>                       <C>                <C>           <C>             <C>
Rho Management Trust I..        1,207,864(2)        25.6%     1,207,864
 767 Fifth Avenue
 New York, NY 10053
Robert P. Bernardi......          920,220(3)        21.0%       920,220
Devarajan S.
 Puthukarai.............          448,679(4)        10.0%       448,679
Platinum Entertainment,
 Inc....................          342,857            8.2%       342,857
 2001 Butterfield Rd.
 Suite 1400
 Downers Grove, IL 60515
Bruno Costa-Marini......          294,372(5)         7.0%       294,372(5)
Abdulla Mohammed Al-
 Romaizan...............          259,740(6)         6.1%       259,740(6)
 P.O. Box 768
 Riyadh 11421
 Kingdom of Saudi Arabia
Irwin H. Steinberg......          150,649(7)         3.5%       150,649(7)
Edward J. Mathias.......           67,420            1.6%        67,420
All executive officers
 and directors as a
 group (6 persons)......        1,645,410(8)        34.3%     1,645,410(8)
</TABLE>
--------
(1) Shares beneficially owned prior to the offering are as adjusted to reflect
    and include the automatic conversion of (i) all outstanding preferred
    stock and outstanding preferred warrants into common stock and common
    stock warrants, respectively, and (ii) all outstanding convertible notes
    into common stock, upon completion of the offering.
(2) Includes: (i) 375,701 shares of Series A and 305,903 shares of Series B
    outstanding preferred stock to be converted into 375,701 and 305,903
    shares of common stock, respectively, and (ii) 338,156 Series B and
    188,104 Series C outstanding preferred warrants to be converted into
    338,156 and 188,104 common stock warrants, respectively, upon the
    completion of this offering. Rho Management Partners L.P., a Delaware
    limited partnership may be deemed the beneficial owner of shares
    registered in the name of Rho Management Trust I, pursuant to an
    investment advisory relationship by which Rho Management Partners L.P.
    exercises sole voting and investment control over such shares and
    warrants.
(3) Includes (i) 51,948 shares of Series A and 41,229 shares of Series B
    outstanding preferred stock to be converted into 51,948 and 41,229 shares
    of common stock, respectively, and (ii) 117,089 Series B and 26,009 Series
    C outstanding preferred warrants to be converted into 117,089 and 26,009
    common stock
 
                                      44
<PAGE>
 
   warrants, respectively, upon the completion of this offering, and (iii)
   64,935 vested options for common stock with exercise prices ranging from
   $4.81 to $5.29 per share.
(4) Includes (i) 194,805 common stock warrants with an exercise price of $3.85
    per share, (ii) 12,987 shares of Series A and 10,307 shares of Series B
    outstanding preferred stock to be automatically converted into 12,987 and
    10,307 shares of common stock, respectively, and (iii) 29,272 Series B and
    6,502 Series C outstanding preferred warrants to be converted into 29,272
    and 6,502 common stock warrants, respectively, upon the completion of this
    offering, and (iv) 64,935 vested options for common stock with exercise
    prices ranging from $4.81 to $5.29 per share.
(5) Includes 8,658 vested options for common stock with an exercise price of
    $3.85 per share.
(6) Includes 51,948 common stock warrants with an exercise price of $4.81 per
    share.
(7) Includes 98,701 common stock warrants with exercise prices ranging from
    $3.85 to $4.62 per share.
(8) Includes: (i) 64,935 shares of Series A and 51,536 shares of Series B
    outstanding preferred stock, to be converted into 64,935 and 51,536 shares
    of common stock, respectively, and (ii) 146,362 Series B and 32,511 Series
    C outstanding preferred warrants to be converted into 146,362 and 32,511
    common stock warrants, respectively, upon completion of this offering.
    Also includes 293,506 outstanding common stock warrants and 136,364 vested
    options for common stock.
 
                                      45
<PAGE>
 
                           DESCRIPTION OF SECURITIES
 
General
 
  Pursuant to our Charter, musicmaker.com is authorized to issue up to
15,584,415 shares of common stock, par value $.01 and 1,547,924 shares of
preferred stock, par value $.01 per share. Prior to this offering,
2,960,058 shares of common stock were issued and outstanding and an additional
3,091,546 were reserved for issuance pursuant to outstanding options, warrants
and conversion features of other securities issued. As of January 31, 1999,
there were approximately 100 holders of our common stock (after giving effect
to the conversion of all outstanding outstanding preferred stock and
convertible notes upon consummation of this offering).
 
  The following description of our capital stock is a summary and is qualified
in its entirety by the provisions of our Charter, Bylaws and applicable law.
These documents have been filed as exhibits to the registration statement, of
which this prospectus forms a part.
 
Reverse Stock Split
 
  Musicmaker.com's Board of Directors and stockholders have approved a reverse
stock split by which each issued and outstanding share of our common stock
will be reclassified in a one-for-3.85 reverse split to be effected on      ,
1999. The reverse stock split similarly affected the holders of our
outstanding options and warrants for common stock, and the conversion features
of the holders of our outstanding preferred stock, outstanding preferred
warrants, and convertible notes.
 
Common Stock
 
  The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Holders of common stock are
entitled to share in any and all dividends that our Board of Directors, in its
discretion, declares from funds legally available therefor. In the event of
any liquidation or dissolution of musicmaker.com, the holders of common stock
are entitled to participate in and share pro rata in the assets available for
distribution to stockholders. Any such distribution would be subsequent to
payment of our liabilities and may be subject to any preferential rights of
any preferred stock or other senior security then outstanding. The holders of
common stock have no cumulative voting, preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered hereby upon issuance and
sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any shares of preferred stock or
senior securities which musicmaker.com may designate in the future.
 
Preferred Stock
 
  Pursuant to musicmaker.com's Charter, our Board of Directors may, without
further action by stockholders, from time to time, issue one or more series of
preferred stock. Blank check preferred stock may be issued with such rights,
preferences, privileges and limitations as the Board of Directors may
determine and as permitted by the DGCL, including:
 
  .  The number of shares constituting the series and the distinctive
     designation of the series of preferred stock.
 
  .  The dividend rate on such preferred stock, the dates of payment and
     whether such dividends shall be cumulative.
 
  .  The extent of voting rights, if any, to be granted to holders of any
     series of preferred stock.
 
  .  Other rights, privileges and preferences, including conversion into
     common stock, redemption by the holder or musicmaker.com and priority
     upon liquidation, dissolution or winding up of musicmaker.com.
 
                                      46
<PAGE>
 
Registration Rights
 
  Holders of our outstanding preferred stock and outstanding preferred
warrants, including Mr. Bernardi, Mr. Puthukarai, Rho, and an additional
investor, have been granted certain demand registration rights. These demand
registration rights may require musicmaker.com to file, on not more than two
occasions, a registration statement under the Securities Act covering all, or
a portion of their common stock issued or issuable, upon the automatic
conversion of the outstanding preferred stock and outstanding preferred
warrants upon consummation of this offering. In connection with the issuance
to Columbia House of a warrant for 129,870 shares of common stock,
musicmaker.com granted certain registration rights permitting the holders to
require that musicmaker.com, on not more than two occasions, file a
registration statement under the Securities Act covering all, or a portion of
the common stock issued or issuable pursuant to the warrant. Under the terms
of his consulting agreement with musicmaker.com, Mr. Steinberg,
musicmaker.com's Vice Chairman of the Board of Directors, was granted
registration rights equivalent to those received by Mr. Bernardi.
 
  In addition, each of the holders indicated above, the noteholders and Boston
Financial & Equity Corporation, a lessor of certain equipment, have certain
"piggyback" registration rights. If musicmaker.com proposes to register any of
its common stock under the Securities Act (other than pursuant to this
offering or in connection with the registration of securities issuable under
an employee benefit plan or a registered exchange offer) holders of
"piggyback" rights may require that musicmaker.com include all or a portion of
their common stock, issued or issuable pursuant to certain exercise rights, in
such registration. In connection with any such offering, the managing
underwriter thereof, shall have certain rights to limit the number of
securities held by persons with "piggyback" registration rights to be included
in such registration. All expenses incurred in connection with the
registration rights above will be borne by musicmaker.com.
 
  The underwriters have requested that all holders of registration rights
forego any request for registration for a period of 180 days following the
date of effectiveness of this prospectus.
 
Delaware General Corporation Law and certain provisions in our Charter
 
  Our Charter provides that musicmaker.com shall indemnify its currently
acting and former directors and officers against any and all liabilities and
expenses incurred in connection with their services in such capacities to the
maximum extent permitted by the DGCL. Our Charter similarly requires
musicmaker.com to advance expenses to our officers and directors entitled to
indemnification to the maximum extent permitted by the DGCL. Advancement of
expenses to directors and officers is conditioned upon receipt of an
undertaking by such director or officer to repay the amount of any advancement
if it shall ultimately be determined that such person is not entitled to be
indemnified by musicmaker.com. The terms and conditions of such advancement
are to be determined by musicmaker.com's Board of Directors.
 
  Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors and officers, musicmaker.com has been informed that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy, as expressed in the Securities Act, and is therefore
unenforceable.
 
  Our Charter provides that our directors shall not be personally liable to
musicmaker.com or our stockholders for monetary damages to fullest extent
permitted by the DGCL. Section 102(b)(7) of the DGCL currently permits
elimination of a director's personal liability to a corporation and its
stockholders except for liability:
 
  .  For any breach of the director's duty of loyalty to the corporation or
     its stockholders.
 
  .  For acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of the law.
 
  .  Under Section 174 of the DGCL for unlawful dividends, distributions or
     unlawful stock repurchases or redemptions.
 
  .  For any transaction from which the director derives an improper personal
     benefit.
 
  Under our Charter and the DGCL, our directors will be protected from
monetary damages for other negligent acts on their part. Stockholders and
musicmaker.com seeking redress against directors may bring an action for
equitable remedies such as an injunction or rescission based upon a director's
breach of fiduciary
 
                                      47
<PAGE>
 
duties, even where monetary remedies are unavailable. Any amendment to the
DGCL that increases or decreases the protection from monetary damages afforded
directors in Delaware shall be automatically incorporated into our Charter.
 
Charter provisions that could delay or prevent a change in control
 
  Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three separate classes,
with only one class, or roughly one-third of the Board of Directors, standing
for election in any given year. This "staggered" structure of the Board of
Directors may have the effect of delaying the ability of stockholders to
change the composition of the Board of Directors and possibly delaying or
preventing a corresponding change in control of musicmaker.com.
 
  Musicmaker.com's Charter also contains a provision which enables the Board
of Directors to issue preferred stock without the approval of stockholders.
The Board of Directors may fix the rights, preferences, privileges and
limitations of such securities at its discretion. The provision grants to the
Board of Directors the right to issue what is often called "blank check"
preferred stock. The provision may be used to permit the Board of Directors to
institute a rights plan, or "poison pill" by which the Board of Directors
issues preferred stock or grants rights to acquire preferred stock, often with
voting rights, to certain holders of common stock. The effect of such
preferred stock grants may be to deter possible takeovers or acquisitions,
making such a transaction prohibitively expensive for potential acquirers.
Issuance of such preferred stock could discourage potential bids for
musicmaker.com, deny stockholders a potential premium on their shares and may
make a change in control of musicmaker.com more difficult. See "Risk Factors--
Anti-takeover effects of our Charter and Bylaws."
 
                                      48
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering, we will have outstanding           shares
of common stock. Of these shares, the           shares of common stock sold in
this offering (assuming no exercise of the Underwriter's over-allotment
option) will be freely tradable in the public market without restrictions
under the Securities Act, except that any shares purchased by affiliates of
musicmaker.com, as defined in Rule 144 under the Securities Act, may only be
sold in compliance with the applicable provisions of Rule 144 discussed below.
 
  In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted securities" for at least
one year, including a person who may be deemed an affiliate of musicmaker.com,
is entitled to sell within any three-month period the number of shares of
common stock that does not exceed the greater of (i) one percent of the then
outstanding shares of common stock of musicmaker.com or (ii) the average
weekly trading volume of common stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are subject
to certain restrictions relating to manner of sale, notice and the
availability of current public information about musicmaker.com. Generally, a
person who is not an affiliate of musicmaker.com and who has satisfied a two-
year holding period will be able to sell without any volume limitations. As of
January 31, 1999, the one-year holding period had expired with respect to
2,056,006 shares of common stock. As of January 31, 1999, the two-year holding
period had expired with respect to 1,327,273 shares of common stock.
 
  Shares of outstanding preferred stock, including all outstanding preferred
warrants, shall be automatically converted into shares of common stock and
common stock warrants, respectively, upon completion of this offering. As a
result of this automatic conversion, 819,199 shares of restricted common stock
shall be issued to the former holders of the outstanding preferred stock and
728,725 warrants for common stock shall be issued in exchange for the
outstanding preferred warrants. Outstanding convertible notes shall
automatically convert into 415,584 shares of common stock upon completion of
this offering.
 
  Stockholders holding approximately       of our outstanding common stock and
outstanding options and warrants for common stock, are expected to agree not
to offer, pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any securities of musicmaker.com
they currently hold without prior written consent of the representatives for a
period of 180 days following the date of the final prospectus.
 
  Upon completion of this offering, we will sell to the representatives, for
nominal consideration, warrants entitling the representatives to purchase an
aggregate of         shares of common stock at an initial exercise price equal
to 110% of the initial public offering price. The representatives' warrants
will be exercisable for a period of four years commencing one year after the
effective date of the registration statement of which this prospectus is a
part. Subject to the limitations of Rule 144, the holders of the
representatives' warrants may sell shares of common stock acquired by exercise
of the warrant one year from the date of exercise thereof without
registration. See "Underwriting."
 
  Prior to this offering, there has been no market for our common stock. No
predictions can be made as to the effect, if any, that sales of shares of
common stock under Rule 144 will have on the market price of our common stock.
Sales in the public market of such common stock under Rule 144 could adversely
affect the market price of our common stock or the ability of musicmaker.com
to raise funds through a public offering of its equity securities. See "Risk
Factors--Shares eligible for future sale."
 
                                      49
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions of an underwriting agreement, the
underwriters named below, for whom Ferris, Baker Watts, Incorporated and
Fahnestock & Co., Inc. are acting as the representatives, have severally
agreed to purchase from us, and we have agreed to sell to the underwriters,
the respective number of shares of common stock set forth opposite each
underwriters named below:
 
<TABLE>
<CAPTION>
                                                                       Number
         Underwriters                                                 of Shares
         ------------                                                 ---------
   <S>                                                                <C>
   Ferris, Baker Watts, Incorporated.................................
   Fahnestock & Co. Inc..............................................
                                                                         ---
     Total...........................................................
                                                                         ===
</TABLE>
 
  The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The nature of the underwriter's
obligation is such that they are committed to purchase and pay for all shares
of common stock if any are purchased.
 
  The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of
this prospectus and to certain securities dealers at such price less a
concession not in excess of $    per share. The underwriters may allow, and
such selected dealers may re-allow, a concession not in excess of $    per
share to certain brokers and dealers. After this offering, the price to the
public, concession, allowance and re-allowance may be changed by the
representatives. The representatives have informed us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
 
  We have granted the underwriters an option exercisable during the 30-day
period after the date of this prospectus, to purchase up to     additional
shares of common stock at the initial public offering price solely to cover
over-allotments, if any. To the extent that the underwriters exercise this
option, each of the underwriters will be committed, subject to certain
conditions, to purchase such additional shares of common stock in
approximately the same proportions as set forth in the above table.
 
  The offering of common stock is made for delivery when, as and if accepted
by the underwriters and subject to prior sale to withdrawal, cancellation or
modification of the offer without notice. The underwriters reserve the right
to reject any order for the purchase of common stock.
 
  We have agreed to issue warrants to the representatives to purchase up to
    shares of common stock, at an exercise price per share equal to 110% of
the initial public offering price per share. The representatives' warrants are
exercisable for a period of four years, commencing one year from the effective
date of the registration statement of which this prospectus is a part. The
representatives' warrants will not be sold, offered for sale, transferred,
assigned or hypothecated for a period of one year from the effective date of
the registration statement other than to officers, employees or partners of
the respective representatives and members of the selling group and their
officers and partners. The holders of the representatives' warrants will have
no voting, dividend or other stockholders' rights until the representatives'
warrants are exercised. We have granted the representatives certain demand and
piggyback registration rights related to the representatives' warrants, which
are applicable during the period that the representatives' warrants are
exercisable. We also have agreed to pay the underwriters a nonaccountable
expense allowance of 1% of the gross proceeds of this offering.
 
  We have agreed to enter into a financial advisory agreement with GunnAllen
Financial, Inc. whereby we will pay GunnAllen an advisor fee of $125,000 upon
the completion of the offering.
 
                                      50
<PAGE>
 
  We have agreed not to issue, and all of our officers and directors, and all
security holders of musicmaker.com are expected to agree not to offer, pledge,
sell, contract to sell, or otherwise transfer or dispose of directly or
indirectly any shares of our capital stock or other equity securities of
musicmaker.com for a period of 180 days after the date of this prospectus
without the prior written consent of Ferris, Baker Watts, Incorporated. In
addition, those officers, directors and each security holder of musicmaker.com
to whom we granted certain registration rights in connection with the issuance
of shares of our common stock or other equity securities of musicmaker.com are
expected to agree not to make any demand for, exercise any right, or file (or
participate in the filing of) a registration statement with respect to the
registration of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Ferris, Baker
Watts, Incorporated.
 
  We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make in respect thereof.
 
  Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
was determined by negotiation among musicmaker.com and the Representatives.
Among the factors considered in determining the public offering price were:
 
  .  The preliminary demand for our common stock.
 
  .  The history of and the prospects for musicmaker.com.
 
  .  The condition of the industry and markets in which we compete.
 
  .  An assessment of our management.
 
  .  Our past earnings and the trend and future prospects of such earnings.
 
  .  The present state of our business operations and development.
 
  .  The general conditions of the securities market at the time of the
     offering; and the market prices of publicly traded common stocks of
     comparable companies in related industries in recent periods.
 
  There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
 
  The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of our
common stock. Such price is subject to change as a result of market conditions
and other factors. We cannot assure you that our common stock can be resold at
or above the initial public offering price.
 
  In order to facilitate this offering, certain persons participating in the
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after the offering in
accordance with Regulation M under the Securities Exchange Act of 1934, as
amended. Specifically, the underwriters may over-allot or otherwise create a
short position in the common stock for their own account by selling more
shares of common stock than have been sold to them by us. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the
price of the common stock by bidding for or purchasing shares of common stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions and use of penalty bids may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages
resales. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
Nasdaq National Market or otherwise and, if continued, may be discontinued at
any time.
 
                                      51
<PAGE>
 
                  TRANSFER AGENT, ESCROW AGENT AND REGISTRAR
 
  The transfer agent, escrow agent and registrar for the common stock is
                   .
 
                                 LEGAL MATTERS
 
  The legality of the securities offered hereby has been passed upon for
musicmaker.com by its counsel, Venable, Baetjer and Howard, LLP of McLean,
Virginia. Certain legal matters will be passed upon for the underwriters by
its counsel Katten Muchin & Zavis, Washington, D.C. Certain matters in
connection with United States patents and trademarks and international patents
will be passed upon for musicmaker.com by Darby & Darby, P.C. of New York, New
York.
 
                                    EXPERTS
 
  The consolidated financial statements of musicmaker.com, Inc. (formerly The
Music Connection Corporation) at December 31, 1998 and 1997, and for the years
ended December 31, 1998 and 1997 and for the period from April 23, 1996
(inception) through December 31, 1996, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
 
  Certain matters dealing with patents and trademarks set forth in "Risk
Factors--We depend upon intellectual property rights and risk having such
rights infringed" and "Business--Intellectual Property and Proprietary Rights"
have been included in this prospectus in reliance upon the written opinion of
Darby & Darby, P.C. of New York, New York, as experts in such matters. See
"Legal Matters."
 
                            ADDITIONAL INFORMATION
 
  Musicmaker.com has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to musicmaker.com and this offering, reference is made to the
registration statement, including the exhibits filed therewith, copies of
which may be obtained at prescribed rates from the SEC at the public reference
facilities maintained by the SEC at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, D.C. 20549 and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Descriptions
contained in this prospectus as to the contents of any contract or other
documents filed as an exhibit to the registration statement are not
necessarily complete and each such description is qualified by reference to
such contract or document. The SEC maintains a website on the Internet that
will contain all future reports, proxy and information statements and other
information that musicmaker.com is required to file electronically with the
SEC. The address of the SEC's website is http://www.sec.gov.
 
  This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications and the Record Industry
Association of America. These industry publications generally indicate that
they have obtained information from sources believed to be reliable, but do
not guarantee the accuracy and completeness of such information. While we
believe those industry publications to be reliable, we have not independently
verified such data. We also have not sought, in certain circumstances, the
consent of these organizations to refer to their reports in this prospectus.
 
                                      52
<PAGE>
 
                              musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                          <C>
Report of Independent Auditors.............................................. F-2
 
Consolidated Balance Sheets................................................. F-3
 
Consolidated Statements of Operations....................................... F-4
 
Consolidated Statements of Stockholders' Deficit............................ F-5
 
Consolidated Statements of Cash Flows....................................... F-6
 
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
 
 
                                      F-1
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
 
  We have audited the accompanying consolidated balance sheets of
musicmaker.com, Inc. (formerly The Music Connection Corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the period from April
23, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
musicmaker.com, Inc. (formerly The Music Connection Corporation) at December
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for the period from April 23, 1996 (inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
 
                                          Ernst & Young LLP
 
Vienna, Virginia
February 5, 1999, except Note 11,
as to which the date is      , 1999
 
-------------------------------------------------------------------------------
  The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts for the reverse stock split as
described in Note 11 to the financial statements.
 
                                          /s/ Ernst & Young LLP
 
Vienna, Virginia
February 18, 1999
 
                                      F-2
<PAGE>
 
                              musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                           December 31,           Pro Forma
                                      ------------------------   December 31,
                                         1997         1998      1998 (Note 10)
                                      -----------  -----------  --------------
                                                                 (Unaudited)
<S>                                   <C>          <C>          <C>
               ASSETS
Current assets:
  Cash and cash equivalents.......... $ 1,401,982  $   972,954   $ 2,286,579
  Accounts receivable................      12,750       17,510        17,510
  Related party account receivable
   (Note 8)..........................         --        81,519        81,519
  Prepaid expenses and other current
   assets............................      17,503       25,395        25,395
                                      -----------  -----------   -----------
    Total current assets.............   1,432,235    1,097,378     2,411,003
Property and equipment, net (Note
 2)..................................     297,140      360,709       360,709
Investments (Note 1).................         --       750,000       750,000
Intangibles, net (Note 3)............         --       967,395       855,000
Other assets.........................         --        58,481        58,481
                                      -----------  -----------   -----------
    Total assets..................... $ 1,729,375  $ 3,233,963   $ 4,435,193
                                      ===========  ===========   ===========
    LIABILITIES AND STOCKHOLDERS'
           (DEFICIT) EQUITY
Current liabilities:
  Accounts payable................... $   328,450  $   455,095   $   455,095
  Accrued expenses...................      91,369      261,974       261,974
  Accrued compensation payable to
   related parties (Note 8)..........     761,221      625,219       625,219
  Current portion of long-term
   obligation (Note 4)...............         --        42,857        42,857
                                      -----------  -----------   -----------
    Total current liabilities........   1,181,040    1,385,145     1,385,145
Long-term obligation (Note 4)........         --       214,286       214,286
Convertible notes payable (Note 4)...         --       512,500           --
Commitments (Note 7)
Convertible preferred stock, $0.01
 par value, 1,547,924 shares
 authorized (Note 5):
  Series A convertible preferred
   stock, 454,545 shares designated;
   454,545 shares issued and
   outstanding.......................   1,750,000    1,750,000           --
  Series B convertible preferred
   stock, 865,801 shares designated;
   0 and 364,654 shares issued and
   outstanding.......................         --     1,684,700           --
  Series C convertible preferred
   stock, 227,578 shares designated;
   no shares issued and outstanding..         --           --            --
  Series A convertible preferred
   stock subscribed..................     (50,000)         --            --
Stockholders' (deficit) equity(Note
 5):
  Common stock, $0.01 par value,
   5,194,805 shares authorized;
   2,056,006, 2,707,954 shares issued
   and outstanding, respectively
   (3,942,737 pro forma shares)......      20,560       27,080        39,427
  Additional paid-in capital.........   1,279,244    4,766,488    10,188,841
  Accumulated deficit................  (2,451,469)  (7,106,236)   (7,392,506)
                                      -----------  -----------   -----------
    Total stockholders' (deficit)
     equity..........................  (1,151,665)  (2,312,668)    2,835,762
                                      -----------  -----------   -----------
    Total liabilities and
     stockholders' (deficit) equity.. $ 1,729,375  $ 3,233,963   $ 4,435,193
                                      ===========  ===========   ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                              musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                          Period from                              Pro Forma
                         April 23, 1996                            Year ended
                         (inception) to Year ended December 31,   December 31,
                          December 31,  ------------------------      1998
                              1996         1997         1998       (Note 10)
                         -------------- -----------  -----------  ------------
                                                                  (unaudited)
<S>                      <C>            <C>          <C>          <C>
Net sales...............   $   8,355    $    13,432  $    74,028  $    74,028
Cost of sales...........      (2,590)        (2,955)     (46,821)     (46,821)
                           ---------    -----------  -----------  -----------
Gross profit............       5,765         10,477       27,207       27,207
Operating expenses:
  Sales and marketing...         --           7,780      929,661      929,661
  Operating and
   development..........      64,029        692,041    1,435,690    1,435,690
  General and
   administrative.......     306,381      1,360,856    2,334,438    2,620,708
                           ---------    -----------  -----------  -----------
                             370,410      2,060,677    4,699,789    4,986,059
                           ---------    -----------  -----------  -----------
Loss from operations....    (364,645)    (2,050,200)  (4,672,582)  (4,958,852)
Other income (expense):
  Interest income.......         --             --        17,815       17,815
  Interest expense......      (2,667)       (33,957)         --           --
                           ---------    -----------  -----------  -----------
                              (2,667)       (33,957)      17,815       17,815
                           ---------    -----------  -----------  -----------
Net loss................   $(367,312)   $(2,084,157) $(4,654,767) $(4,941,037)
                           =========    ===========  ===========  ===========
Basic and diluted net
 loss per share (Note
 9).....................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                           =========    ===========  ===========  ===========
Weighted average shares
 outstanding............     830,076      1,734,328    2,186,488    2,863,521
                           =========    ===========  ===========  ===========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                              musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
 
<TABLE>
<CAPTION>
                           Common Stock    Additional
                         -----------------  Paid-In   Accumulated
                          Shares   Amount   Capital     Deficit       Total
                         --------- ------- ---------- -----------  -----------
<S>                      <C>       <C>     <C>        <C>          <C>
 Issuance of common
 stock.................. 1,327,273 $13,273 $    8,467 $       --   $    21,740
 Net loss...............       --      --         --     (367,312)    (367,312)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1996................... 1,327,273  13,273      8,467    (367,312)    (345,572)
 Issuance of common
 stock..................   524,415   5,244    435,696         --       440,940
 Issuance of common
 stock and warrants for
  services to non-
 employees..............    25,974     260    150,240         --       150,500
 Conversion of notes
 payable................   178,344   1,783    684,841         --       686,624
 Net loss...............       --      --         --   (2,084,157)  (2,084,157)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1997................... 2,056,006  20,560  1,279,244  (2,451,469)  (1,151,665)
 Issuance of common
 stock..................   651,948   6,520  2,987,782         --     2,994,302
 Issuance of warrants
 and options to non-
  employees.............       --      --     499,462         --       499,462
 Net loss...............       --      --         --   (4,654,767)  (4,654,767)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1998................... 2,707,954 $27,080 $4,766,488 $(7,106,236) $(2,312,668)
                         ========= ======= ========== ===========  ===========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
 
                              musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                        Period from
                                       April 23, 1996
                                       (inception) to Year ended December 31,
                                        December 31,  ------------------------
                                            1996         1997         1998
                                       -------------- -----------  -----------
<S>                                    <C>            <C>          <C>
Operating activities
 Net loss............................    $(367,312)   $(2,084,157) $(4,654,767)
 Adjustments to reconcile net loss to
   net cash provided by (used in)
   operating activities:
  Depreciation and amortization......        7,700         29,887      203,122
  Conversion of accrued interest to
   common stock......................          --          36,624          --
  Services received in exchange for
   stock and warrants................          --         150,500      499,462
  Changes in operating assets and
   liabilities:
    Accounts receivable..............      (38,387)        25,637       (4,760)
    Related party account
     receivable......................          --             --       (81,519)
    Prepaid expenses and other
     current assets..................       (8,994)        (8,509)      (7,892)
    Other assets.....................          --             --       (58,481)
    Accounts payable.................      166,018        162,432      126,645
    Accrued expenses.................       46,025         45,344      170,605
    Accrued compensation payable to
     related parties.................      217,587        543,634       30,665
    Long-term obligation.............        2,667         (2,667)     257,143
                                         ---------    -----------  -----------
      Net cash provided by (used in)
       operating activities..........       25,304     (1,101,275)  (3,519,777)
Investing activities
 Purchases of property and
 equipment...........................      (34,972)      (299,755)    (217,961)
                                         ---------    -----------  -----------
      Net cash used in investing
       activities....................      (34,972)      (299,755)    (217,961)
Financing activities
 Proceeds from issuance of
 convertible notes payable...........      400,000        250,000      512,500
 Payment of fees on convertible notes
 payable.............................          --             --      (116,125)
 Issuance of convertible preferred
 stock...............................          --       1,700,000    1,568,033
 Issuance of common stock............       21,740        440,940    1,344,302
                                         ---------    -----------  -----------
      Net cash provided by financing
       activities....................      421,740      2,390,940    3,308,710
                                         ---------    -----------  -----------
 Net increase (decrease) in cash and
 cash equivalents....................      412,072        989,910     (429,028)
 Cash and cash equivalents at
 beginning of period.................          --         412,072    1,401,982
                                         ---------    -----------  -----------
 Cash and cash equivalents at end of
 period..............................    $ 412,072    $ 1,401,982  $   972,954
                                         =========    ===========  ===========
Non-cash investing and financing
 activities
 Issuance of common stock............    $  18,230    $       --   $       --
                                         =========    ===========  ===========
 Conversion of notes payable to
 common stock (Note 4)...............    $     --     $   686,624  $       --
                                         =========    ===========  ===========
 Common stock issued for licensing
 agreement (Note 5)..................    $     --     $       --   $ 1,650,000
                                         =========    ===========  ===========
 Conversion of accrued compensation
 to preferred stock (Note 5).........    $     --     $       --   $   166,667
                                         =========    ===========  ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1998
 
1. Summary of Significant Accounting Policies
 
 The Company
 
  Musicmaker.com, Inc. (formerly The Music Connection Corporation) (the
"Company") was incorporated in Delaware on April 23, 1996. The Company is an
e-commerce provider of customized music CD compilations on the Internet. The
Company's website, "www.musicmaker.com," as well as mail-order promotions,
allow customers to order custom compiled music CDs. Customers can also
digitally download songs from the Company's online library directly to their
personal computers.
 
  Since inception, management has been primarily involved in recruiting
personnel, developing the technological infrastructure necessary to create
custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. The Company
continues to rely on outside sources of capital to develop and exploit its
products and markets.
 
  In February 1999, the Company plans to file a registration statement with
the Securities and Exchange Commission relating to the initial public offering
(the "IPO") of the Company's common stock.
 
 Principles of Consolidation
 
  The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, CD Kit, as of December 31, 1996
and 1997. As of December 31, 1998, CD Kit was inactive with no remaining
assets or liabilities. All significant inter-company transactions and balances
have been eliminated in consolidation.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Revenue Recognition
 
  Net sales are recognized at the time merchandise is shipped to customers for
custom CDs and upon execution of orders for digitally downloaded songs.
 
 Cash and Cash Equivalents
 
  The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
 
 Investments
 
  In connection with exclusive music license, stock exchange and marketing
agreements signed with Platinum Entertainment, Inc. ("Platinum") on September
30, 1998, the Company received 111,457 shares of unregistered common stock of
Platinum (see Note 5). The Company's investment in these equity securities was
recorded at the fair market value on the date of the transaction and is
accounted for using the cost method.
 
                                      F-7
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Royalty Advances and Operating and Development Costs
 
  In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to music labels are recorded as an asset if the past
performance and current popularity of the music to which the advance relates
provide a sound basis for estimating the probable future recoupment of such
advances. Advances are then expensed as subsequent royalties are earned. Any
portion of advances that subsequently appear not to be fully recoverable from
future royalties are charged to expense during the period in which the loss
becomes evident.
 
  Operating and development costs relating to the Company's proprietary custom
CD compilation software technology are expensed as incurred. Operating and
development costs also include recoupable but not returnable advances and
network and website costs. The Company has expensed as operating and
development costs royalty advances that were paid upon signing of certain
initial royalty agreements with independent music labels, due to management's
expectations of minimal revenues expected during the one year period following
the signing of the contracts. These charges resulted in increases to operating
and development costs of approximately $447,500 and $614,000 for the years
ended December 31, 1997 and 1998, respectively. The Company is required to
make additional advances upon the anniversaries of the signing of these
initial contracts. The Company will capitalize these future advances and then
amortize the expense to match the revenues. Once significant revenues have
been generated, the Company will classify these costs as costs of sales.
 
 Advertising Costs
 
  The Company expenses all advertising costs as incurred. The Company incurred
$0, $7,800 and $328,959 in advertising costs for the period from April 23,
1996 (inception) to December 31, 1996, and the years ended December 31, 1997
and 1998, respectively.
 
 Fair Value of Financial Instruments
 
  The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash, accounts receivable,
investments, accounts payable and related party payables, to approximate the
fair value of the respective assets and liabilities.
 
 Income Taxes
 
  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
 
Net Loss Per Share
 
  The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," ("SFAS 128") which established new standards for
computing and presenting net income per share information. Basic net loss per
share was determined by dividing net loss by the weighted average number of
common shares outstanding during each period. Diluted net loss per share
excludes common equivalent shares,
 
                                      F-8
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
unexercised stock options and warrants as the computation would be anti-
dilutive. A reconciliation of the net loss available for common shareholders
and the number of shares used in computing basic and diluted net loss per
share is in Note 9.
 
  Basic and diluted loss per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an
initial public offering, be included in the calculation of basic and diluted
loss per share as if they were outstanding for all periods presented. To date,
the Company has not had any nominal issuances or grants at nominal prices.
 
 Stock-Based Compensation
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Bulletin No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25 (see Note 5).
 
 Reclassifications
 
  Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the presentation of the 1998 financial
statements.
 
 Recent Pronouncements
 
  In 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
 
  In 1998, the Company adopted FASB Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes
standards for disclosures about products, geographies and major customers. The
Company's implementation of this standard does not have any effect on its
financial statements.
 
  The Accounting Standards Executive Committee (AcSEC) recently issued SOP 98-
5, "Reporting on the Costs of Start-up Activities." SOP 98-5 is effective for
fiscal years beginning after December 15, 1998 and requires the costs of
start-up activities, including organization costs, to be expensed as incurred.
The Company has elected early adoption of SOP 98-5. However, the early
adoption of the new rules does not have a material effect on the Company's
financial position or results from operations.
 
2. Property and Equipment
 
  Property and equipment are stated at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated
useful life or the lease term, ranging from three to seven years. Depreciation
and amortization expense was $7,700, $29,887 and $154,392 for the period from
April 23, 1996 (inception) through December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively.
 
                                      F-9
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                              1997      1998
                                                            --------  ---------
   <S>                                                      <C>       <C>
   Computer equipment and software......................... $328,166  $ 506,120
   Leasehold improvements..................................      --      36,823
   Furniture and equipment.................................    6,561      9,745
                                                            --------  ---------
                                                             334,727    552,688
   Less accumulated depreciation and amortization..........  (37,587)  (191,979)
                                                            --------  ---------
                                                            $297,140  $ 360,709
                                                            ========  =========
</TABLE>
 
3. Intangibles
 
  In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company recorded an intangible asset for
licensing fees of $900,000 (see Note 5). The asset is the difference in fair
market values of musicmaker.com's common stock issued to Platinum and the
Platinum common stock issued to the Company. The Company is amortizing the
intangible on a straight-line basis over the five year period of the license
agreement. The carrying value of the intangible asset will be reviewed if the
facts and circumstances suggest impairment. If such a review indicates that
the carrying value will not be recoverable as determined based on undiscounted
cash flows over the remaining amortization period, the Company will reduce the
carrying value by the estimated shortfall of cash flows.
 
  In connection with the private placement of convertible notes payable, the
Company recorded loan fees of $116,125 (see Note 4). The Company is amortizing
this intangible through December 31, 2000, the maturity date of the
convertible notes payable.
 
  Intangible assets consist of the following:
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                              1997      1998
                                                            -------- ----------
   <S>                                                      <C>      <C>
   Licensing fees.......................................... $   --   $  900,000
   Loan fees...............................................     --      116,125
                                                            -------  ----------
                                                                --    1,016,125
   Less accumulated amortization...........................     --      (48,730)
                                                            -------  ----------
                                                            $   --   $  967,395
                                                            =======  ==========
</TABLE>
 
4. Convertible Notes Payable and Long-term Obligations
 
  In December 1996, the Company received $400,000 and issued 12% convertible
notes to certain investors (including the founding stockholders and a director
of the Company). The Company had the right, at its option, between the date of
issuance and June 15, 1997, to convert all of the principal and accrued
interest owed to note holders into shares of the Company's common stock.  In
1997, the Company issued two additional convertible notes totaling $250,000
with the same terms. In June 1997, the Company converted the principal amount
of $650,000 of convertible notes payable plus the accrued interest of $36,624
into 178,344 shares of common stock.
 
  In October 1998, the Company initiated an offering for 8% convertible
secured subordinate promissory notes which are convertible at any time at the
election of the holder and are mandatorily convertible upon the
 
                                     F-10
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
closing of an initial public offering with gross proceeds of $5,000,000 or
more or upon certain mergers and consolidations of the Company. The conversion
price is $4.81 per share of common stock, subject to certain adjustments. The
convertible notes payable are secured by a lien on the assets of the Company
pursuant to a security agreement and the principal and accrued interest are
due on December 31, 2000. As of December 31, 1998, the Company had convertible
notes payable of $512,500 and had recorded loan fees of $116,125 (see Note 3).
 
  On July 1, 1998, the Company entered into a mutual coexistence agreement
with Music Maker Relief Foundation, Inc. ("Music Maker Relief Foundation"), an
unaffiliated not-for-profit corporation that owns the trademark MUSICMAKER and
the Internet domain name MUSICMAKER.ORG. In consideration of avoiding any
possible conflict regarding names, marks, goods and services, the Company
agreed to pay $300,000 to Music Maker Relief Foundation. The Company paid
$42,857 upon signing of the agreement and has a remaining obligation of
$257,143 ($42,857 on April 15th of each of the years 1999 through and
including 2004). The Company expensed $300,000 upon signing of the agreement.
 
5. Common Stock and Convertible Preferred Stock
 
 Common Stock and Warrants
 
  On July 3, 1996, the two founders of the Company purchased a total of
649,351 shares of common stock for $2,500. In July 1996, 649,351 shares of
common stock were issued to the former stockholders of CD Kit, S.A., giving
them a 50% interest in the then issued and outstanding common stock of the
Company. Two outside investors purchased 2,597 and 25,974 shares of common
stock in October and December of 1996, respectively.
 
  In 1997, 524,416 shares of common stock were issued to both outside
investors and the founding stockholders at prices ranging from $0.04 per share
to $3.85 per share. The Company also issued 25,974 shares of common stock for
services to consultants valued at $50,500. Additionally, the Company issued
25,974 warrants to purchase common stock at an exercise price of $3.85 per
share to a consultant for services related to signing royalty agreements with
record labels and valued at $100,000. The Company recorded $150,500 of expense
related to the issuance of these shares of common stock and warrants to
consultants for services. The Company also issued 194,805 warrants to purchase
common stock at an exercise price of $3.85 per share to a stockholder and
officer of the Company for services related to signing royalty agreements with
record labels. All of these warrants expire on October 15, 2007.
 
  In 1998, the Company issued a total of 309,091 shares of common stock at
$4.81 per share to seven investors for a total of $1,487,500. The Company paid
a finders fee of $143,198 related to this private placement and is obligated
to issue 46,764 warrants in 1999 related to the completion of the private
placement (see Note 11). The Company also issued warrants to purchase 51,948
shares of common stock at an exercise price of $4.81 per share to one of the
investors and recorded an expense of $88,000 for the value of the warrants.
 
  On June 12, 1998, the Company signed an agreement with Columbia House with a
three year term beginning September 1, 1998, under which the Company will
offer custom CDs for sale to Columbia House's customers through Columbia
House's websites and promotional inserts in Columbia House's mailings. The
Company will design and supply promotional material to Columbia House,
manufacture the custom CDs and process all orders (shipping, billing and
collecting) and will pay a share of the net profits derived from the sale of
CDs to Columbia House's customers to Columbia House. In connection with this
agreement, the Company issued 129,870 warrants to purchase common stock at an
exercise price of $4.62 per share to Columbia House and recorded an expense of
$160,000 for the value of the warrants. These warrants expire on September 1,
2001.
 
                                     F-11
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In January 1998, a stockholder and officer of the Company returned 72,727
stock options to the Company in exchange for warrants to purchase 72,727
shares of common stock with an exercise price of $3.85 per share and valued at
$148,400. These warrants expire on January 15, 2008. This individual is also
the beneficial owner of warrants for 25,974 shares of common stock granted to
members of his family as compensation for his consulting services in August
1998 with an exercise price of $4.62 per share valued at $64,000. The Company
recorded an expense of $212,400 related to the issuance of these warrants.
These warrants expire on August 15, 2008.
 
  In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company issued 342,857 shares of common
stock to Platinum (valued at $1,650,000) and Platinum issued 111,457 shares of
its unregistered common stock to the Company (having an aggregate value of
$750,000). The Company recorded the difference in the fair market values of
the two stocks as licensing fees (see Note 3).
 
 Convertible Preferred Stock and Warrants
 
  On December 8, 1997, the Company sold 389,610 shares of the Company's Series
A preferred stock at $3.85 per share. Additionally, 64,935 shares of the
Company's Series A preferred stock were purchased by two existing stockholders
at $3.85 per share. The Company did not receive payment for 12,987 shares of
the Series A preferred stock until 1998 and has therefore shown a reduction to
the preferred stock on the accompanying December 31, 1997 balance sheet.
 
  The Company also issued 865,801 warrants to purchase Series B preferred
stock at a price of $4.62 per share, and 227,578 warrants to purchase Series C
preferred stock at a price of $5.78 per share. The warrants to purchase Series
B preferred stock are exercisable, in whole or in part, at any time commencing
on the date of grant through the fifth anniversary thereof. The warrants to
purchase Series C preferred stock are exercisable, in whole or in part, at any
time commencing on the date of grant through the fourth anniversary thereof.
 
  Each holder of preferred stock is entitled to vote on all matters as if
their shares of preferred stock were converted to voting common stock. All
outstanding shares of preferred stock have an automatic conversion feature
upon the consummation of a firm commitment underwritten public offering of at
least $15 million with a valuation of the Company greater than $50 million
immediately prior to the initial public offering, or upon an affirmative vote
of the holders of at least 50.1% of the outstanding shares of preferred stock
to complete such a conversion. The conversion ratio is initially on a one-for-
one basis for all series of preferred stock; however, the conversion price of
each series shall be subject to adjustment for certain diluting issues as
described in the Company's Restated Certificate of Incorporation.
 
  The preferred stock is redeemable at the election of at least 50.1% of the
preferred stock holders in two equal installments, if notice is provided to
the Company on or before October 8, 2002. The redemption price would be $3.85
per share, $4.62 per share and $5.78 per share plus a further amount per share
equal to any declared and unpaid dividends for Series A, Series B and Series C
preferred stock, respectively. The first installment would be on or about
December 8, 2002, and the second installment would be on or about December 8,
2003, subject to the Company having funds legally available. If sufficient
funds are not legally available for redeeming the preferred stock at either of
the installment dates, the Company will have to apply the available funds to
redeem the preferred stock on a ratable basis and then redeem the remaining
shares as soon as practicable after the Company has the funds legally
available.
 
                                     F-12
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the preferred stock shall be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to holders of the common stock, $3.85 per share plus declared
and unpaid dividends on Series A preferred stock, $4.62 per share plus
declared and unpaid dividends on Series B preferred stock and $5.78 per share
plus declared and unpaid dividends on Series C preferred stock.
 
  On March 16, 1998, an investor exercised 89,453 warrants to purchase Series
B preferred stock at a price of $4.62 per share for $413,272 in cash. Two
officers of the Company were required to exercise 15,461 warrants to purchase
Series B preferred stock at the same price.
 
  On June 30, 1998, two investors exercised 223,665 warrants to purchase
Series B preferred stock at a price of $4.62 per share for $1,033,333 in cash.
Two officers of the Company were required to exercise 36,075 warrants to
purchase Series B preferred stock at the same price. The exercise of the
36,075 warrants was offset by a reduction to accrued liabilities for
consulting services.
 
 Stock Option Plan
 
  The 1996 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in 1996. The purpose of the Plan is
to promote the long-term growth and profitability of the Company by providing
key people with incentives to contribute to the growth and financial success
of the Company. The aggregate number of shares of common stock for which
options may be granted under the Plan shall not exceed 779,221 shares (see
Note 11). Additional information with respect to stock option activity is
summarized as follows:
 
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                              ----------------------------------
                                                    1997             1998
                                              ---------------- -----------------
                                                      Weighted          Weighted
                                                      Average           Average
                                                      Exercise          Exercise
                                              Shares   Price   Shares    Price
                                              ------- -------- -------  --------
   <S>                                        <C>     <C>      <C>      <C>
   Outstanding at beginning of year..........  19,480  $0.39   215,298   $3.54
   Options granted........................... 195,818  $3.85   389,611   $4.88
   Options exercised.........................     --   $ --        --    $ --
   Options canceled or expired...............     --   $ --    (72,727)  $3.85
                                              -------  -----   -------   -----
   Outstanding at end of year................ 215,298  $3.54   532,182   $4.48
                                              =======  =====   =======   =====
   Exercisable at end of year................  19,480  $0.39   126,312   $3.79
                                              =======  =====   =======   =====
</TABLE>
 
  The options outstanding at December 31, 1998 range in price from $0.39 per
share to $5.29 per share and have a weighted average remaining contractual
life of 7.6 years.
 
  The Company applies APB 25 in accounting for its stock option plan and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS 123's fair value method to the
Company's stock-based awards results in net losses of $372,951, $2,093,571 and
$4,872,452 in 1996, 1997 and 1998, respectively, with a net loss per share of
$0.45, $1.21 and $2.23, respectively. The weighted average fair value of the
options granted in 1997, used as a basis for the above pro forma disclosures,
was estimated as $1.69 as of the date of grant using a minimum value method
option pricing model. The weighted average fair value of the options granted
during 1998 was estimated as $1.95 as of the date of grant using the Black-
Scholes option-
 
                                     F-13
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
pricing model with the following assumptions: dividend yield 0%, volatility of
25%, risk-free interest rate of 6.5% and expected lives of 5 or 10 years. The
effect of applying SFAS 123 on 1997 and 1998 pro forma net loss as stated
above is not necessarily representative of the effects on reported net income
for future years due to, among other things, the vesting period of the stock
options and the fair value of additional stock options in future years.
 
 Warrants
 
  The following table summarizes all common and preferred stock warrant
activity:
 
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                         -----------------------
                                                            1997        1998
                                                         ----------- -----------
   <S>                                                   <C>         <C>
   Outstanding at beginning of year.....................         --    1,314,158
   Warrants issued......................................   1,314,158     280,519
   Warrants exercised...................................         --      364,654
                                                         ----------- -----------
   Outstanding at end of year...........................   1,314,158   1,230,023
                                                         =========== ===========
</TABLE>
 
  The weighted average fair value of the warrants granted during 1998 was
estimated as $1.66 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 25%, risk-free
interest rate of 6.5% and expected lives ranging from 3.5 to 10 years.
 
6. Income Taxes
 
  At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $4,260,000. The timing and manner in which the operating loss
carry-forwards may be utilized in any year will be limited to the Company's
ability to generate future earnings and by limitations imposed due to change
in ownership. Current net operating loss carry-forwards will expire in the
year 2018. As the Company has not generated earnings and no assurance can be
made of future earnings, a valuation allowance in the amount of the deferred
tax assets has been recorded. The change in the valuation allowance was
$1,748,542. There was no current or deferred provision for income taxes for
the period from April 23, 1996 (inception) through December 31, 1996 or the
years ended December 31, 1997 or 1998.
 
  Net deferred tax assets consist of:
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                        ----------------------
                                                          1997        1998
                                                        ---------  -----------
   <S>                                                  <C>        <C>
   Deferred tax assets:
     Start up expenses................................. $ 555,944  $   460,108
     Deferred compensation.............................   287,365      237,583
     Warrants..........................................    57,189      227,795
     Trademark expense.................................       --       114,000
     Net operating loss carry-forward..................    10,985    1,620,539
                                                        ---------  -----------
     Deferred tax assets before valuation allowance....   911,483    2,660,025
   Less valuation allowance............................  (911,483)  (2,660,025)
                                                        ---------  -----------
   Net deferred tax assets............................. $     --   $       --
                                                        =========  ===========
</TABLE>
 
  The Company has not paid any income taxes since inception.
 
                                     F-14
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to the loss before income taxes due to the
effects of the following:
 
<TABLE>
<CAPTION>
                                       Period from
                                      April 23, 1996
                                      (inception) to Year ended December 31,
                                       December 31,  ------------------------
                                           1996         1997         1998
                                      -------------- ----------- ------------
   <S>                                <C>            <C>         <C>
   Expected tax benefit at federal
    statutory tax rate..............    $(124,886)   $ (708,613) $ (1,582,621)
   Future state benefit, net of
    federal benefit.................      (16,305)      (79,801)     (186,191)
   Nondeductible expenses and
    other...........................      (12,943)       31,065        20,270
   Increase in valuation allowance..      154,134       757,349     1,748,542
                                        ---------    ----------  ------------
                                        $     --     $      --   $        --
                                        =========    ==========  ============
</TABLE>
 
7. Commitments
 
 Royalty Agreements
 
  The Company has signed contracts with record labels for non-exclusive rights
to manufacture, advertise, market, promote, distribute and sell custom CDs and
digitally downloaded songs over the Internet. The agreements contain a master
use royalty rate of 15% of the selling price less any sales, excise or similar
taxes. If the Company enters into a more favorable royalty rate with another
licensor, the majority of these contracts contain clauses allowing the
licensor to also receive the more favorable royalty terms. As discussed in
Note 1, the majority of the contracts require advances upon the anniversary
dates of the signing of the contracts. The more recent agreements provide for
the Company to pay advances based on actual royalties earned by the label in
the previous year, as opposed to a fixed amount.
 
  Fixed royalty commitments on contracts entered into as of December 31, 1998
are as follows:
 
<TABLE>
<CAPTION>
   Year ended December 31,
   -----------------------
   <S>                                                                  <C>
     1999.............................................................. $527,500
     2000..............................................................  183,333
                                                                        --------
                                                                        $710,833
                                                                        ========
</TABLE>
 
 Operating Leases
 
  The Company leases its office facility, certain computer equipment and
office furniture under operating lease agreements that were entered into
during 1998. Operating lease expense for the period from April 23, 1996
(inception) to December 31, 1996, and the years ended December 31, 1997 and
1998 was $1,800, $21,000, and $110,000, respectively.
 
 Financial Consulting Agreement
 
  In connection with the Company's planned IPO, the Company signed an
agreement on December 23, 1998 obligating it to pay $125,000 at the closing of
the IPO.
 
                                     F-15
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Future minimum lease payments as of December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
   Year ended December 31,
   -----------------------
   <S>                                                                  <C>
     1999.............................................................. $188,912
     2000..............................................................  164,656
     2001..............................................................  115,297
     2002..............................................................  118,584
     Thereafter........................................................  299,618
                                                                        --------
                                                                        $887,067
                                                                        ========
</TABLE>
 
8. Related Party Transactions
 
  Accrued compensation of $756,221 and $625,219 as of December 31, 1997 and
1998, respectively, are amounts due to stockholders for consulting services
rendered to the Company. Additionally, in December 1998, the Company advanced
a stockholder and officer $81,519 against his 1999 bonus.
 
9. Net Loss Per Share
 
  The following table sets forth the computation of basic and diluted net loss
per share:
 
<TABLE>
<CAPTION>
                             Period from
                            April 23, 1996 Year ended   Year ended    Pro Forma
                            (inception to   December     December     Year ended
                             December 31,      31,          31,      December 31,
                                 1996         1997         1998          1998
                            -------------- -----------  -----------  ------------
                                                                     (Unaudited)
   <S>                      <C>            <C>          <C>          <C>
   Numerator:
     Net loss..............   $(367,312)   $(2,084,157) $(4,654,767) $(4,941,037)
                              =========    ===========  ===========  ===========
   Denominator:
     Denominator for basic
      net loss per share--
      weighted average
      shares...............     830,076      1,734,328    2,186,488    2,863,521
   Effect of dilutive
    securities:
     Preferred stock.......         --             --           --           --
     Stock options.........         --             --           --           --
     Warrants..............         --             --           --           --
                              ---------    -----------  -----------  -----------
   Dilutive potential
    common shares..........         --             --           --           --
   Denominator for diluted
    net loss per share--
    adjusted weighted
    average shares.........     830,076      1,734,328    2,186,488    2,863,521
                              =========    ===========  ===========  ===========
   Basic net loss per
    share..................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                              =========    ===========  ===========  ===========
   Diluted net loss per
    share..................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                              =========    ===========  ===========  ===========
</TABLE>
 
 
                                     F-16
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
 
<TABLE>
<CAPTION>
                             Period from
                            April 23, 1996                            Pro Forma
                            (inception) to  Year ended   Year ended   Year ended
                             December 31,  December 31, December 31, December 31,
                                 1996          1997         1998         1998
                            -------------- ------------ ------------ ------------
                                                                     (Unaudited)
   <S>                      <C>            <C>          <C>          <C>
   Preferred stock:
     Series A..............        --        454,545      454,545           --
     Series B..............        --            --       364,654           --
   Preferred stock
    warrants:
     Series B..............        --        865,801      501,147           --
     Series C..............        --        227,578      227,578           --
   Stock options...........     19,480       215,298      532,182       532,182
   Warrants................        --        220,779      501,298     1,230,023
</TABLE>
 
10. Pro Forma Financial Information (unaudited)
 
  The financial statements include pro forma information as of December 31,
1998 to give effect to (i) the one-for-3.85 reverse stock split to be effected
prior to the completion of the IPO, (ii) the automatic conversion, upon the
completion of the IPO, of all outstanding shares of convertible preferred
stock into 819,199 shares of common stock, (iii) the automatic conversion of
all outstanding convertible notes payable into 415,584 shares of common stock
($512,500 of convertible notes payable outstanding at December 31, 1998 and
$1,487,500 of convertible notes payable issued in January 1999), and (iv) the
write-off of all capitalized loan fees related to the convertible notes
payable ($112,395 capitalized at December 31, 1998 and $173,875 capitalized in
January 1999).
 
11. Subsequent Events
 
  On November 20, 1998, the Board of Directors approved an increase in the
aggregate number of shares of common stock for which options may be granted
under the Stock Option Plan to be 779,221 shares, subject to the approval of
the stockholders. The stockholders approved the authorized shares increase in
February 1999. The stockholders also authorized the Company's Amended and
Restated Certificate of Incorporation in February 1999, which increased the
total number of authorized shares of common stock to 15,584,416 shares.
 
  In January 1999, the Company completed its private placement of convertible
notes payable and received an additional $1,487,500. In connection with the
convertible notes payable issued in January, the Company recorded loan fees of
$173,875 and issued a warrant to purchase 41,558 shares of common stock at an
exercise price of $4.81, which expires on January 11, 2004.
 
  In January 1999, the Company completed its common stock private placement
and issued an additional 252,104 shares of common stock at $4.81 per share for
a total of $1,213,250 in cash. The Company paid a commission of approximately
$97,000 related to this private placement and issued a warrant to purchase
46,764 shares of common stock with an exercise price of $4.81, which expires
on January 14, 2004.
 
                                     F-17
<PAGE>
 
                             musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  On January 8, 1999, the Company signed a lease line agreement which provides
leasing for computer and related equipment as well as CD fabrication equipment
up to $200,000 between the signing of the agreement and June 8, 1999. Any
equipment leased under this agreement will have a 24 month lease term, and at
the end of the lease term the Company will either be obligated to buy the
equipment at 10% of the original equipment cost or extend the lease term for
an additional 24 months. The Company also signed the first lease under this
agreement which will have a monthly rental payment of $8,261. As part of the
lease line agreement, the Company issued a warrant to purchase 6,234 shares of
its common stock at $4.81 per share which expires on January 8, 2009.
 
  On February 12, 1999, the Company signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. The credit
facility matures six months from the date of the loan unless $5,000,000 in new
equity has been raised prior to maturity. In that case, the portion of the
credit facility used for equipment and software purchases will be termed-out
for 24 months. If the term of the credit facility is extended, the financial
institution will have the right to purchase warrants equal to 4% of the
commitment amount.
 
  In February 1999, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock in the IPO.
 
  On     , 1999, the Board of Directors approved a one-for-3.85 reverse stock
split of the Company's common stock, which will become effective on       .
All references in the accompanying financial statements to the number of
shares of common stock and per-share amounts have been restated to reflect the
split. Additionally, all references in the accompanying financial statements
to the number of shares of preferred stock and per-share amounts have been
restated to reflect the split in accordance with the Company's Restated
Articles of Incorporation.
 
  Immediately upon completion of the IPO, all outstanding shares of Series A,
Series B and Series C convertible preferred stock will convert into 819,199
shares of common stock and all outstanding convertible notes payable will
convert into 415,584 shares of common stock.
 
                                     F-18
<PAGE>
 
                                    Part II
 
                    Information Not Required in Prospectus
 
Item 13. Other Expenses of Issuance and Distribution.
 
  We estimate that our expenses to be paid in connection with the offering
(other than underwriting discounts, commissions and reasonable expense
allowances) will be as follows:
 
<TABLE>
        <S>                                                             <C>
        SEC registration fee........................................... $ 8,340
        NASD filing fee................................................ $ 3,500
        Nasdaq National Market listing fee............................. $75,625
        Printing and engraving expenses................................ $     *
        Accounting fees and expenses................................... $     *
        Legal fees and expenses........................................ $     *
        Miscellaneous.................................................. $     *
                                                                        -------
              Total.................................................... $     *
                                                                        =======
</TABLE>
--------
* To be filed by amendment.
 
Item 14. Indemnification of Directors and Officers.
 
  Musicmaker.com is organized under the laws of the State of Delaware.
Musicmaker.com's Charter and Bylaws provide that musicmaker.com shall
indemnify and advance expenses to its directors, officers, employees and
agents, and all persons who at any time served as directors, officers,
employees or agents of musicmaker.com, to the fullest extent permitted, and in
the manner provided under the laws of the State of Delaware.
 
  The DGCL provides that a Delaware corporation has the power generally to
indemnify its directors, officers, employees and other agents serving, or who
have served, musicmaker.com (each, a "Corporate Agent") against expenses and
liabilities (including amounts paid in settlement) in connection with any
proceeding involving such person by reason of his being a Corporate Agent,
other than a proceeding by or in the right of the corporation, if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal proceeding, such person had no reasonable cause to believe his
conduct was unlawful.
 
  In the case of an action brought by or in the right of the corporation,
indemnification of a Corporate Agent is permitted if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation; however, no indemnification is permitted in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that
the Court of Chancery or the court in which such proceeding was brought shall
determine upon application that despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to such indemnification.
 
  To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in the defense of such
proceeding, whether or not by or in the right of the corporation, or in the
defense of any claim, issue or matter therein, the corporation is required to
indemnify such person for expenses in connection therewith. Expenses incurred
by a Corporate Agent in connection with a proceeding may, under certain
circumstances, be paid by the corporation in advance of the final disposition
of the proceeding as the corporation deems appropriate. Musicmaker.com's
Charter permits the advancement of expenses by musicmaker.com to officers or
directors defending a qualified civil or criminal action upon receipt of an
undertaking by such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification.
The terms and conditions of such advancement are to be determined by
musicmaker.com's Board of Directors.
 
 
                                     II-1
<PAGE>
 
  The power to indemnify and advance the expenses under the DGCL does not
exclude other rights to which a Corporate Agent may be entitled to under the
certificate of incorporation, by laws, agreement, vote of stockholders or
disinterested directors or otherwise.
 
  Pursuant to Delaware law and musicmaker.com's Charter, a director, officer,
employee or agent of musicmaker.com that is successful on the merits or
otherwise in defense of any action, suit or proceeding, or in defense of any
claim, issue or matter therein, may require musicmaker.com to provide
indemnification for expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
 
  Unless ordered by a relevant court, indemnification for qualified persons
shall be authorized on behalf of musicmaker.com by: (i) a majority of a quorum
of the Board of Directors, if a quorum consisting of the directors not party
to such action suit or proceeding can be obtained; or (ii) by independent
legal counsel in a written opinion, if a quorum of (i) above is not obtainable
or if such disinterested quorum so directs; or (iii) stockholder approval.
 
  Under the DGCL and musicmaker.com's Charter, musicmaker.com is permitted to
purchase and maintain insurance on behalf of Corporate Agents of
musicmaker.com or persons serving at the request of musicmaker.com as
Corporate Agents of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and
incurred by him or her in such capacity or arising out of his or her status as
such, whether or not musicmaker.com would have had the power to indemnify such
person.
 
  The purpose of these provisions is to assist musicmaker.com in retaining
qualified individuals to serve as officers, directors or other Corporate
Agents by limiting their exposure to personal liability for serving as such.
 
Item 15. Recent Sales of Unregistered Securities.
 
  During the past three years, the following securities were issued by
musicmaker.com without registration under the Securities Act:
 
  In July 1996, in connection with its formation, musicmaker.com issued and
sold 551,948 and 97,403 shares of common stock to Mr. Bernardi,
musicmaker.com's founder, Chairman of the Board of Directors and Co-Chief
Executive Officer, and an accredited investor, respectively, for nominal
consideration.
 
  In July 1996, musicmaker.com issued 649,351 shares of common stock to seven
foreign stockholders in connection with the acquisition of all of the
outstanding securities of CD Kit, S.A.
 
  Between December 1996 and May 1997, musicmaker.com issued and sold 12%
convertible notes to eight accredited investors for $650,000. The notes were
convertible into common stock.
 
  Between October 1996 and May 1997, musicmaker.com issued and sold 353,247
shares of common stock to various accredited investors for total aggregate
consideration of approximately $13,510. In May 1997, 12,987 shares of common
stock were issued in exchange for, and as compensation for services rendered
to musicmaker.com.
 
  Between July 1997 and November 1997, musicmaker.com issued and sold 167,273
shares of common stock to investors for total aggregate consideration of
$303,440. In July 1997, 12,987 shares of common stock were issued to a
consultant in exchange for, and as compensation for services rendered to
musicmaker.com.
 
  In July 1997, the outstanding notes issued between December 1996 and May
1997 were converted to 178,344 shares of common stock at a conversion price of
$3.85 per share. Also, five note holders including one of our officers
invested $25,000 each and each received 6,494 shares.
 
  In October 1997, musicmaker.com issued 194,805 common stock warrants to Mr.
Puthukarai, musicmaker.com's President, Co-Chief Executive Officer and Chief
Operating Officer and a warrant for 25,974
 
                                     II-2
<PAGE>
 
shares of common stock to another investor. The warrants are exercisable by
the holders into common stock at an exercise price of $3.85 per share.
 
  In December 1997, musicmaker.com issued and sold 454,545 shares of Series A
preferred stock to Rho, Mr. Bernardi and Mr. Puthukarai, and another investor
at a price of $3.85 per share. Additionally, musicmaker.com issued 865,801
Series B and 227,578 Series C preferred warrants to the persons above. The
Series B preferred warrants are exercisable into Series B preferred stock at
an exercise price of $4.62 per share and the Series C preferred warrants are
exercisable into Series C preferred stock at an exercise price of $5.78 per
share. Musicmaker.com's outstanding preferred stock and outstanding preferred
warrants shall automatically convert into common stock, and warrants therefor,
upon completion of the offering.
 
  Effective February 18, 1999, musicmaker.com's stockholders approved and
adopted an amendment to our stock option plan which authorized musicmaker.com
to grant options to purchase up to 779,221 shares of common stock. As of
January 31, 1999, 532,182 options for shares of common stock were granted and
outstanding. No shares of common stock have been issued pursuant to the
exercise of options under the stock option plan. The exercise price of the
options for musicmaker.com's common stock ranges from $0.385 to $5.29 per
share.
 
  In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to obtaining
license agreements with record labels on behalf of musicmaker.com. These
warrants expire January 15, 2008. In August 1998, musicmaker.com issued 25,974
common stock warrants to four members of Mr. Steinberg's family as record
holders. The warrants were granted as compensation for consulting services
rendered to musicmaker.com by Mr. Steinberg. The warrants are convertible by
the holders into common stock at an exercise price of $4.62 per share and
expire on August 15, 2008.
 
  In June 1998, musicmaker.com issued a warrant for 129,870 shares of common
stock to Columbia House in connection with entering into a marketing alliance.
The warrant is convertible by the holder into common stock at an exercise
price of $4.62 per share.
 
  In September 1998, musicmaker.com issued 259,740 shares of common stock to
Platinum at a value of $1,650,000 in connection with a marketing agreement,
licensing arrangement and a stock exchange agreement under which
musicmaker.com purchased 111,457 shares of common stock of Platinum. In
November 1998, an additional 83,117 shares of common stock were issued
pursuant to the terms of the stock exchange agreement above.
 
  Between September 1998 and January 1999, musicmaker.com issued shares of its
common stock in a private placement to accredited investors at $4.81 per
share. Musicmaker.com used the financial advisory services of Ryan, Lee &
Company, Incorporated, on a best efforts basis, which received a 7% commission
and warrants for 46,764 shares of our common stock exercisable at $4.81 per
share as compensation for their assistance in the private placement.
Musicmaker.com received consideration in connection with this private
placement of approximately 701,494. The offering closed on January 14, 1999.
 
  Between November 1998 and January 1999, musicmaker.com issued an aggregate
value of $2,000,000 8% convertible notes to accredited investors. The
convertible notes were issued at a cost of $25,000 per note and each note is
convertible into 5,195 shares of musicmaker.com's common stock at $4.81 per
share. Musicmaker.com received consideration in connection with the above sale
of convertible notes of approximately $1,800,000. Musicmaker.com utilized the
services of GunnAllen Financial, Inc., on a best efforts basis, which received
a 10% discount and commission for their assistance in the sale above, and
41,558 warrants for our common stock with an exercise price of $4.81 per
share. The offering of convertible notes above closed on January 11, 1999.
 
 
                                     II-3
<PAGE>
 
  All the above transactions were exempt from registration pursuant to
Sections 3(b), 4(2) or 4(6) of the Securities Act.
 
Item 16. Exhibits.
 
  The following exhibits are filed as part of this registration statement:
 
<TABLE>
<CAPTION>
                                                                           Page
   Exhibit No.                        Description                          No.
   -----------                        -----------                          ----
   <C>         <S>                                                         <C>
    1.1        Form of Underwriting Agreement between musicmaker.com and
               Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
               Inc. as Representatives.*
    3.1        Restated Certificate of Incorporation.*
    3.2        Bylaws.*
    4.1        Form of Common Stock Certificate.*
    4.2        Representatives' Warrant Agreement.*
    5.1        Opinion of Venable, Baetjer and Howard, LLP regarding
               legality.*
    5.2        Opinion of Darby & Darby, P.C.*
   10.1        Amended and Restated Employment Agreement between the
               Company and Robert P. Bernardi, as amended, dated
               February 12, 1999.
   10.2        Amended and Restated Employment Agreement between the
               Company and Devarajan S. Puthukarai, as amended, dated
               February 12, 1999.
   10.3        Consulting Agreement dated January 23, 1997, between the
               Company and Irwin H. Steinberg, as amended on January 1,
               1998, and by letters to the Company dated August 28, 1998
               and August 31, 1998.
   10.4        Letter Agreement dated June 12, 1998, between the Company
               and The Columbia House Company.
   10.5        The Company's Amended Stock Option Plan.*
   10.6        Marketing Agreement dated September 30, 1998, between
               Platinum Entertainment, Inc. and the Company.
   10.7        Memorandum of Understanding between the Company and Audio
               Book Club, Inc. dated January 18, 1999.
   10.8        Office/Warehouse/Showroom Lease dated January 15, 1998
               between the Company and Century Properties Fund XX.
   10.9        Form of Lock-up Agreement.*
   10.10       Letter Agreement dated February 12, 1999 between the
               Company and Imperial Bank.*
   10.11       Master Equipment Lease dated January 8, 1999 between the
               Company and Boston Financial & Equity Corporation.*
   23.1        Consent of Ernst & Young LLP, independent auditors.
   23.2        Consent of Venable, Baetjer and Howard, LLP (included in
               Exhibit 5.1).*
   23.3        Consent of Darby & Darby, P.C.
   24          Power of Attorney.
   27          Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
 
Item 17. Undertakings.
 
  (a) The undersigned musicmaker.com hereby undertakes:
 
    (1) To file, during any period in which offers or sales are being made, a
  post-effective amendment to this registration statement;
 
      (i) To include any prospectus required by Section 10(a)(3) of the
    Securities Act;
 
                                     II-4
<PAGE>
 
      (ii) To reflect in the prospectus any facts or events arising after
    the effective date of the registration statement (or the most recent
    post-effective amendment thereof) which, individually or in the
    aggregate, represent a fundamental change in the information set forth
    in the registration statement). Notwithstanding the forgoing, any
    increase or decrease in volume of securities offered (if the total
    dollar value of securities offered would not exceed that which was
    registered) and any deviation from the low or high end of the estimated
    maximum offering range may be reflected in the form of prospectus filed
    with the Commission pursuant to Rule 424(b) if, in the aggregate, the
    changes in volume and price represent no more than a 20% change in the
    maximum aggregate offering price set forth in "Calculation of
    Registration Fee" table in the effective registration statement;
 
      (iii) To include any material information with respect to the plan of
    distribution not previously disclosed in the registration statement or
    any material change to such information in the registration statement;
 
    (2) That, for the purpose of determining any liability under the
  Securities Act, each such post-effective amendment shall be deemed to be a
  new registration statement relating to the securities offered therein, and
  the offering of such securities at that time shall be deemed to be the
  initial bona fide offering thereof.
 
    (3) To remove from registration by means of a post-effective amendment
  any of the securities being registered which remain unsold at the
  termination of the offering.
 
  (b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
 
  (c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
 
  (d) The undersigned Registrant hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of prospectus filed as part of this
  registration statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective.
 
    (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
                                     II-5
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Reston, Virginia, on the 17th day of
February 1999.
 
 
                                          MUSICMAKER.COM, INC.
 
                                                  /s/ Robert P. Bernardi
                                          By__________________________________:
                                                    Robert P. Bernardi
                                             President and Co-Chief Executive
                                                          Officer
 
                               POWER OF ATTORNEY
 
  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert P. Bernardi and Devarajan S.
Puthukarai and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
 
                                     II-6
<PAGE>
 
  Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
 
 
<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
        /s/ Robert P. Bernardi         Chairman and Co-Chief      February 17, 1999
______________________________________  Executive Officer
          Robert P. Bernardi            (Principal Executive
                                        Officer)
 
          /s/ Mark A. Fowler           Director of Finance and    February 17, 1999
______________________________________  Administration and Chief
            Mark A. Fowler              Financial Officer
                                        (Principal Financial and
                                        Accounting Officer)
 
        /s/ Irwin H. Steinberg         Vice Chairman              February 8, 1999
______________________________________
          Irwin H. Steinberg
 
     /s/ Devarajan S. Puthukarai       Co-Chief Executive         February 6, 1999
______________________________________  Officer, President, Chief
       Devarajan S. Puthukarai          Operating Officer and
                                        Director
 
        /s/ Edward J. Mathias          Director                   February 17, 1999
______________________________________
</TABLE>  Edward J. Mathias
 
 
 
                                      II-7
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                           Page
   Exhibit No.                        Description                          No.
   -----------                        -----------                          ----
   <C>         <S>                                                         <C>
    1.1        Form of Underwriting Agreement between musicmaker.com and
               Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
               Inc. as Representatives.*
    3.1        Restated Certificate of Incorporation.*
    3.2        Bylaws.*
    4.1        Form of Common Stock Certificate.*
    4.2        Representatives' Warrant Agreement.*
    5.1        Opinion of Venable, Baetjer and Howard, LLP regarding
               legality.*
    5.2        Opinion of Darby & Darby, P.C.*
   10.1        Amended and Restated Employment Agreement between the
               Company and Robert P. Bernardi, as amended, dated
               February 12, 1999.
   10.2        Amended and Restated Employment Agreement between the
               Company and Devarajan S. Puthukarai, as amended, dated
               February 12, 1999.
   10.3        Consulting Agreement dated January 23, 1997, between the
               Company and Irwin H. Steinberg, as amended on January 1,
               1998, and by letters to the Company dated August 28, 1998
               and August 31, 1998.
   10.4        Letter Agreement dated June 12, 1998, between the Company
               and The Columbia House Company.
   10.5        The Company's Amended Stock Option Plan.*
   10.6        Marketing Agreement dated September 30, 1998, between
               Platinum Entertainment, Inc. and the Company.
   10.7        Memorandum of Understanding between the Company and Audio
               Book Club, Inc. dated January 18, 1999.
   10.8        Office/Warehouse/Showroom Lease dated January 15, 1998
               between the Company and Century Properties Fund XX.
   10.9        Form of Lock-up Agreement.*
   10.10       Letter Agreement dated February 12, 1999 between the
               Company and Imperial Bank.*
   10.11       Master Equipment Lease dated January 8, 1999 between the
               Company and Boston Financial & Equity Corporation.*
   23.1        Consent of Ernst & Young LLP, independent auditors.
   23.2        Consent of Venable, Baetjer and Howard, LLP (included in
               Exhibit 5.1).*
   23.3        Consent of Darby & Darby, P.C.
   24          Power of Attorney (Contained on the signature page).
   27          Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 299500}]
{"company-data": {"conformed-name": "MUSICMAKER COM INC", "cik": "0001079786", "assigned-sic": "", "irs-number": "541811721", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-72685", "film-number": "99546208"}, "business-address": {"street1": "1831 WIEHLE AVENUE", "street2": "SUITE 128", "city": "RESTON", "state": "VA", "zip": "20190", "phone": "7039044110"}, "mail-address": {"street1": "1831 WIEHLE AVENUE", "street2": "SUITE 128", "city": "RESTON", "state": "VA", "zip": "20190"}}
As filed with the Securities and Exchange Commission on February 19, 1999
 
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
 
                               ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ---------------
                             MUSICMAKER.COM, INC.
            (Exact Name of Registrant as Specified in its Charter)
 
        Delaware                     5961                   54-1811721
    (State or Other           (Primary Standard          (I.R.S. Employer
    Jurisdiction of               Industrial            Identification No.)
    Incorporation or         Classification Code
     Organization)                 Number)
 
                               ---------------
                              1831 Wiehle Avenue
                                   Suite 128
                            Reston, Virginia 20190
                                (703) 904-4110
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                   Registrant's Principal Executive Offices)
 
                               ---------------
                              Robert P. Bernardi
                          Co-Chief Executive Officer
                             musicmaker.com, Inc.
                              1831 Wiehle Avenue
                                   Suite 128
                            Reston, Virginia 20190
                                (703) 904-4110
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent For Service)
 
                               ---------------
                                  Copies to:
         John L. Sullivan, III                     Andrew J. Sherman
           Andrea S. Kaufman                        David J. Kaufman
            Erik J. Lichter                        Alan J. Schaeffer
   Venable, Baetjer and Howard, LLP              Katten Muchin & Zavis
         2010 Corporate Ridge               1025 Thomas Jefferson St., N.W.
               Suite 400                               Suite 700
           McLean, VA 22102                       Washington, DC 20007
            (703) 760-1600                           (202) 625-3790
                               ---------------
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement is effective.
 
  If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                               ---------------
                        CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Proposed
                                            Maximum
         Title of Each Class of            Aggregate   Amount of
            Securities to be               Offering   Registration
               Registered                  Price(2)       Fee
------------------------------------------------------------------
Common Stock, par value $0.01 per share   $30,000,000    $8,340
------------------------------------------------------------------
-------------------------------------------------------------------------------
 
(1) Includes     shares of common stock which may be purchased by the
    underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
    to Rule 457 under the Securities Act of 1933, as amended.
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
 
                Subject to completion: dated February 19, 1999.
 
PROSPECTUS
 
                             musicmaker.com, Inc.
                                    [logo]
 
                               shares of common stock
 
                  $   per share initial public offering price
 
 
  This is our initial public offering. Prior to this initial public offering,
there has been no public market for our common stock. We expect our initial
public offering price to be between $    and $    per share. We have filed an
application for our common stock to be quoted on the Nasdaq National Market
under the symbol "MMKR."
 
                             Offering Information
Per share Total
Initial public offering price...................................
Underwriting discounts/commissions..............................
Estimated offering expenses.....................................
Net offering proceeds to musicmaker.com, Inc....................
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase a maximum of    additional shares to
cover over-allotments. Because the underwriters may chose not to exercise
their over-allotment option, the calculations in the table above do not
account for such exercise.
 
                                ---------------
 
             Investing in our common stock involves certain risks.
      See "Risk Factors" section beginning on page 5 of this prospectus.
 
                                ---------------
 
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
 
Ferris, Baker Watts                                       Fahnestock & Co. Inc.
     Incorporated
MUSICMAKER(TM), MUSIC CONNECTION(TM), MUSICMAGIC(TM) and CD KIT(TM) are
trademarks of musicmaker.com, Inc. Musicmaker.com, Inc. has applied for
federal trademark registration for each of the marks above. All other
trademarks or service marks appearing in this prospectus are the property of
their respective holders.
 
 
 [Picture of musicmaker.com website and custom CDs and descriptive language to
                            be filed by amendment.]
Prospectus Summary
 
  You should read this summary together with the more detailed information and
financial statements and related notes thereto appearing elsewhere in this
prospectus, including the information under "Risk Factors." Unless otherwise
indicated, all information reflects: a one-for-3.85 reverse stock split
effected on    , 1999; the automatic conversion of all outstanding shares of
preferred stock and all outstanding convertible notes into shares of our common
stock; and the automatic conversion of all outstanding preferred stock warrants
into common stock warrants upon completion of this offering.
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, Inc. format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
 
  .  Creedence Clearwater    .  The Beach Boys           .  Ziggy Marley
      Revival
                             .  Miles Davis              .  Johnny Cash
  .  Jerry Lee Lewis
                             .  John Coltrane            .  Dionne Warwick
  .  Little Richard  
                             .  The Yardbirds with       .  Muddy Waters
  .  Frank Zappa                 Eric Clapton
                                                         .  The Blues Brothers
  .  Taylor Dayne            .  Blondie                  
                                                         .  The Kinks
  .  The Ramones             .  Kansas                   
                                                         .  The Band
 
  We believe that the multimedia features available through the interactive
environment of the Internet make it an ideal medium for promoting, marketing
and selling our custom CDs and digitally downloaded music.
 
  Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs and digital
downloads:
 
  .  Growth in sales of CD singles.
 
  .  Growth of the Internet as a viable retail medium.
 
  .  Increasing affluence of the over 30 generation.
 
  .  Continued prominence of classic rock albums.
 
  .  Record label desire to diversify distribution methods while protecting
     intellectual property rights.
 
 
                                       1
We sell our custom CDs through our website as well as the websites of other
prominent music retailers, including Platinum Entertainment, Inc., Trans World
Entertainment Corporation and N2K Inc. (musicboulevard.com). Additionally, we
have a marketing alliance with The Columbia House Company, a leading record and
video club, jointly owned by Sony Music Entertainment, Inc. and Time Warner
Inc. This alliance currently allows us to exclusively market our custom CDs to
Columbia House's 15 million members, including those without Internet access,
through Columbia House's websites and direct marketing campaigns.
Musicmaker.com has recently entered into a similar marketing alliance with
Audio Book Club, Inc., a direct marketer of audio books through the Internet
and club member catalogs, and intends to seek additional alliances with music
and non-music retailers.
 
  Our management team has significant experience in both the music and
technology industries. Our officers and directors include the former Chairman
and Chief Executive Officer of PolyGram Records, Inc. and President of Mercury
Records Corporation, the former President of Warner Music Media and RCA Direct
Marketing, Inc./BMG Direct Marketing, Inc., as well as the co-founder of
PictureTel Corporation.
 
  We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
 
  .  Offer a new way to buy licensed, customized music.
 
  .  Offer most extensive selection of music for custom compilation and
     digital downloading.
 
  .  Increase website traffic through industry alliances and multiple
     hyperlinks.
 
  .  Create strong brand awareness.
 
  .  Establish genre-specific user communities.
 
  .  Capitalize on cross-selling opportunities.
 
  .  Leverage technologies for additional formats.
 
  .  Expand international presence.
 
  Musicmaker.com, Inc. is a Delaware corporation incorporated on April 23,
1996. Our principal executive office is located at 1831 Wiehle Avenue, Suite
128, Reston, Virginia 20190, and our telephone number is (703) 904-4110. Our
World Wide Web site is www.musicmaker.com. The information on our website is
not incorporated by reference into this prospectus.
 
                                       2
The Offering
Common stock offered by
 musicmaker.com...............
 
Common stock outstanding after
 this offering(1).............
 
Use of proceeds...............  .  Pay advances to record labels in connection
                                   with acquiring additional music content.
                                .  Expand advertising, marketing and
                                   promotional efforts with existing and future
                                   strategic marketing partners.
                                .  Maintain and upgrade technological systems.
                                .  Fund working capital and general
                                   corporate purposes. See "Use of Proceeds."
 
Proposed Nasdaq National
 Market symbol................  "MMKR"
--------
(1) Does not include:
 
 .      shares of common stock underlying outstanding warrants issued to Ferris,
   Baker Watts, Incorporated and Fahnestock & Co. Inc., as representatives of
   the underwriters, or 595,855 shares of common stock underlying outstanding
   common stock warrants, or 247,039 additional shares reserved for issuance
   pursuant to our stock option plan.
 
   Includes:
 
 .  532,182 shares of common stock underlying stock options outstanding as of
   the date of this prospectus pursuant to our stock option plan and 728,725
   shares of common stock underlying warrants issued upon conversion of the
   outstanding preferred warrants. See "Management--Stock Option Plan."
 
                                       3
Summary Financial Data
 
  The following table summarizes our financial data. You should read this
information together with our consolidated financial statements and notes
thereto appearing elsewhere in this prospectus.
 
Consolidated Statement of Operations Data:
Period from
                                      April 23, 1996
                                      (inception) to Year ended December 31,
                                       December 31,  ------------------------
                                           1996         1997         1998
                                      -------------- -----------  -----------
Net sales............................   $   8,355    $    13,432  $    74,028
Cost of sales........................       2,590          2,955       46,821
                                        ---------    -----------  -----------
Gross profit.........................       5,765         10,477       27,207
Total operating expenses.............     370,410      2,060,677    4,699,789
                                        ---------    -----------  -----------
Loss from operations.................    (364,645)    (2,050,200)  (4,672,582)
Net interest (expense) income........      (2,667)       (33,957)      17,815
                                        ---------    -----------  -----------
Net loss.............................   $(367,312)   $(2,084,157) $(4,654,767)
                                        =========    ===========  ===========
Pro forma basic and diluted net loss
 per share (1)(2):                                                $     (1.73)
                                                                  ===========
Pro forma weighted average shares
 outstanding (1)(2):                                                2,863,521
                                                                  ===========
At December 31, 1998
                                      -----------------------------------------
                                                                   Pro Forma
                                        Actual    Pro Forma (1) As Adjusted (3)
                                      ----------  ------------- ---------------
Consolidated Balance Sheet Data:
Cash and cash equivalents...........  $  972,954   $2,286,579        $
Working capital ....................    (287,767)   1,025,858
Total assets........................   3,233,963    4,435,193
Debt, long-term portion.............     726,786      214,286
Convertible preferred stock.........   3,434,700          --
Total stockholders' (deficit) equity
 ...................................  (2,312,668)   2,835,762
--------
(1) Pro forma to give effect to:
  . A one-for-3.85 reverse stock split to be effected, on     , 1999.
 
  .  The automatic conversion, upon the completion of the offering, of all
     outstanding shares of preferred stock into 819,199 shares of common
     stock.
 
  .  The automatic conversion of all outstanding convertible notes into
     415,584 shares of common stock ($512,500 of convertible notes
     outstanding at December 31, 1998 and $1,487,500 of convertible notes
     issued in January 1999).
 
  .  The write-off of all capitalized loan fees related to the convertible
     notes ($112,395 capitalized at December 31, 1998 and $173,875
     capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
    financial statements.
(3) Adjusted to give effect to reflect the sale of      shares of common stock
    offered hereby at an assumed initial public offering price of $    per
    share (the midpoint of the range) and the application of the net proceeds
    of this offering. See "Use of Proceeds" and "Capitalization."
 
 
                                       4
RISK FACTORS
 
  You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before making any investment
decision. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties, not presently known to us,
or currently considered immaterial by our management, may also materially
affect our future business, financial condition and results of operations. As
a result of any of the risks we encounter, our business, financial condition
and results of operations could be materially adversely affected. In addition,
any such adverse effect could cause the trading price of our common stock to
decline and you may correspondingly lose all or some portion of your
investment in us.
 
We have a limited operating history, have incurred losses and may continue to
realize losses. We also have an accumulated deficit that may continue to
increase.
 
  We began commercial operations in November 1997. Accordingly, we have a
limited operating history and we face all of the risks and uncertainties
encountered by early stage companies in new, unproven and rapidly evolving
markets. Among other things, our business will require:
 
  .  Expanding the content available in our online music library.
 
  .  Increasing awareness of the musicmaker.com brand.
 
  .  Increasing our customer base.
 
  .  Attracting and retaining talented management, technical, marketing and
     sales personnel.
 
  If we are unable to achieve any of these goals, or other requirements for
the successful growth of an early stage Internet commerce company, our
business, financial condition and results of operations may be materially
adversely affected.
 
  We have had net losses in each period since we began operations. We
anticipate that such losses may continue for the foreseeable future as our
operating expenses continue to increase. We reported a net loss of $4,654,767
and $2,084,157 for the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, we had an accumulated deficit of $7,106,236. There
can be no assurance that we will ever achieve profitable operations or
generate significant revenue with our current products and strategy. See
"Summary Financial Data," the consolidated financial statements appearing
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
We do not have a license agreement with any major record label and currently
rely solely on independent record labels for our music content.
 
  In order to build our music library, we must negotiate and enter into
license agreements with record labels. We rely upon our license agreements
with over 85 record labels, all of which are typically smaller, independent
labels. In order to achieve significant commercial success, we believe we need
to enter into a license agreement with at least one of the five major record
labels. Together, the five major record labels below accounted for
approximately 80% of the music sold in 1997:
 
  .  BMG Entertainment
 
  .  EMI
 
  .  Universal Music Group
 
  .  Sony Music Entertainment
 
  .  Warner Music
 
We may not be able to negotiate additional agreements and obtain additional
licenses on favorable terms, if at all. Our inability to secure licenses for
additional song titles or to obtain commercially popular music titles in a
 
                                       5
timely fashion may have a material adverse effect upon our business, financial
condition and results of operations.
 
  In addition, we may encounter difficulty in making the minimum payments
required under our existing and any future license agreements with record
labels. Our failure to make such minimum payments could have material adverse
effects on our relationships with record labels, including, but not limited
to, cancellation of our license agreements. Any difficulties in obtaining, or
maintaining rights to music content could materially affect our business,
financial condition and results of operations. See "Business--Music Content."
 
We need to develop the musicmaker.com brand.
 
  Our future success and growth significantly depend upon our promotion and
favorable consumer perception of the musicmaker.com brand. Increased
recognition and awareness of the musicmaker.com brand will largely depend upon
our advertising and promotional efforts, our strategic marketing alliances,
and our continued provision of a high quality product and high level of
customer service. There can be no assurance that these efforts will result in
increased brand recognition or if such increased brand recognition is
obtained, that we will experience a corresponding increase in the sale of our
custom CDs. See "Business--musicmaker.com Strategy."
 
Our business depends on continued growth of online commerce.
 
  Purchasing products and services over the Internet is a new and emerging
market. Our future revenues and profits are substantially dependent upon
widespread consumer acceptance and use of the Internet and other online
services as a medium for commerce. Rapid growth of the use of the Internet and
other online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce. Demand for and market acceptance of recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there are few proven products and services. For us to
grow, consumers who have historically used traditional means of commerce will
instead need to purchase products and services online, and as a result the
custom CD market may not be viable without the growth of Internet commerce.
 
We depend upon maintenance and continued improvement of the Internet's
infrastructure.
 
  The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and
security, and the timely development of complementary products, such as high-
speed modems, to provide reliable Internet access and services.
 
  The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could face such outages
and delays in the future. Outages and delays are likely to affect the level of
Internet usage, the level of traffic on our website and the number of
purchases on our website. In addition, the Internet could lose its viability
as a mode of commerce due to delays in the development or adoption of new
standards to handle increased levels of activity or due to increased
government regulation. The adoption of such new standards or government
regulation may also require us to incur substantial compliance costs.
 
Our business model is novel and unproven.
 
  Musicmaker.com is based on a novel and unproven business model. It is
impossible to predict the degree to which consumers will use the
musicmaker.com service and the level of consumer acceptance for our custom
CDs. It is also difficult to anticipate the level of acceptance of our
distribution model by additional record labels, specifically major record
labels. We will be successful only if consumers and record labels respond
favorably to our business model and our custom CDs and digitally downloaded
music.
 
 
                                       6
Factors influencing consumers' acceptance of our custom CDs and digitally
downloaded music include:
 
  .  Our ability to consistently provide high quality custom CDs and
     digitally downloaded music at competitive prices.
 
  .  Our maintenance of a user-friendly ordering process and a high level of
     customer service.
 
  .  Consumers' desire to conduct online commerce, specifically their demand
     for custom CDs.
 
  Factors influencing record labels' acceptance of our business model include:
 
  .  The belief that sales of custom CDs and digitally downloaded music will
     enable record labels to gain market exposure for artists and titles in
     their back catalogs and generate incremental revenue without disrupting
     existing distribution channels or retail pricing structures.
 
  .  The belief that musicmaker.com will be able to assist in the protection
     of record label's intellectual property rights.
 
  Should we encounter difficulty with any of the factors above, or other
factors associated with consumer or record label acceptance of our business
model, it is possible that we will not achieve profitability. See "Business--
musicmaker.com Strategy."
 
The online music industry is extremely competitive.
 
  The market for online commerce is extremely competitive and we believe such
competition will continue to grow and intensify. Our most visible custom
compilation competitors currently include Custom Revolutions, Inc., CDuctive,
and amplified.com. Although our primary focus is on sales of custom, rather
than pre-recorded music CDs, we may ultimately compete with existing online
websites that provide sales of pre-recorded music on the Internet. Such online
competitors may include N2K, CDnow, Inc., Amazon.com, Inc., barnesandnoble.com
inc., Columbia House and BMG Music Service. We do not believe that any of
these competitors currently offer customized music compilations to their
customers. However, CDnow purchased SuperSonic Boom, a custom compilation
provider, in June 1998.
 
  We also face significant competition in the growing market to provide
digitally downloaded music, specifically for music files in MP3 format.
Digitally downloaded music can currently be found on the websites of existing
online music retailers, artists and record labels as well as catalogs of songs
provided by internet portals such as Lycos. We expect the competition to
provide MP3 files to intensify with further entry by additional record labels,
artists and portals, including those with greater resources and music content
than musicmaker.com. Recently, the five major record labels announced that
they have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods."
 
  Our ability to effectively compete in the online music industry will depend
upon, among other things:
 
  .  Our ability to expand the list of song titles available from our online
     music library.
 
  .  Our continued promotion of the musicmaker.com website and brand.
 
  .  Our maintenance and improvement of the technical systems upon which our
     operations rely.
 
  .  Our ability to attract and retain experienced management, technical,
     marketing and sales personnel.
 
  .  Our ability to provide a high quality, easy to use mechanism by which
     users can customize and purchase music at a reasonable price.
 
  Our failure in connection with any of the factors above, would materially
adversely affect our ability to compete.
 
 
                                       7
In addition to competition encountered on the Internet, we face competition
from traditional music retail chains and megastores, mass merchandisers,
consumer electronics stores, music clubs, and a number of small custom
compilation start-up companies. We could also face competition from record
companies, multimedia companies and entertainment companies that seek to offer
recorded music either directly to the public or through strategic ventures and
partnerships.
 
  Many of our current and potential competitors in the Internet commerce and
music businesses have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger existing customer bases than musicmaker.com. For example, should record
labels decide to compete with us by offering their own custom CDs over the
Internet or by making their music available for digital downloads, we would be
at a significant disadvantage from a music library selection standpoint. We
expect that such competitors may be able to respond more quickly to new or
emerging technological change, competitive pressures and changes in customer
demand. As a result of their advantages, our competitors may be able to limit
or curtail our ability to successfully compete in the industry. The
competitive pressures that we encounter in the industry could materially
adversely affect our business, financial condition and operating results. See
"Business--Competition."
 
We are significantly dependent upon certain existing and future marketing
alliances.
 
  We believe that future marketing of our custom CDs is heavily dependant upon
existing strategic marketing alliances. We anticipate that our ability to
distribute print advertisements, promote the musicmaker.com brand name and
ultimately sell custom CDs would be materially adversely affected by
contractual difficulties associated with, or the termination of, our existing
marketing alliances.
 
  We especially rely upon our current marketing alliance with Columbia House.
Columbia House may terminate our alliance upon not less than thirty days
notice if Mr. Puthukarai ceases to be musicmaker.com's President and Chief
Operating Officer and Columbia House deems his replacement incompatible with
their interest, or Columbia House determines after the first six
musicmaker.com promotional mailings to its members that its financial returns
do not justify continuing the relationship. Columbia House may choose to enter
into non-exclusive marketing agreements with our competitors if they offer a
significant repertoire of music unavailable through musicmaker.com. Our
alliance with N2K is subject to renegotiation as a result of its proposed
merger with CDNow, which acquired a custom compilation provider in June 1998.
 
  Our future success and development of the musicmaker.com brand name is also
heavily dependant upon our ability to enter into additional marketing
alliances and hyperlink arrangements with music and entertainment companies,
Internet service providers, and Internet search engines. There is no assurance
that we will be able to develop future strategic alliances on terms favorable
to us, if at all. Our inability to enter into such alliances in the future
could materially adversely affect the promotion of our musicmaker.com brand
and our custom CDs. See "Business--Marketing."
 
Growth of musicmaker.com may challenge our business operations.
 
  Since beginning commercial operations in November 1997, we have rapidly
expanded our operations. While we anticipate continued expansion of our
operations for the foreseeable future, such growth may place considerable
strain on our existing resources and technology, as well as our management,
technical, marketing and sales personnel. In order to adequately manage our
growth, it will be necessary to continue to implement our strategy and to
assess and upgrade the systems and resources which support our operations. If
we are unable to manage our growth effectively, our business, financial
condition and results of operations may be materially adversely affected. See
"Business--musicmaker.com Strategy."
 
We may encounter security risks associated with business on the Internet.
 
  We are potentially vulnerable to computer break-ins, "hackers," credit
fraud, viruses and other similar disruptive problems caused by our customers
or unauthorized third parties. These disruptions could result in interruption,
delay or possible cessation of service to our customers. Unauthorized activity
on our network or website could also result in potential misappropriation of
proprietary information or customer data. Such misappropriation could cause us
to incur significant litigation expense to assert our proprietary rights or
defend possible claims of misuse of, or failure to secure, consumers' personal
information.
 
                                       8
Consumers currently use their credit cards to make online purchases. We rely
on licensed encryption and authentication technology to secure transmission of
confidential information, including credit card numbers. It is possible that
advances in computer capabilities and technology could result in a compromise
or breach of the technology we use to protect customer transaction data. Such
security concerns of our business, and the online industry generally may deter
customers and potential customers from using the Internet as a means of
commerce. Security breaches could also expose us to potential liability to
customers, record labels and others and could inhibit the growth of the
Internet as a merchandising medium.
 
Our industry may encounter changes in music distribution methods.
 
  New digital distribution channels for music could radically alter the
established order of artists, publishers, distributors, retailers and media
companies that use current music distribution methods. Early adopters are
currently performing market trials with high quality, open format MP3
downloaded music files--some posted legally by artists or record labels on
their own websites, others posted illegally on sites that have pirated
intellectual property owned by the major and independent labels. A portable
device, the Rio, that plays MP3 downloaded music files recently became
available to consumers.
 
  In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which uses IBM software, will allow
approximately 1,000 cable subscribers in San Diego to download music from a
library of 1,000 album titles and several hundred song titles provided by the
major record labels. The market trial is viewed by many as the first step
taken by the major record companies to consider the sale of digital music
online.
 
  A task force of recording companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, is attempting
to develop standards by which songs available in digital format can be
disseminated without infringing upon copyright or other intellectual property
rights. We have made a business decision to provide licensed music content
over the Internet by licensing content from labels in a traditional manner to
ensure compliance with existing copyright laws. The acceptance and integration
of any of these new methods of music distribution, without sufficient
protection of intellectual property or industry uniformity, could materially
adversely affect our business, financial condition and results of operations.
Increased availability of high bandwidth capacity could further alter existing
distribution methods.
 
We may not be able to keep up with technological advancements.
 
  The market for providing custom CDs and digitally downloaded music on the
Internet, and for Internet commerce generally, is characterized by rapid
change, evolving industry standards and the frequent introduction of new
technological products and services. The introduction of new technology,
products, services or standards may prove to be too difficult, costly or
simply impossible to integrate into our existing systems. Such innovations
could render our existing or any future products and services obsolete. Our
ability to remain competitive will also depend heavily upon our ability to
maintain and upgrade our technology products and services. Any difficulty
keeping pace with technological advancements could hurt growth of our
business, retention of our customers and may materially adversely affect our
business, financial condition and results of operations.
 
Risk of our system failure.
 
  Our business heavily depends upon our ability to maintain our computer and
telecommunications equipment in effective working order. The scalability
features of our storage and fabrication systems have not been tested in actual
operations and may not be able to handle a large increase in customer demand
or a significant increase in our online music library. The strain associated
with increased demands upon our systems may result in reduced quality of our
customer service and products or potential system failure. Any interruption,
damage to, or failure of our systems could have a material adverse effect on
our business, financial condition and results of operations.
 
  Substantially all of our computer and telecommunications operations are
located at our facility in Reston, Virginia. We currently do not maintain a
redundant website or co-hosting arrangement nor do we have an off-site back-up
of our music library. In the event of a catastrophic loss at our Reston
facility resulting in damage to, or destruction of, our computer and
telecommunications systems, we would have a material interruption in our
business operations.
 
                                       9
We depend upon intellectual property rights and risk having such rights
infringed.
 
  We consider our trademarks, trade secrets and similar intellectual property
to be a valuable part of our business. To protect such intellectual property
rights, we rely upon copyright, trademark, patent and trade secret laws, as
well as confidentiality agreements with our employees and consultants. There
can be no assurance that our use of such contracts and the application of
existing law will provide sufficient protection from misappropriation or
infringement of our intellectual property rights. It is possible that others
will develop and patent technologies that are similar or superior to that of
musicmaker.com. It is also possible that third parties will obtain and use our
content or technology without authorization.
 
Musicmaker.com's year 2000 risks.
 
  The year 2000 issue is the result of computer programs written using year
identifiers consisting of two digits, rather than four. Use of two digits to
identify years may cause certain systems to recognize a date using "00" as the
year 1900, rather than the year 2000. The year 2000 issue could result in
system failures, or miscalculations causing disruption to the operations of
many businesses. We have not verified that the companies doing business with
us are year 2000 compliant. Significant uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance. Any year
2000 compliance problem of musicmaker.com, our current and any future
strategic marketing partners, our vendors or our users could have a material
adverse effect on our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 System Costs."
 
We may be exposed to liability for content retrieved from our website.
 
  Our exposure to liability from providing content on the Internet is
currently uncertain. Due to third party use of information and musical content
downloaded from our website, we may be subject to claims for defamation,
negligence, copyright, trademark or patent infringement or other theories
based on the nature and content of such materials. Our exposure to such
liability, particularly for claims not covered by insurance, or in excess of
any insurance coverage, could have a material adverse effect on our business,
financial condition and results of operations.
 
We depend upon the services of key personnel.
 
  Our future success depends heavily upon the continued service and industry
relationships of our key senior management personnel, including, but not
limited to:
 
  .  Robert P. Bernardi, our Chairman of the Board of Directors and Co-Chief
     Executive Officer.
 
  .  Devarajan S. Puthukarai, our President, Co-Chief Executive Officer and
     Chief Operating Officer.
 
  .  Irwin H. Steinberg, our Vice Chairman of the Board of Directors and a
     consultant to musicmaker.com.
 
  Any departure by key senior management personnel may have a material adverse
effect upon our business, financial condition and results of operations. See
"Risk Factors--We are significantly dependent upon certain existing marketing
alliances," "Business--Marketing" and "Management."
 
We depend upon hiring and retaining qualified employees.
 
  Our current and future operations significantly depend upon our ability to
attract, retain and motivate highly qualified, managerial, technical,
marketing and sales personnel. Competition for such personnel is intense,
particularly in the Northern Virginia employment market. There can be no
assurance that we will be able to retain our existing employees or attract,
retain and motivate highly qualified personnel in the future. Such personnel
difficulties could impair growth of our business, promotion of our
musicmaker.com brand and products, and materially adversely affect our
business, financial condition and results of operations.
 
 
                                      10
Regulation of Internet domain names is uncertain.
 
  We currently hold the Internet domain name "musicmaker.com." Domain names
generally are regulated by Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to
change. Regulatory bodies could establish additional top level domains,
appoint additional domain name registrars or modify the requirements for
holding domain names. As a result, we may not acquire or maintain the
musicmaker.com domain name in all of the countries in which we conduct or
expect to conduct business. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks
and other proprietary rights.
 
Our industry may be subject to increased government regulation.
 
  As commerce conducted on the Internet continues to evolve, federal, state or
foreign agencies may adopt regulations or impose new taxes intended to cover
our business operations. Such efforts may seek to regulate areas including
user privacy, pricing, content and consumer protection standards for our
products and services. Compliance with such regulations could hinder our
growth or prove to be prohibitively expensive. It is also possible that the
introduction of such regulations could expose companies involved in Internet
commerce, or the provision of content over the Internet, to significant
liability. If enacted, such government regulation could materially adversely
affect the viability of Internet commerce, generally, as well as our business,
financial condition and results of operations.
 
Certain existing investors own a large percentage of musicmaker.com's voting
securities.
 
  Following the completion of this offering, our executive officers, directors
and their affiliated entities together will beneficially own approximately
of our outstanding shares of common stock (   if the underwriters'
overallotment option is exercised in full). As a result, these stockholders
will exercise significant control over all matters requiring stockholder
consent. Matters typically submitted to our stockholders for a vote include
the election of our directors, mergers or consolidations, and any sale of all,
or substantially all of our assets. The concentrated holdings of the
stockholders noted above may result in delay or deterrence of possible changes
in our control, which may reduce the market price of our common stock. See
"Principal Stockholders."
 
We may encounter risks associated with international expansion.
 
  We intend to expand our business into international markets. In the event
that we conduct any such expansion, we will encounter many of the risks
associated with international business expansion, generally. Such risks
include, but are not limited to, language barriers, changes in currency
exchange rates, political and economic instability, difficulties with
regulatory compliance and difficulties with enforcing contracts and other
legal obligations. See "Business--musicmaker.com Strategy."
 
Shares eligible for future sale.
 
  We will have     shares of common stock outstanding after this offering. The
common stock sold in this offering will be freely tradable except for any
shares purchased by "affiliates" as that term is defined in Rule 144,
promulgated under the Securities Act of 1933, as amended. Our common stock
sold prior to the offering and certain other securities sold prior to the
offering, including securities automatically converting into common stock upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144. In addition the following securities are outstanding and,
upon exercise of certain purchase rights and issuance of common stock therefor
unless registered, may only be sold pursuant to Rule 144 or an exemption from
registration.
 
 .  Under our stock option plan, options to purchase 532,182 shares of common
   stock are issued and outstanding and upon exercise, the underlying common
   stock may be freely traded subject to certain limitations imposed by Rule
   701 of the Securities Act. An additional 247,039 shares of common stock are
   reserved for issuance under our stock option plan.
 
                                      11
.  595,855 common stock warrants outstanding, 728,725 common stock warrants to
   be issued upon conversion of the outstanding preferred warrants and
   common stock warrants to be issued to the representatives in connection
   with this offering. The holders of the warrants may sell shares of common
   stock acquired upon exercise no earlier than six months from the date of
   issuance, pursuant to, and as limited by, Rule 144.
 
  Stockholders holding approximately  or  % of our outstanding common stock
have agreed not to offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any
musicmaker.com securities currently held without prior written consent of
Ferris, Baker Watts, Incorporated for a period of 180 days. Further sales of
common stock under Rule 144 or otherwise, and the introduction of such shares
into the public market could materially adversely affect the market price of
our common stock. See "Shares Eligible for Future Sale."
 
Our management will have broad discretion in applying the net proceeds of this
offering.
 
  Assuming an initial offering price of $   and after deducting underwriting
discounts and commissions and other expenses of the offering, we will receive
net proceeds of $   . We have not yet determined the specific dollar amount of
net proceeds to be allocated to any of the possible uses indicated in "Use of
Proceeds." Accordingly, our management will have broad discretion in applying
the net proceeds of the offering. See "Use of Proceeds."
 
Investors purchasing common stock in this offering will experience immediate
and substantial dilution.
 
  The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after this offering. Accordingly, if you purchase common
stock in this offering, you will incur immediate dilution of approximately
$   , or    % in the pro forma net tangible book value per share of common
stock from the price you pay for the common stock. To the extent that
outstanding options and warrants are exercised or additional securities are
issued, there will be further dilution to the investors in this offering. See
"Dilution" and "Shares Eligible for Future Sale."
 
Tax uncertainties of our business.
 
  It is possible that the current tax moratorium limiting the ability of state
and local governments to impose taxes on Internet based transactions could
fail to be renewed prior to October 2001. Failure to renew this legislation
would allow states to impose new taxes on Internet based commerce. Should
states impose a requirement that online vendors collect taxes for all products
shipped to each state, collection of such sales tax could create additional
administrative burdens on our operations and slow the growth of Internet
commerce. The imposition of such taxes could materially adversely affect our
ability to become profitable in the future.
 
There has not been a public market for our common stock and its market price
is likely to fluctuate.
 
  Prior to this offering there has been no public market for our common stock.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "MMKR." There can be no assurance, however, that an active trading
market will develop, or, if developed, that such a market will be maintained.
 
  The market price of our common stock is likely to be volatile. As a result,
you may not be able to resell your shares at or above the initial public
offering price and could lose all or some portion of your investment. This
volatility may result from factors including:
 
  .  Variations in our quarterly operating results.
 
  .  Increase or decrease in orders placed for our products.
 
  .  Changes in estimates prepared by analysts for musicmaker.com or online
     commerce generally.
 
  .  Any announcement of technological innovations.
 
  .  The introduction of new competitors or changes in customer preferences.
 
  .  The general condition of companies engaged in Internet commerce.
 
  .  Other events or factors affecting the market for our common stock and
     the stock market generally.
 
                                      12
The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price
of common stock for many companies engaged in industries similar to
musicmaker.com. The factors above could materially adversely affect the market
price of our common stock.
 
We may have fluctuations in our quarterly results.
 
  We expect to experience significant fluctuations in our future quarterly
operating results caused by a variety of factors, many of which are outside of
our control. Factors affecting our quarterly results may include:
 
  .  Any announcement, or introduction of new or enhanced websites, products,
     services and strategic alliances by us, our alliance partners or our
     competitors.
 
  .  Any changes to our current product offering, increases or decreases in
     our song library or that of our competitors.
 
  .  Seasonality of music purchases.
 
  .  Level of customer satisfaction, including our ability to retain existing
     customers and attract new customers.
 
  .  Price competition or changes in our current licensing arrangements.
 
  .  Increases or decreases in the use of the Internet, generally, and
     consumer acceptance of the Internet for retail commerce purposes.
 
  .  Our ability to upgrade or respond to technological advances in a timely
     and cost effective manner with minimal disruption to our operations.
 
  .  Technical difficulties, system downtime or Internet disruptions.
 
  .  General economic conditions and conditions specific to Internet commerce
     and the music industry.
 
  As a result of these and other factors, period-to-period comparisons of our
results of operations may not be meaningful and should not be relied upon as
an indication of our future performance. As a result of any of the factors
above, our operating results could be below expectations of investors and
market analysts, and the market price of our common stock could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
Anti-takeover effects of our Charter and Bylaws.
 
  Our Charter and Bylaws contain provisions that could discourage potential
acquisition proposals and might delay or prevent a change in control of
musicmaker.com. These provisions could make musicmaker.com less attractive to
potential acquirers. These provisions could also result in our stockholders
being denied a premium for, or receiving less for, their shares than they
otherwise might have been able to obtain in a takeover attempt. See
"Description of Securities."
 
Our stockholders may have difficulty in recovering monetary damages from
directors.
 
  Our Charter contains a provision which eliminates personal liability of our
directors for monetary damages to be paid to us and our stockholders for
breach of certain fiduciary duties. As a result of this provision, our
stockholders may be unable to recover monetary damages against our directors
for their actions that constitute a breach of certain fiduciary duties,
negligence or gross negligence. Inclusion of this provision in our Charter may
also reduce the likelihood of derivative litigation against our directors and
may discourage lawsuits against our directors for breach of their duty of care
even though such claims might have been successful and benefited stockholders.
See "Description of Securities."
 
                                      13
We may require additional capital or financing in the future.
 
  We anticipate that the proceeds of this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital needs for at least the next 12 months. Beyond that period, we
may need to raise additional funds. We cannot be certain that we will be able
to obtain such funds on favorable terms, if at all. If we decide to raise such
funds by issuing additional equity securities, purchasers in this offering may
experience additional dilution. Issuance of additional equity securities may
also involve granting preferences or privileges ranking senior to those
purchasers in this offering. If we cannot obtain sufficient funds, we may not
be able to grow our operations, take advantage of future business
opportunities or respond to technological developments or competitive
pressures. See "Dilution," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
We do not intend to pay dividends.
 
  We have never paid dividends on our common stock. We do not intend to pay
dividends and purchasers should not expect to receive dividends on our common
stock for the foreseeable future. See "Dividend Policy" and "Description of
Securities."
 
Warning regarding our use of forward-looking statements.
 
  This prospectus contains forward-looking statements. Such statements relate
to possible future events, our future performance and our future operations.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "anticipates," "believes," "expects,"
"plans," "future," "intends," and other similar expressions. These forward-
looking statements are only our predictions. Our actual results could and
likely will differ materially from these forward-looking statements for many
reasons, including the risks described below and appearing elsewhere in this
prospectus.
 
                                      14
USE OF PROCEEDS
 
  Assuming an initial offering price of    and after deducting underwriting
discounts and commissions and other expenses of this offering, we will receive
net proceeds of     from the sale of     shares of our common stock in this
offering. We intend to use the net proceeds of this offering to pay advances
in connection with acquiring additional music content from record labels. We
also anticipate using net proceeds to expand our advertising, marketing and
promotional efforts with our existing and future strategic marketing partners.
Net proceeds may be used to support promotional inserts in direct mailings to
Columbia House and Audio Book Club members, website advertising and seasonal
product promotions. We intend to use net proceeds to maintain, back-up, and
upgrade the technological systems which support our operations. Although we do
not have any current plans to acquire any businesses, we may use a portion of
the net proceeds of the offering for such purposes. We have not yet determined
the amount of net proceeds to specifically allocate to each of the foregoing
purposes. As a result, management will have significant discretion in the
application of such proceeds. Allocation of net proceeds is further subject to
future events including general economic conditions, changes in
musicmaker.com's strategy and response to competitive pressures and consumer
preferences associated with the music industry and Internet commerce. Pending
use, we will invest the net proceeds of this offering in bank certificates of
deposit and other fully insured investment grade interest bearing securities.
See "Business--musicmaker.com Strategy" and "Risk Factors--Our management will
have broad discretion in applying the net proceeds of this offering."
 
                                      15
CAPITALIZATION
 
  The following table sets forth our capitalization as of December 31, 1998:
 
    .  On an actual basis.
 
    .  On a pro forma basis to reflect:
 
           .  A one-for-3.85 reverse stock split to be effected on       ,
              1999.
 
           .  The automatic conversion, upon the completion of the offering,
              of all outstanding shares of preferred stock into 819,199 shares
              of common stock.
 
           .  The automatic conversion of all outstanding convertible notes
              into 415,584 shares of common stock ($512,500 of convertible
              notes outstanding at December 31, 1998 and $1,487,500 of
              convertible notes issued in January 1999) and the issuance of
              252,104 shares of common stock after December 31, 1998.
 
    .  On a pro forma as adjusted basis, to reflect the receipt by
       musicmaker.com of the estimated net proceeds from the offering.
 
  The information below assumes an initial public offering price of $    as
reduced for underwriting discounts, commissions and expenses incurred in
connection with the offering.
As of December 31, 1998
                                           -------------------------------------
                                                                      Pro Forma
                                             Actual      Pro Forma   As Adjusted
                                           -----------  -----------  -----------
Current portion of long-term obligation..  $    42,857  $    42,857
                                           ===========  ===========     ====
Convertible notes and long-term
 obligation..............................  $   726,786  $   214,286
Series A preferred stock.................    1,750,000          --
Series B preferred stock.................    1,684,700          --
Stockholders' (deficit) equity:
  Common stock, $0.01 par value;
   5,194,805 shares authorized; 2,707,954
   shares issued and outstanding on an
   actual basis; 3,942,737 shares issued
   and outstanding on a pro forma basis
   and     shares issued and outstanding
   on a pro forma as adjusted basis......       27,080       39,427
  Additional paid-in capital.............    4,766,488   10,188,841
  Accumulated deficit....................   (7,106,236)  (7,392,506)
                                           -----------  -----------     ----
Total stockholders' (deficit) equity ....   (2,312,668)   2,835,762
                                           -----------  -----------     ----
Total capitalization.....................  $ 1,848,818  $ 3,050,048
                                           ===========  ===========     ====
16
DILUTION
 
  The difference between the initial public offering price per share of common
stock and the as adjusted pro forma net tangible book value per share of
common stock after this offering constitutes the dilution to investors
purchasing common stock in this offering. Net tangible book value per share is
determined by dividing musicmaker.com's net tangible book value (total assets
less total liabilities) by the number of outstanding shares of common stock.
 
  At December 31, 1998, our net tangible book value was $    or $    per share
of common stock. After giving effect to the sale of the common stock offered
hereby, assuming an initial public offering price of $    and after deducting
the estimated underwriting discounts, commissions and offering expenses, our
net tangible book value as of December 31, 1998, would have been $    or $
per share. This represents an immediate increase in net tangible book value of
$    per share to the existing holders of common stock and an immediate
dilution to investors purchasing in this offering of $    per share. The
following table illustrates the per share dilution to investors purchasing in
this offering:
Assumed initial public offering price per share..........................
     Net tangible book value before offering................................
     Pro forma increase attributable to new investors.......................
     Net tangible book value after offering.................................
   Pro forma dilution to investors purchasing in offering...................
The following table summarizes as of December 31, 1998, on the pro forma
basis described above, the number of shares of capital stock purchased from
musicmaker.com, the total consideration paid to musicmaker.com and the average
price per share paid by existing stockholders and by investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $  , before deducting the estimated underwriting discount and
commissions and estimated offering expenses:
Shares Purchased       Total Consideration       Average
                         -------------------    ----------------------     Price
                         Number     Percent      Amount      Percent     Per Share
                         --------   --------    ----------  ----------   ---------
Existing stockholders...                      %  $                     %   $
New investors...........                                                   $
                          --------    --------   ----------   ---------    ----
  Total.................                   100%  $                  100%
                          ========    ========   ==========   =========    ====
The table above excludes the following:
 
  .  595,855 common stock warrants issued and outstanding, 728,725 common
     stock warrants to be issued upon conversion of the oustanding preferred
     stock warrants, and    common stock warrants to be issued to the
     representatives in connection with this offering; and
 
  .  532,182 options issued as of January 31, 1999 under our stock option
     plan.
 
  To the extent that any of these options or warrants are exercised, there
would be further dilution to investors purchasing in the offering. See
"Capitalization," "Management--Stock Option Plan" and Notes 5 and 9 of the
notes to the consolidated financial statements.
 
                                DIVIDEND POLICY
 
  We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends, if any, in the future will be at the sole
discretion of the Board of Directors.
 
                                      17
SELECTED FINANCIAL DATA
 
  The following selected financial data should be read in conjunction with the
consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the period from April 23, 1996 (inception) to December
31, 1996 and the years ended December 31, 1997 and 1998, and the consolidated
balance sheet data at December 31, 1997 and 1998 are derived from the
consolidated financial statements of musicmaker.com that have been audited by
our independent auditors, and are included elsewhere in this prospectus.
 
Consolidated Statement of Operations Data:
Year ended December 31,
                                                     ------------------------
                                      Period from
                                    April 23, 1996
                                    (inception) to
                                   December 31, 1996    1997         1998
                                   ----------------- -----------  -----------
Net sales.........................     $   8,355     $    13,432  $    74,028
Cost of sales.....................         2,590           2,955       46,821
                                       ---------     -----------  -----------
Gross profit......................         5,765          10,477       27,207
Operating expenses:
  Sales and marketing.............           --            7,780      929,661
  Operating and development.......        64,029         692,041    1,435,690
  General and administrative......       306,381       1,360,856    2,334,438
                                       ---------     -----------  -----------
Total operating expenses..........       370,410       2,060,677    4,699,789
                                       ---------     -----------  -----------
Loss from operations..............      (364,645)     (2,050,200)  (4,672,582)
Net interest (expense) income.....        (2,667)        (33,957)      17,815
                                       ---------     -----------  -----------
Net loss..........................     $(367,312)    $(2,084,157) $(4,654,767)
                                       =========     ===========  ===========
Basic and diluted net loss per
 share(2).........................     $   (0.44)    $     (1.20) $     (2.13)
                                       =========     ===========  ===========
Weighted average shares
 outstanding(2)...................       830,076       1,734,328    2,186,488
                                       =========     ===========  ===========
Pro forma basic and diluted net
 loss per share(1)(2):                                            $     (1.73)
                                                                  ===========
Pro forma weighted average shares
 outstanding(1)(2):                                                 2,863,521
                                                                  ===========
Consolidated Balance Sheet Data:
At December 31, 1998
                                        ---------------------------------------
                                                                   Pro Forma
                                          Actual    Pro Forma(1) As Adjusted(3)
                                        ----------  ------------ --------------
Cash and cash equivalents.............. $  972,954   $2,286,579    $
Working capital........................   (287,767)   1,025,858
Total assets...........................  3,233,963    4,435,193
Debt, long-term portion................    726,786      214,286
Convertible preferred stock............  3,434,700          --
Total stockholders' (deficit) equity... (2,312,668)   2,835,762
--------
(1) Pro forma to give effect to:
  .  A one-for-3.85 reverse stock split to be effected on      , 1999.
  .  The automatic conversion, upon the completion of the offering, of all
     shares of outstanding preferred stock into 819,199 shares of common
     stock.
  .  The automatic conversion of all outstanding convertible notes into
     415,584 shares of common stock ($512,500 of convertible notes
     outstanding at December 31, 1998 and $1,487,500 of convertible notes
     issued in January 1999).
  .  The write-off of all capitalized loan fees related to the convertible
     notes ($112,395 capitalized at December 31, 1998 and $173,875
     capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
    financial statements.
(3) Adjusted to give effect to reflect the sale of     shares of common stock
    offered hereby at an assumed initial public offering price of $    per
    share and the application of the net proceeds therefrom. See "Use of
    Proceeds" and "Capitalization."
 
                                      18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
  The following discussion of the financial condition and results of operations
of musicmaker.com should be read in conjunction with the consolidated financial
statements and the related notes thereto and other financial information
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Musicmaker.com's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
factors set forth under "Risk Factors" and appearing elsewhere in this
prospectus.
 
Overview
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
.  Creedence Clearwater Revival  .  The Beach Boys       .  Ziggy Marley
                      
  .  Jerry Lee Lewis               .  Miles Davis          .  Johnny Cash   
                           
  .  Little Richard                .  John Coltrane        .  Dionne Warwick 
                           
  .  Frank Zappa                   .  The Yardbirds with   .  Muddy Waters
                                      Eric Clapton
  .  Taylor Dayne                  .  Blondie              .  The Blues Brothers
                           
  .  The Ramones                   .  Kansas               .  The Kinks
                 
                                                           .  The Band
 
  Musicmaker.com was incorporated in April 1996 ("Inception"). On July 31,
1996, musicmaker.com acquired the technology to produce its custom CDs. See
"Certain Transactions." During the remainder of 1996 and through the year ended
December 31, 1997, musicmaker.com's operating activities consisted of
recruiting personnel, developing the technological infrastructure necessary to
create custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. Musicmaker.com
launched its website in October 1997 and shipped its first custom CD in
November 1997. In 1998, musicmaker.com established several strategic alliances
with leading online and offline music marketers. See "Business--Marketing."
 
  Since commercial operations primarily began in the fourth quarter of 1997,
musicmaker.com has sold over 5,000 custom CDs. Through July 1998, all of
musicmaker.com's net sales had been derived from the sale of custom CDs through
its own website and print promotions. In August 1998, musicmaker.com began
selling its custom CDs through a marketing alliance with N2K. In October 1998,
musicmaker.com began selling its custom CDs through marketing alliances with
Platinum and Columbia House. See "Business--Marketing."
 
  Net sales are primarily derived from custom CDs offered over the Internet and
through advertising campaigns and individual songs downloaded directly from
musicmaker.com's website. Net sales are net of sales
 
                                       19
discounts, and include shipping and handling charges. Customer accounts are
settled by directly charging a customer's credit card. Net sales are
recognized upon shipment of the CD from musicmaker.com's production site in
Reston, Virginia. For digitally downloaded songs, net sales are recognized
upon execution of the order.
 
  Cost of sales principally consist of content costs, production and shipping
costs, and credit card receipt processing costs. Content costs will include
royalty payments based on actual sales. Production costs include jewel cases,
CD trays and CD inserts. Musicmaker.com expects that its cost of sales will
increase significantly as it enters into additional licensing agreements to
further expand and develop its music library.
 
  Sales and marketing expenses consist primarily of advertising and
promotional expenditures, including payroll and related expenses.
Musicmaker.com expenses all advertising costs as incurred. Musicmaker.com
expects sales and marketing expenses to increase significantly as it endeavors
to increase its customer base, drive traffic to its website and enhance brand
name awareness.
 
  Operating and development expenses are expensed as incurred and consist
primarily of initial royalty payments and content development costs. To
establish its music library, musicmaker.com made advance royalty payments
pursuant to licensing agreements with certain record labels. These payments
have been classified as operating and development expenses due to management's
belief that minimal net sales will be generated during the one year period
following the payment of these advances. Musicmaker.com is required to make
additional annual advance payments for up to two years. Should these initial
arrangements generate significant revenues, future advances will be classified
as cost of sales. With respect to future licensing arrangements,
musicmaker.com intends to pay royalties based on actual sales which would be
included in cost of sales. Musicmaker.com expects that in the future,
operating and development costs will consist primarily of payroll and related
expenses for website and system development as well as expenses associated
with website hosting and Internet operations. Musicmaker.com's operating and
development expenses have increased significantly since Inception, and are
expected to continue to increase with our growth.
 
  General and administrative expenses consist primarily of legal and
professional fees, payroll costs and related expenses for officers and
administrative personnel, as well as other expenses associated with corporate
functions.
 
  Musicmaker.com has an extremely limited operating history upon which to base
an evaluation of its business and prospects. Musicmaker.com has yet to achieve
significant net sales and its ability to generate significant net sales in the
future is uncertain. Further, in view of the rapidly evolving nature of
musicmaker.com's business and its very limited operating history,
musicmaker.com has little experience forecasting net sales. Therefore,
musicmaker.com believes that period-to-period comparisons of our financial
results are not necessarily meaningful and you should not rely upon them as an
indication of future performance.
 
  To date, musicmaker.com has incurred substantial costs to create, introduce
and enhance its services, to acquire content, to build brand awareness and to
grow its business. As a result, musicmaker.com has incurred operating losses
since Inception. In addition, musicmaker.com expects significantly increased
operating expenses in connection with an increase in the size of its staff,
expansion of its marketing efforts, and an increase in its research and
development efforts to assist in musicmaker.com's planned growth. To the
extent that increases in operating expenses precede or are not followed by
increased net sales, musicmaker.com's business, financial condition and
results of operations will be materially adversely affected. See "Risk
Factors--We have a limited operating history, have incurred losses and may
continue to realize losses. We also have an accumulated deficit that may
continue to increase."
 
  Musicmaker.com's business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early years, particularly companies in new and rapidly evolving markets such
as electronic commerce. See "Risk Factors--We depend on continued growth of
online commerce" and "We depend on maintenance and continued improvement of
the Internet's infrastructure." In addition, musicmaker.com's net sales depend
substantially upon the level of activity on its website and the success of its
Columbia House print promotions. Although musicmaker.com has experienced
growth in its operations, there can be no assurance that musicmaker.com's net
sales will continue at its current level or rate of growth.
 
                                      20
Results of Operations
 
 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  Net Sales.  Net sales for the year ended December 31, 1998 were $74,028
compared to $13,432 for the year ended December 31, 1997. The generation of
net sales resulted from development of our customer base, expansion of our
music library and the formation of strategic alliances with Columbia House,
N2K and Platinum which provided Internet traffic and access to additional
customer bases.
 
  Cost of Sales.  Cost of sales for the year ended December 31, 1998 were
$46,821 compared to $2,955 for the year ended December 31, 1997. For the
period ended December 31, 1998 content costs accounted for $10,258 or 22% of
cost of sales and production costs accounted for $32,086 or 69% of cost of
sales. Postage and mailing and credit card costs accounted for $2,383 and
$2,095, respectively for the year ended December 31, 1998, or a combined 9% of
cost of sales. Cost of sales for the year ended December 31, 1997 consisted
entirely of production costs of $2,955.
 
  Operating and Development Expenses. Operating and development expenses were
$1,435,690 for the year ended December 31, 1998 compared to $692,041 for the
year ended December 31, 1997. This increase was primarily attributable to
expenses associated with obtaining content as well as enhancing the features
and functionality of our website and related systems.
 
  Sales and Marketing Expenses.  Sales and marketing expenses were $929,661
for the year ended December 31, 1998 compared to $7,780 in the year ended
December 31, 1997. Sales and marketing expense for the year ended December 31,
1998 consisted primarily of print advertising, expenditures incurred in the
development of our strategic alliances and increases in sales and marketing
personnel.
 
  General and Administrative Expenses. General and administrative expenses
were $2,334,438 for the year ended December 31, 1998 from $1,360,856 for the
year ended December 31, 1997. This increase was primarily due to increases in
the number of personnel and corporate facility expenses necessary to support
the growth of our business and operations.
 
  Interest Expense/Income.  Interest income for the year ended December 31,
1998 was $17,815 compared to interest expense of $33,957 for the year ended
December 31, 1997. The 1997 interest expense was attributable to convertible
notes which were converted to common stock in June 1997. Musicmaker.com did
not have any interest expense associated with debt during the year ended
December 31, 1998.
 
 Year Ended December 31, 1997 Compared to Inception Period from April 23, 1996
to December 31, 1996
 
  Net Sales.  Net sales were $13,432 for the year ended December 31, 1997
compared to $8,355 for the period from Inception through December 31, 1996
(the "Inception Period"). Net sales in the Inception Period consisted of
certain product sales from musicmaker.com's subsidiary which was dissolved in
early 1999. The increase in net sales was principally due to growth in
musicmaker.com's customer base and expansion of its music library.
 
  Cost of Sales.  Cost of sales were $2,955 for the year ended December 31,
1997 compared to $2,590 for the Inception Period.
 
  Operating and Development Expenses. Operating and development expenses were
$692,041 for the year ended December 31, 1997 compared to $64,029 for the
Inception Period. This increase was primarily attributable to costs incurred
to obtain content and to enhance the features and functionality of
musicmaker.com's website and related systems.
 
  Sales and Marketing Expenses. Sales and marketing expenses were $7,780 for
the year ended December 31, 1997. There were no sales and marketing expenses
for the Inception Period.
 
                                      21
General and Administrative Expenses. General and administrative expenses
were $1,360,856 for the year ended December 31, 1997 compared to $306,381 for
the Inception Period. This increase was primarily due to increases in the
number of personnel and corporate facility expenses necessary to support the
growth of musicmaker.com's business and operations.
 
Liquidity and Capital Resources
 
  Net cash used in operating activities totaled $3,519,777 for the year ended
December 31, 1998 as compared net cash used in operating activities of
$1,101,275 for the year ended December 31, 1997. Net cash used in operating
activities for the year ended December 31, 1998 was primarily attributable to
the net loss of $4,654,767 offset by accrued compensation to related parties
of $30,665, an increase in accounts payable and accrued expenses of $297,250,
and an increase in long-term obligations of $257,143. Net cash used in
operating activities for the year ended December 31, 1997 was primarily
attributable to the net loss of $2,084,157, offset by an increase to accrued
compensation payable to related parties of $543,634, the issuance of stock and
warrants for services for $150,500, and an increase in accounts payable and
accrued expenses of $207,776.
 
  Cash used in investing activities was $217,961 and $299,755 for the years
ended December 31, 1998 and 1997, respectively. The increase from the year
ended December 31, 1997 to December 31, 1998 included the purchase of computer
equipment and software for $177,954, the purchase of leasehold improvements of
$36,823 and furniture and other office equipment of $3,184.
 
  Net cash provided by financing activities was $3,308,710 and $2,390,940 for
the year ended December 31, 1998 and December 31, 1997, respectively. Net cash
provided by financing activities, for the year ended December 31, 1998 was
through the issuance of outstanding preferred stock for $1,568,033 and the
issuance of common stock for $1,344,302. The net cash provided by financing
activities for this period also included the net proceeds from the issuance of
convertible notes of $396,375. Net cash provided by financing activities, for
the year ended December 31, 1997, was primarily through the issuance of
outstanding preferred stock for $1,700,000, issuance of common stock for
$440,940 and proceeds from the issuance of convertible notes of $250,000.
 
  On January 8, 1999, musicmaker.com signed a lease line agreement which
provides leasing for computer and related equipment as well as CD fabrication
equipment up to $200,000 between the signing of the agreement and June 8,
1999. Any equipment leased under this agreement will have a 24 month lease
term, and at the end of the lease term musicmaker.com will either be obligated
to buy the equipment at 10% of the original equipment cost or extend the lease
term for an additional 24 months. Borrowings under this lease line agreement
require payments due in advance with a monthly rental factor of .0498 for
months one through 24. The actual monthly rental will be determined by
multiplying the cost of the equipment by the applicable monthly rental factor,
plus any monthly maintenance charges. We will provide the lessor with a first
security interest in the equipment leased under this agreement for the
duration of the term of the lease. Musicmaker.com also signed the first lease
under this agreement which will have a monthly rental payment of $8,261. As
part of the lease line agreement, musicmaker.com issued a warrant to purchase
6,234 shares of its common stock at $4.81 per share which expires on January
8, 2009.
 
  On February 12, 1999, musicmaker.com signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. Borrowings
under this line of credit bear interest at Imperial Bank's prime rate of
interest plus 2%. The line of credit is secured by a blanket security interest
on all of our assets including general intangibles excluding previously leased
equipment. The line also has certain financial covenants, including minimum
net worth and liquidity ratios. At February 15, 1999, we did not have any
outstanding balances under this line of credit. Interest on any balance
outstanding is payable monthly with principal and all accrued interest due six
months from the date of the loan. In the event that equipment and software
purchases under the line are termed out, equal payments of principal and
interest will be due monthly for 24 months, starting on the first month
following the initial six month maturity. If the term of the credit facility
is extended, Imperial Bank will have the right to purchase warrants equal to
4% of the commitment amount.
 
                                      22
Musicmaker.com anticipates that it will have negative cash flows for the
foreseeable future. It is estimated that musicmaker.com will need to provide
for items such as computer storage, production equipment, distribution
equipment, hardware and software for computer systems, and furniture and
fixtures. Musicmaker.com expects to fund its purchase of such capital
equipment with its working capital, which will include the proceeds from this
offering.
 
  As of December 31, 1998, musicmaker.com had approximately $973,000 in cash
and cash equivalents. Musicmaker.com believes that the net proceeds from its
prior financings, this offering, and cash flows from operations, will be
adequate to satisfy its operations, working capital and capital expenditure
requirements for at least the next 12 months, although musicmaker.com may seek
to raise additional capital during that period. There can be no assurance that
such financing will be available on acceptable terms, if at all, or that such
financing will not dilute shares held by musicmaker.com's stockholders. See
"Risk Factors--We may require additional capital or financing in the future."
 
Year 2000 System Costs
 
  Computer systems, software packages and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."
 
  Musicmaker.com may realize exposure and risk if the systems it relies upon
to conduct day-to-day operations are not year 2000 compliant. The potential
areas of exposure include electronic data exchange systems operated by third
parties with whom musicmaker.com transacts business, certain products
purchased from third parties and computers, software, telephone systems and
other equipment used internally. To minimize the potential adverse effects of
the year 2000 problem, musicmaker.com established an internal project team
comprised of all functional disciplines. This project team has begun a three-
phase process of identifying internal systems (both information and non-
information technology systems) that are not year 2000 compliant, determining
their significance in the effective operation of musicmaker.com, and
developing plans to resolve the issues where necessary. Musicmaker.com has
been communicating with its suppliers and others with whom it does business to
coordinate year 2000 readiness. The responses received by musicmaker.com to
date indicate that steps are currently being taken to address this concern.
However, if such third parties are not able to make all systems year 2000
compliant, there could be a material adverse impact on musicmaker.com.
 
  After initial review of musicmaker.com's principal transaction processing
software through which nearly all of musicmaker.com's business is transacted,
management has determined musicmaker.com to be year 2000 compliant and, as
such, does not anticipate any material adverse operational issues to arise.
Musicmaker.com plans to complete the year 2000 compliance assessment by the
end of the first quarter 1999 and implement corrective solutions before the
end of the third quarter 1999. Based on current estimates, management expects
that musicmaker.com's future costs in connection with its year 2000 compliance
project will not exceed $10,000; however, future anticipated costs are
difficult to estimate with any certainty and may differ materially from those
currently projected based on the results of phase one of musicmaker.com's year
2000 project. The anticipated costs associated with musicmaker.com's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement musicmaker.com's future contingency plans.
Musicmaker.com has not yet developed a contingency plan in the event that any
non-compliant critical systems are not remedied by January 1, 2000, nor has it
formulated a timetable to create such contingency plan. Upon completion of our
review, if systems material to musicmaker.com's operations have not been made
year 2000 compliant in a timely manner, the year 2000 issue could have a
material adverse effect on musicmaker.com's business, financial condition and
results of operations.
 
 
                                      23
BUSINESS
 
Overview
 
  Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, format.
 
  We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
 
  .  Creedence Clearwater Revival
                              .  The Beach Boys           .  Ziggy Marley
                              .  Miles Davis              .  Johnny Cash
  .  Jerry Lee Lewis
                              .  John Coltrane            .  Dionne Warwick
  .  Little Richard
                              .  The Yardbirds with Eric Clapton
                                                          .  Muddy Waters
  .  Frank Zappa
                              .  Blondie                  .  The Blues
  .  Taylor Dayne                                            Brothers
                              .  Kansas                   .  The Kinks
  .  The Ramones
                                                          .  The Band
 
Industry Background
 
  Historically, the music industry has benefited from advances in technology,
such as the introduction of the CD in 1983. During the last ten years much of
the industry's growth resulted from consumers replacing existing record or tape
music collections with CDs. According to the Record Industry Association of
America, nine of the top ten selling albums were produced before 1982 and
include such established artists as The Eagles, Pink Floyd, Billy Joel,
Fleetwood Mac, Led Zeppelin, The Beatles, Boston and AC/DC.
 
  According to the Record Industry Association of America, domestic music sales
grew from $6.2 billion in 1988 to $13.7 billion in 1998. Of the $13.7 billion
in total sales, full length CDs continue to account for the greatest dollar and
unit volume, such sales increased by approximately 13% from 1997 to 1998.
 
  Musicmaker.com believes that substantial growth opportunities exist for sales
of music over the Internet. According to Jupiter Communications, LLC, total
online sales of pre-recorded music are projected to increase from $37.0 million
in 1997 to $1.4 billion in 2002. Musicmaker.com believes that while the
Internet provides an additional, price competitive distribution channel for
pre-recorded music, the potential exists to use the Internet as a value-added
method of distribution. Internet based retailers have certain other advantages
over traditional retail channels. Musicmaker.com estimates that music retail
stores generally stock between 10,000 and 39,000 of the available 200,000 CDs
and tend to carry a greater percentage of hit releases, often at the expense of
differing music genres and back titles from the libraries of record labels.
Additionally, online retailers are open 24 hours and Internet users and their
purchases can be tracked to provide demographic information for use in direct
marketing or other targeted programs.
 
  We believe that the demographic profile of consumers of recorded music has
aged along with the general population. According to the Record Industry
Association of America, domestic purchases of recorded music by
 
                                       24
those age 30 and over have increased from approximately 32% of the U.S. sales
in 1988 to approximately 48% of sales, or approximately $5.9 billion, in 1997.
We believe that the Internet represents an attractive retail and promotion
medium for customers in this age group as they are less "hits-driven" than
younger age groups, typically can afford to buy more titles at one time, often
own PCs and generally have credit cards, which are usually used to make
electronic payments. Despite the fact that those age 30 and over represent the
largest segment of the United States population and have the highest level of
disposable income, this group currently spends the smallest percentage of its
disposable income on music purchases. We attribute this phenomenon to the
allocation of most retail shelf space and promotional budgets to new releases,
which are typically targeted at younger audiences. We believe that a
significant opportunity exists in remarketing older titles to the 30 and over
age group. We believe that this group will be attracted to the flexibility of
our custom CDs.
 
  One of the latest technological innovations in the music industry has
centered on digital distribution, the downloading of compressed music files
over the Internet to a PC. Such music files can be stored to a PC or on a CD
using a read/write CD-ROM drive. Recently, MP3, a non-streaming compression
technology, has proliferated over the Internet, allowing users to freely
distribute songs, without making royalty payments to the music label or to the
artist holding the rights to such music. Certain factors, including bandwidth
constraints, a limited selection of music, difficulties with industry
acceptance, the required purchase of a specialized MP3 player and the lack of
portability associated with downloaded music, have limited the growth of MP3
to date. Nevertheless, MP3's ability to freely copy and transfer music and the
potential subsequent loss of revenue is of substantial concern to the music
industry.
 
  In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which utilizes IBM software, will
allow approximately 1,000 cable subscribers in San Diego to download music
from a library of 1,000 album titles and several hundred song titles provided
by the major record labels. The market trial is viewed by many as the first
step taken by the major record companies to consider the sale of digital music
online.
 
  Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs:
 
  .  Growth in sales of CD singles.
 
  .  Growth of the Internet as a viable retail medium.
 
  .  Increasing affluence of the over 30 generation.
 
  .  Continued prominence of classic rock albums.
 
  .  Record label desire to diversify distribution methods while protecting
     intellectual property rights.
 
MUSICMAKER.COM STRATEGY
 
  We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
 
  Offer a new way to buy licensed, customized music.  Through our proprietary
technology, we offer consumers a new method for customizing, digitally
downloading and purchasing music over the Internet. Unlike many online
retailers, we do not use the Internet simply to distribute products that can
be purchased elsewhere. Rather, our website and proprietary production
technology provide the ability to create a novel product--the
custom CD--that could not previously be mass marketed. We have implemented new
technology for digital downloading to help protect the intellectual property
rights of record labels.
 
  Offer most extensive selection of music for custom CD compilation and
digital downloading.  We intend to offer consumers the most extensive
collection of music available for use in custom CDs and digital downloading.
We have entered into exclusive and non-exclusive license agreements with more
than 85 music labels and currently have a music library of more than 150,000
songs. We intend to significantly expand our existing music catalog through
the development of content relationships with additional record labels,
including major labels.
 
  Increase website traffic through industry alliances and multiple
hyperlinks. We seek to establish strategic alliances with global music and
media companies to attract additional users to the musicmaker.com website. We
 
                                      25
are currently the exclusive provider or a featured retailer of custom CDs for
Columbia House, N2K, Platinum, Audio Book Club and Trans World. We intend to
continue to expand the number and depth of our marketing alliances and
affiliate programs to drive traffic and increase the number of third party
hyperlinks to musicmaker.com.
 
  Create strong brand awareness.  We currently promote our brands through
online and traditional media, special event driven promotions and artist-
specific offerings. We intend to enhance brand awareness of our website by
advertising and co-marketing as well as through strategic relationships
whereby other websites designate musicmaker.com as their online music retailer
for custom CDs.
 
  Establish genre-specific user communities.  By collecting information about
our customers, we are able to target demographic user groups, thereby
providing advertisers and sponsors with access to highly defined audiences.
This segmentation will enable advertisers and sponsors to customize their
messages through banner advertisements, event and program sponsorships and
music recording promotions. We intend to provide our advertisers and sponsors
with quantitative feedback on the effectiveness of their programs.
 
  Capitalize on cross-selling opportunities.  We intend to generate additional
revenue by drawing users to our website and providing hyperlinks to music
related merchandise sites offering posters, clothing and books. We intend to
generate cross-selling opportunities by establishing hyperlinks between artist
and fan club websites, placing posts in music related news groups and securing
reviews and event notices in appropriate online directories.
 
  Leverage technologies for additional formats. We intend to provide
additional products to consumers which may include custom music on mini-disc,
custom music videos on DVD, audio books on CD and software on CD-ROM. By
leveraging our existing technology to a variety of formats, we believe that we
will effectively increase the content and marketability of our products.
 
  Expand international presence.  We intend to capitalize on the global nature
of music and the Internet by building an international user base. We intend to
create local language versions of, and culture specific music content for,
musicmaker.com. We also intend to expand our international presence through
localized websites in countries with a demand for international music.
 
Music Content
 
  We have licensed music from record labels to expand and diversify our online
music library. We have focused primarily on independent record labels, which
represent approximately 20% of the $40 billion recorded music industry, and
have entered into content licenses with over 85 independent record labels.
 
  Our music collection currently contains more than 150,000 tracks licensed
from independent record labels including:
.  The All Blacks B.V.                .  Nimbus Communications International
    (Roadrunner)                          Limited
                                       .  Platinum Entertainment, Inc.
 .  Alligator Records
                                       .  Prestige Records, Ltd.
 .  Brunswick Record Corp.
                                       .  Reachout International Records,
 .  Cakewalk LLC (32 Records              Inc. (ROIR)
    Jazz)                              .  Rounder Records Corp.
 .  Del-Fi Records
                                       .  Storyville Records
 .  Fantasy Records, Inc.
                                       .  Sun Entertainment Corporation
 .  HNH International Limited
    (Naxos)                            .  Surrey House Music
 .  Koch International L.P.
                                       .  VelVel Records LLC
 .  Lightyear Entertainment, L.P.
                                       .  Viceroy Entertainment Group
 .  Minnesota Mining and
    Manufacturing Company (3M)
 
  Our music library contains significant catalogs of blues, jazz, classical,
rock (including heavy metal and punk), country, rhythm and blues, pop, gospel
and oldies. Set forth below is a sampling of the artists contained in our
music library, organized by music genre, for which we have licensed at least
ten songs.
 
                                      26
Sample Artists by Music Genre
 
Blues       .Marcia Ball              Jazz         .  Louis Armstrong
            .Elvin Bishop                          .  Chet Baker
            .Blues Brothers and Friends            .  Count Basie
            .Roy Buchanan                          .  Dave Brubeck
            .Otis Clay                             .  John Coltrane
            .Albert Collins                        .  Miles Davis
            .Buddy Guy                             .  Bill Evans
            .John Lee Hooker                       .  Stan Getz
            .Lightnin' Hopkins                     .  Dizzy Gillespie
            .Elmore James                          .  Billie Holiday
            .Albert King                           .  Charles Mingus
            .Brownie Mc Ghee                       .  Thelonious Monk
            .Roomful of Blues                      .  Charlie Parker
            .Memphis Slim                          .  Cole Porter
            .Muddy Waters                          .  Art Tatum
            .Junior Wells
            .Johnny Winter
 
Rock        .Atlanta Rhythm Section   Country      .Bellamy Brothers
            .The Band                              .Johnny Cash
            .Big Star                              .Roy Clark
            .Savoy Brown                           .Patsy Cline
            .Creedence Clearwater Revival          .The Gatlin Brothers
            .The Guess Who                         .Crystal Gayle
            .Kansas                                .Merle Haggard
            .The Kinks                             .Ronnie McDowell
            .Alvin Lee                             .Roger Miller
            .Alan Parsons                          .Juice Newton
            .Paul Rodgers                          .Billy Joe Royal
            .The Troggs                            .Conway Twitty
            .Bill Wyman
            .The Yardbirds with Eric Clapton
            .Frank Zappa
 
Metal       .  Annihilator            Soul/R & B   .  Barbara Acklin
            .  Biohazard                           .  Booker T. & The MG's
            .  Crimson Glory                       .  Cameo
            .  Deicide                             .  Gene Chandler
            .  King Diamond                        .  The Chi-lites
            .  Life of Agony                       .  George Clinton
            .  Machine Head                        .  Dramatics
            .  Motorhead                           .  The Gap Band
            .  Obituary                            .  Isaac Hayes
            .  Sepultura                           .  Etta James
            .  Type O Negative                     .  The Persuasions
                                                   .  Jackie Wilson
 
                                       27
Sample Artists by Music Genre (Continued)
 
Rock 'n     .  Jerry Lee Lewis          Pop         .The Beach Boys
Roll        .  Carl Lee Perkins                     .Peter Cetera
            .  Ritchie Valens                       .Roger Daltrey
                                                    .Taylor Dayne
                                                    .The Foundations
                                                    .KC & The Sunshine Band
                                                    .The Vogues
                                                    .Dionne Warwick
 
Reggae      .Black Uhuru                Alternative .Circle Jerks
            .Dennis Brown                           .The Fleshtones
            .Culture                                .In The Nursery
            .Marcia Griffiths                       .The Legendary Pink Dots
            .The Heptones                           .Marine Girls
            .Gregory Isaacs                         .The Moon Seven Times
            .The Paragons                           .Plastic Noise Experience
            .Lee "Scratch" Perry                    .Television
            .Yellowman
 
 
Folk        .  The Burns Sisters        Bluegrass   .Bela Fleck
            .  Ramblin' Jack Elliott                .The Bluegrass Album Band
            .  John Fahey                           .J.D. Crowe & The New
            .  David Grisman                        South
            .  Peter Keane                          .The Freight Hoppers
            .  Leo Kottke                           .John Hartford
            .  John McCutcheon                      .The Johnson Mountain Boys
            .  Tom Paxton                           .The Nashville Bluegrass
            .  Tony Rice                            Band
            .  Dave Van Ronk                        .Doc Watson
            .  Cheryl Wheeler
 
Punk        .The Buzzcocks              Easy Listening
                                                    .Ronnie Aldrich
            .The Dickies                            .Arthur Ferrante
            .The Dictators                          .Nick Ingman Orchestra
            .UK Subs                                .Intimate Broadway
                                                    .Peter Nero
                                                    .  The Royal Philharmonic
                                                       Orchestra
                                                    .  Pat Valentino
 
Techno
            .  Chosen Few
            .  Fear Factory
            .  Front Line Assembly
            .  Intermix
            .  Technohead
 
  We intend to significantly expand and diversify our existing music catalog
through the development of content relationships with additional record labels.
 
 
                                       28
Downloading of Music on the Internet
 
  Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately five million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
 
  We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
 
Marketing
 
  Our marketing strategy is designed to build brand awareness, attract repeat
users and direct traffic to our website through hyperlinks with strategic
partner websites. We use a combination of advertising and promotion, both
traditional and online, to accomplish these objectives.
 
 Marketing Alliances
 
  To promote our custom CDs and establish musicmaker.com as the premier brand
for custom CDs, we have entered into marketing alliances with major music
marketing companies including Columbia House, N2K, Platinum and Trans World.
We have recently entered into a marketing alliance with Audio Book Club and
intend to seek additional alliances with music and non-music retailers. These
strategic alliances are intended to drive traffic to our website, increase the
number of websites where our custom CDs can be purchased, and co-promote our
products through direct mail campaigns. Through marketing alliances,
musicmaker.com seeks to be the exclusive custom CD provider featured on a
partner's website or in other promotional materials or activities. We believe
that such alliances provide access to a targeted customer base, such as
customers who purchase music or music related merchandise online.
 
  The Columbia House Company Alliance.  We are currently the exclusive
marketer and featured retailer of custom CDs for Columbia House, a leading
record and video club, jointly owned by Sony Music Entertainment, Inc. and
Time Warner Inc. We provide our custom CD compilation services to Columbia
House's 15 million club members through website and direct mail promotions.
 
  Columbia House displays and promotes musicmaker.com's custom CDs on
ColumbiaHouse.com, its club website and TotalE.com, its non-club website that
offers music, videos, DVDs, computer software and other related merchandise to
the general public. Columbia House also provides a hyperlink directly to a co-
branded musicmaker.com and Columbia House website.
 
  We will also market our custom CDs through a series of print promotion
campaigns in conjunction with the Columbia House's direct mail program.
Through these direct promotion campaigns, we can market our products to all of
Columbia House's members, including those without Internet access.
Musicmaker.com can include promotional inserts in at least six Columbia House
direct mailings per year. The inserts will promote both the co-branded and
musicmaker.com websites and allow club members to purchase custom CDs using a
mail-in form.
 
                                      29
Our marketing alliance with Columbia House expires in September 2001. Under
this alliance, we may not sell custom CDs through any other music club without
prior consent of Columbia House. Additionally, we have exclusive rights to
offer our custom CDs to Columbia House's members unless and until one of our
competitors offers a significant repertoire of music content unavailable
through musicmaker.com. Columbia House and musicmaker.com share the profits
net of certain expenses from custom CD sales originating from Columbia House
members and from users referred from their websites. The allocation of net
profits is calculated based upon the terms of the musicmaker.com license
agreement covering each of the selected song titles.
 
  If during the term of the Columbia House alliance, Sony or Warner
exclusively allow Columbia House club members to create custom CDs using music
from their libraries, Columbia House is required to use musicmaker.com as its
custom CD provider. Columbia House may terminate our alliance upon not less
than thirty days notice if Mr. Puthukarai ceases to be musicmaker.com's
President and Chief Operating Officer and Columbia House deems his replacement
incompatible with their interest, or Columbia House determines after the first
six musicmaker.com promotional mailings to its members that its financial
returns do not justify continuing the relationship. We anticipate mailing our
first promotional insert to Columbia House members in the second quarter of
1999. Columbia House received 129,870 warrants for common stock exercisable at
$4.62 per share prior to September 1, 2001 as part of this marketing alliance.
 
  Platinum Entertainment, Inc. Alliance.  We are the exclusive marketer of
custom CDs and digitally downloaded music for Platinum, the largest
independent music label in the United States with artists such as Peter
Cetera, Roger Daltry, Crystal Gayle and Dionne Warwick. Platinum displays and
promotes our custom CDs on their PlatinumCD.com website which has a direct
hyperlink to musicmaker.com. Musicmaker.com also has exclusive license rights
to Platinum's entire music catalog of approximately 13,000 songs.
 
  We have a marketing alliance and license agreement with Platinum that
expires in September 2003. We currently have exclusive rights to Platinum's
music content and to offer custom CDs on Platinum's website. After the first
two years of our alliance, however, Platinum may elect to provide its library
on a non-exclusive basis to other custom compilation providers. Net profits
from the sale of custom CDs under the alliance are allocated based upon the
song titles selected, from which website customer orders originate and the
exclusivity of the alliance. Under this alliance, we may not use music content
licensed from Platinum for sale of custom CDs through an automated kiosk.
 
  Under our marketing and music content alliance with Platinum we intend to
offer approximately 13,000 songs and 1,300 albums in MP3 format beginning in
the second quarter of 1999.
 
  Audio Book Club, Inc. Alliance.  We have an exclusive marketing alliance
with Audio Book Club, a provider of direct to consumer marketing of audio
books with over 1.3 million audio users and buyers. Under this arrangement,
musicmaker.com will be the exclusive provider of custom CDs through the
AudioBookClub.com and BooksAloud.com websites and through print promotions in
direct mailings to members.
 
  Our marketing alliance with Audio Book Club expires in January 2002, with
three-year renewals to be negotiated with terms no less favorable than the
current arrangement. Under this alliance, musicmaker.com will promote its
custom CDs:
 
 .  On Audio Book Club's websites.
 
 .  By participating in at least six direct mailings to club members per year.
 
 .  By sponsoring annual Valentine's Day and Christmas promotions.
 
Net profits of sales to Audio Book Club members will be allocated based upon
the license arrangements covering the songs selected. Audio Book Club may
terminate the marketing alliance upon 30 days' notice after the first six
months of the relationship.
 
 
                                      30
Trans World Entertainment Corporation Alliance.  We have a non-exclusive
marketing alliance with Trans World, one of the largest music retailers in the
United States operating approximately 520 specialty retail music and video
stores including approximately 320 mall locations under the names Record Town,
Saturday Matinee, and F.Y.E., and approximately 200 freestanding stores under
the names Coconuts Music and Movies, Planet Music, Strawberries and Waxie
Maxie's. Under this alliance, musicmaker.com and Trans World will establish a
co-branded, co-promoted marketing campaign to sell our custom CDs over the
Internet through Trans World's TWEC.com website.
 
  Our marketing alliance with Trans World is for a one-year term, renewable
from year to year, and begins upon activation of the link between
musicmaker.com and TWEC.com. This alliance requires musicmaker.com to accept
any music content owned or licensed and offered by Trans World for inclusion
in custom CDs. Musicmaker.com and Trans World will divide the gross revenues
received from orders under the alliance based upon the license arrangement
covering the content included on custom CDs.
 
  N2K Inc. Alliance.  Musicmaker.com markets its custom CDs with N2K, a major
Internet retailer of music CDs. Musicmaker.com and N2K establish co-branded
websites through which N2K customers can purchase our custom CDs from select
genres and artist or occasion--specific music libraries. In 1998, the first
two joint promotions, featuring Miles Davis and Christmas music compilations,
were launched.
 
  Musicmaker.com has agreed to offer N2K the right of first negotiation,
except with respect to Columbia House, for any genre, artist or occasion-
specific promotions. Musicmaker.com and N2K allocate proceeds from the sale of
promotional custom CDs based upon the website from which the order originates
and the shipping option chosen by the customer. The terms of our relationship
with N2K are subject to continued renewal and renegotiation as a result of a
merger between N2K and CDnow.
 
 Affiliate Program
 
  We intend to position our website as part of an interconnected online music
network through our affiliate program. This program will allow customers who
visit affiliate websites to hyperlink to musicmaker.com through banner ads and
other prominent displays. Musicmaker.com will allocate a portion of revenue
from sales of custom CDs to the referring affiliate.
 
 Merchandising and Consumer Programs
 
  Insider's Club.  Our Insider's Club membership program awards members a free
song(s) on custom CDs after a specified number of purchases. This club allows
us to collect user demographics, foster repeat purchases, and attempt to
capture a greater portion of a member's purchases of custom CDs and digitally
downloaded music. Consumers joining the Insider's Club submit personal and
credit profiles to eliminate time and effort required for the collection of
billing and shipping information.
 
  Special Promotional Sales.  We intend to produce and license custom CDs to
marketers for use as promotional items. We will have specialized sales
personnel who will target large companies for custom-made, promotional CD
products.
 
  Targeted Consumer Marketing.  We collect information on website visitors and
customers such as point of origin, advertisement banner clicks, destination
after leaving the musicmaker.com website, genres searched, previous purchases
and geographic location. Additional customer specific marketing data is
obtained through the musicmaker.com Insider's Club. This information is used
to develop advertising strategies and marketing campaigns and serves as the
basis for our one-to-one marketing efforts. We intend to deploy push-marketing
programs consisting of targeted e-mails, which may include discount coupons
and information regarding new releases and special sales and promotions. We
have also developed a Music Advisor program based on "intelligent agent"
software licensed from Net Perceptions, Inc. that compares consumers'
interests based upon past purchases and other activities and provides
personalized recommendations. Musicmaker.com believes that such personalized
measures are important in building and maintaining customer loyalty and in
positioning musicmaker.com as a preferred source of custom CDs and digitally
downloaded music.
 
                                      31
Pricing
 
  We price our custom CDs to be competitive with pre-recorded CDs sold in
retail locations. A five song custom CD is priced at $9.95 with each
additional song priced at $1.00, plus an additional charge for shipping and
handling. Songs digitally downloaded to a consumer's PC are priced at $1.00
per song.
 
 Electronic Kiosks
 
  We intend to offer our custom CDs through stand-alone, touch screen, user-
friendly kiosks placed in strategic locations in 1999. We intend to place
these kiosks in retail music stores, university bookstores, national movie
theater chains, major book chains, convenience stores, computer store chains,
video chains, and other places frequented by potential music purchasers. With
the musicmaker.com proprietary kiosk system, a consumer can select up to 20
songs from a library of music stored locally in the kiosk. The custom CD is
fabricated on a proprietary recording system housed within the kiosk and
delivered automatically to the consumer within approximately five minutes of
placing the order. We believe that the presence of these kiosks in strategic
locations will further promote musicmaker.com as the premier brand for custom
CDs.
 
Technology
 
  Our technology enables us to rapidly manufacture and ship custom CDs that
are equivalent in sound quality to pre-recorded CDs. This process technology
consists of a distributed storage and high speed CD fabrication system running
across a high speed fiber local area network managed and controlled by
proprietary software we developed.
 
  We store and maintain our digital library of music titles in uncompressed
(wav) format on storage arrays of hard drives. Each array consists of up to
eight 36 gigabytes magnetic hard disk drives that holds approximately 288
gigabytes of digital information, or approximately 10,000 songs. Music data is
typically received in digital format on pre-recorded CDs or DAT. Certain older
titles are converted to DAT from analog format prior to being transferred to
the arrays for permanent digital storage.
 
  The array architecture is scalable and additional arrays can be added to
accommodate an increase in our online music library. Using this method, our
configuration can manage up to terabytes of musical data (or millions of songs
of storage capability). We believe that the array configuration is a cost-
effective storage method as it can scale to store additional data as
necessary; provide search and retrieval functions up to 100 times faster; and
provide a more reliable search, retrieval, and delivery capability than
alternative systems including CD jukeboxes and optical jukeboxes. Such
alternative systems do not scale as easily or effectively and also contain
fragile moving parts. Our arrays are complemented by a magnetic tape backup
system, and each array can be re-recorded in approximately 15 minutes.
 
 Database Management
 
  Our system uses a software program to manage the vast amount of digital
music and customer information stored in the arrays. This program enables the
system to:
 
  .  Scan the stored musical data by artist, title, music genre or key word.
 
  .  Retrieve the music from the arrays.
 
  .  Deliver the information to the fabrication units that produce the custom
     CDs.
 
The software runs on our workstations' PCs that are linked to several magnetic
storage arrays. These PCs run in parallel on our high speed network. As a
result, any PC on the system can find musical information contained in any
array. The database is maintained on a Sun Microsystems, Inc. server and UNIX
operating system. The workstations and PCs that run our web, storage, and news
audio servers are built to our specifications.
 
 CD Fabrication
 
  Our CD fabrication units automatically write musical information to a CD as
well as print song titles, artist names, graphics, pictures and other
personalized information on the CD. Based on an average CD selection of ten
songs, the custom CD can be produced in five minutes, or eight times as fast
as manual fabrication. Musical information is received by the fabrication
unit, sits in a queue and is assigned a consumer order number so that a
customer can check on the status of their order online. A single CD
fabrication unit is capable of producing up
 
                                      32
to 1,500 CDs in a 24 hour period. The present capacity of our three
fabrication units is approximately 4,500 CDs per 24 hour period. Our
production system is scalable and can grow to support production of tens of
thousands of CDs per day (or millions of CDs per year). The scalable feature
of the fabrication units does not involve any modification to our software.
 
 Fault Tolerance
 
  Our storage and production architecture uses redundant servers and a tape
storage system for backup, to minimize downtime due to system outages or
maintenance needs. The largest single point of failure in our storage system
is a single magnetic disk or 36 gigabytes (or approximately 1,000 songs), a
relatively small portion of our music library. Our architecture provides a
back-up system that allows continuous operation through redundant servers in
the event of occasional component failure. Even in the event of a complete
failure of an array, the system can redeposit the data digitally on the arrays
using high speed backup at a rate of approximately 4,000 songs per hour.
 
 
 musicmaker.com Website.
 
  Musicmaker.com's website is easy to use, graphical in design and allows
custom music selection of titles from our music library. The website has a
built-in full-text search engine to allow customers to search by artist,
title, genre and keyword to find and display appropriate songs or artists.
Furthermore, each song has a 30-second Real Audio sample track which customers
can listen to prior to making a song selection.
 
  The web site's personalization capabilities offer the option of printing a
40-character message on the CD surface itself, on the tray card and on the
sides (spines) of the jewel box. Musicmaker.com also provides the capability
for the customer to select an occasion-specific graphic (e.g., birthday cake,
rose, diploma, etc.) to be printed on the CD surface, or upload a digital
picture or graphic to the server for printing in color on the CD surface.
 
 Digital Downloading of Music over the Internet
 
  Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately 5.0 million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
 
  We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
 
Quality Assurance and Customer Service
 
  We believe that high levels of consumer service and support are critical to
retaining and expanding our user base. After a CD is manufactured, it is
loaded into our testing facilities where the music is sampled by computer to
assure quality. The system also monitors the production process real time
during fabrication, and performs error checking throughout. Custom CDs are
then shipped within 24 hours of order.
 
  Our representatives respond to inquiries regarding our products and register
consumers' credit card information over the phone. We believe that these
representatives are a valuable source of consumer feedback which we use to
improve our services. Customer service will be assisted by automated e-mails
which notify consumers about the status of their orders.
 
Competition
 
  The market for providing music (either pre-recorded CDs or custom CDs) on
the Internet is highly competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of
 
                                      33
websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, we expect that
competition will continue to intensify.
 
  Currently, there are more than 100 music retailing websites on the Internet,
most of which sell pre-recorded music CDs which can be purchased in most
retail music stores. In addition to intense competition from Internet music
retailers, we also face competition from traditional retail stores, including
chains and megastores, mass merchandisers, consumer electronics stores and
music clubs. The most visible custom compilation competitors include Custom
Revolutions, Inc., CDuctive, and amplified.com. Additionally, the major record
labels, often with resources greater than musicmaker.com's, may decide to
enter the custom CD business directly and would as a result be potential
competitors.
 
  We also face significant and increasing competition in the growing market to
provide digitally downloaded music, specifically for music files in MP3
format. Competition to provide digitally downloaded music can currently be
found on the websites of existing online music retailers such as MP3.com and
GoodNoise Corporation, websites established by recording artists and websites
of record labels. Catalogs of songs available in MP3 format are also provided
by internet portals such as Lycos. We expect the competition to provide MP3
files to intensify with further entry by additional record labels, artists and
portals, including those with greater resources and music content than
musicmaker.com. Recently, the five major record labels announced that they
have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods" and
"Risk Factors--The online music industry is extremely competitive."
 
  We believe that our primary competitive advantages in providing music
entertainment products and services via the Internet are:
 
 .  Brand recognition.                    .  High quality custom CDs.
 
 
 .  Ease of use of our customization      .  Availability and high level of
   process.                                 consumer support.
 
 
 .  Competitive price of our custom       .  Technical expertise and
   CDs.                                     experience.
 
 
 .  Large online library of music         .  Music industry relationships
   available for custom CDs and             and experience.
   digital downloading.
 
 .  Scalable, cost-effective
   technology.
 
  Our success in this market will depend heavily upon our ability to provide
high quality, entertaining content, along with cutting-edge technology and
value-added Internet services. Other factors that will affect our success
include our continued ability to attract experienced marketing, sales and
management talent.
 
  Many of our current and potential competitors in the Internet and music
entertainment businesses have longer operating histories, significantly
greater financial and marketing resources, greater name recognition and larger
existing consumer bases than musicmaker.com. These competitors may be able to
respond more quickly to new or emerging technologies and changes in consumer
requirements and to devote greater resources to the development, promotion and
sale of their products or services than musicmaker.com. There can be no
assurance that we will be able to compete successfully against current or
future competitors.
 
  Given the large growth potential of this marketplace, we believe that
competitors will enter the marketplace. We believe, however, that we have a
significant first mover advantage. We have established preliminary music and
marketing alliances with significant music marketing companies and maintain a
strong foundation of technological and music industry expertise. We believe
that we will succeed in building a high level of brand awareness to establish
dominance prior to the market entrance of a significant competitor. See "Risk
Factors--The online music industry is extremely competitive."
 
EMPLOYEES
 
  We believe that our employees and their knowledge and capabilities are a
major asset of musicmaker.com. We have been successful in attracting and
retaining employees skilled in our core business competencies and intend to
continue to employ highly skilled personnel.
 
                                      34
As of January 31, 1999, we employed 15 full-time employees and consultants.
We believe that our relations with our employees are good. None of our
employees are covered by collective bargaining agreements.
 
  There is significant competition for employees with the managerial,
technical, marketing and sales skills required to operate our business. Our
success will depend in part upon our ability to attract, retain, train and
motivate highly skilled employees. See "Risk Factors--We depend upon hiring
and retaining qualified employees."
 
Intellectual Property and Proprietary Rights
 
  We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as contractual restrictions to protect our technology. It is our
policy to require that those persons with access to our proprietary technology
and information enter into confidentiality agreements with us upon the
commencement of their employment, consulting or other contractual
relationships.
 
  We seek to protect our storage and fabrication system under patents and our
brand names under trademarks as noted below. Except as noted below, we
presently have no other patents, trademarks or patent/trademark applications
pending. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or duplicate aspects of our production system or
to obtain and use information that we regard as proprietary. Policing
unauthorized use of our intellectual property is difficult, and there can be
no assurance that our efforts to protect our proprietary rights will be
adequate or that our competition will not independently develop and patent
similar or superior technology. In addition, the laws of some foreign
countries may not provide protection of our proprietary rights to as great an
extent as do the laws of the United States.
 
  There can be no assurance that third parties will not claim infringement by
us with respect to others' current or future patent or proprietary rights. We
expect that Internet music content providers will be increasingly subject to
infringement claims as the number of issued Internet related and business
model patents and music delivery websites increases and the functionality of
music delivery systems based upon new technologies trend toward a similar
appearance. Defending against any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require us to enter into additional royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, and could have a material adverse effect upon our
business, results of operations, and financial condition.
 
  Patents. We have been issued a notice of allowance for a patent application
by the U.S. PTO for a system for and method of producing custom CDs, which
resulting patent will expire in 2016. We own two related U.S. patent
applications currently pending in the U.S. PTO. We also own a pending
international counterpart patent application corresponding to the subject
matter of these U.S. patent applications. In addition, we have filed three
U.S. patent applications relating to kiosk technology and CD jewel cases.
 
  Trademarks. We own a number of trademarks based on our use of those marks in
commerce, and have applied to the U.S. PTO to federally register such marks as
well as others based on our intent to use them. We use the marks MUSIC
CONNECTIONTM and MUSICMAKERTM, in commerce, and have applied to register each
of these trademarks with the U.S. PTO. We have also filed two additional
trademark applications for CD KITTM and MUSICMAGICTM based on our intent to
use such marks. See "Risk Factors--We depend upon intellectual property rights
and risk having such rights infringed."
 
Property
 
  Our headquarters occupy approximately 4,500 square feet of general office
space. The monthly rent for this space is approximately $8,000. Our current
lease is set to expire in June 2005. We believe that our current leasehold
facilities are adequate for our intended use for the foreseeable future.
 
Legal Proceedings
 
  We are not currently a party to any pending lawsuits, nor do we know of any
potential claims which, in the aggregate, could have a material adverse effect
on our business, financial condition or results of operations. Certain aspects
of our business and potential changes with regard to government regulation of
Internet commerce may, however, increase our risk of liability. See "Risk
Factors."
 
                                      35
MANAGEMENT
 
  The following table sets forth certain information regarding our executive
officers and directors:
Name                      Age   Position
   ----                      ---   --------
Robert P. Bernardi.......  46   Chairman of the Board of Directors and Co-Chief Executive Officer
   Devarajan S. Puthukarai..  55   Director, President, Co-Chief Executive Officer and
                                   Chief Operating Officer
   Irwin H. Steinberg.......  78   Director, Vice Chairman of the Board of Directors
   William Crowley..........  44   Vice President of Marketing and Sales
   Mark A. Fowler...........  38   Chief Financial Officer and Director of Finance and Administration
   Edward J. Mathias........  54   Director
Executive Officers and Directors
 
  Robert P. Bernardi.  Mr. Bernardi is musicmaker.com's founder, Chairman of
the Board of Directors and Co-Chief Executive Officer. Mr. Bernardi has served
as a director since Inception. From 1990 to 1996, Mr. Bernardi was a co-
founder, Chairman of the Board of Directors and Chief Executive Officer of
TREEV, Inc. (formerly Network Imaging Corporation), a publicly-held software
company for which he continues to serve as a director. From 1988 to 1990, Mr.
Bernardi was an independent consultant in the document imaging and
telecommunications fields. From 1987 to 1988, Mr. Bernardi was a co-founder,
President and Chief Executive Officer of TranSwitch Corporation, a publicly-
held company that designed high-speed telecommunications chips. From March
1984 to December 1987, Mr. Bernardi was Chairman of the Board of Directors and
Chief Executive Officer of Spectrum Digital Corporation, a publicly-held
telecommunications equipment manufacturing company. From 1984 to 1987, Mr.
Bernardi was a co-founder and director of PictureTel Corporation, a publicly-
held manufacturer of full-motion video conferencing systems. Prior to 1984,
Mr. Bernardi held various executive management positions with MCI
Communications Corporation, Mobil Corporation, Booz, Allen & Hamilton, Inc.
and The MITRE Corporation. Mr. Bernardi earned a Bachelor of Science degree in
Physics and a Master of Science degree in Business and Economics from the
State University of New York at Stonybrook.
 
  Devarajan S. Puthukarai.  Mr. Puthukarai is musicmaker.com's President, Co-
Chief Executive Officer and Chief Operating Officer and has served as director
since April 1997. From 1991 to April 1997, Mr. Puthukarai was President of
Warner Music Media, a division of Warner Music Enterprises, a Time Warner Inc.
company engaged in the business of promoting new and upcoming artists. From
1984 to 1990, Mr. Puthukarai was President of RCA Direct Marketing Inc./BMG
Direct Marketing Inc., launching the country's first CD music club and
building the world's largest classical music club. Mr. Puthukarai earned his
Bachelor of Science and Bachelor of Law degrees from Madras University in
India. Mr. Puthukarai earned a Master of Business Administration degree from
the Indian Institute of Management, a Harvard/Ford Foundation school in
Ahemadabad, India.
 
  Irwin H. Steinberg.  Mr. Steinberg has been a musicmaker.com director and
Vice Chairman of the Board of Directors since January 1997. Mr. Steinberg also
serves as a consultant to musicmaker.com. From 1982 to the present, Mr.
Steinberg has been President of IHS Corporation, a consulting firm
specializing in the music industry. From 1975 to 1982, Mr. Steinberg was
Chairman and Chief Executive Officer of PolyGram Records, Inc. Mr. Steinberg
was co-founder of Mercury Records Corporation. From 1946 to 1975, Mr.
Steinberg was employed with Mercury Records Corporation where he progressed
from Chief Financial Officer to Executive Vice President to President, which
later position he held from 1968-1975. While employed by PolyGram Records,
Inc. and Mercury Records Corporation, Mr. Steinberg was a member of the RIAA.
Mr. Steinberg currently serves as an adjunct Professor at Columbia College of
the Arts, in Chicago, where he teaches graduate courses in music business. Mr.
Steinberg holds a Bachelors degree from the University of Chicago Business
School and a Masters degree from the California State University at Domingo
Hills.
 
 
                                      36
William Crowley.  Mr. Crowley has served as musicmaker.com's Vice President
of Marketing and Sales since August 1996. From 1995 to 1996, Mr. Crowley was a
Vice President at Warner Music Enterprises where he was responsible for
advertising, creative services and circulation marketing for its sampling
programs and roster of music magazines. From 1993 to 1995, Mr. Crowley was
Vice President at PolyGram Group Distribution, Inc. where he was responsible
for direct development of both music products and new channels of distribution
for PolyGram labels. From 1990 to 1993, Mr. Crowley was the Director of
Marketing and Product Development at Time Life Music where he was responsible
for new product and business activities for popular and classical music
products. From 1981 to 1990, Mr. Crowley was Director of Artists Repertoire
and Merchandising at BMG Direct Marketing, Inc. where he was responsible for
product selection and development, and merchandising and market research for
BMG music clubs. Mr. Crowley earned a Masters degree in Business
Administration from New York University and a Bachelors degree in Political
Science and Economics from Northwestern University.
 
  Mark Fowler.  Mr. Fowler has served as musicmaker.com's Chief Financial
Officer since January 1999 and as its Director of Finance and Administration
since April 1998. From 1995 to 1998, Mr. Fowler was the Controller at
BioReliance Corporation, a publicly-held international contract research
organization. From 1994 to 1995, Mr. Fowler was the Controller at Fusion
Lighting, Inc., an international research and development company. From 1991
to 1994, Mr. Fowler was the Controller at Excalibur Technologies Corporation,
a publicly-held software development firm. Prior to 1991, Mr. Fowler held
several positions, including a consultant position with Booz, Allen &
Hamilton, Inc. Mr. Fowler is a certified public accountant in the State of
Virginia. He earned a Bachelor of Science degree in Finance from Radford
University and is currently enrolled at the Johns Hopkins University pursuing
a Masters degree in Business Administration.
 
  Edward J. Mathias.  Mr. Mathias has served as a musicmaker.com director
since December 1996. Mr. Mathias is a Managing Director and assisted in
founding The Carlyle Group L.P., a Washington, D.C.-based merchant bank. Mr.
Mathias is also a special limited partner in Trident Capital, a partnership
focusing on business and information service companies. Mr. Mathias currently
serves as a director for Sirrom Capital Corporation, U.S. Office Products
Company, Inc., Condor Technology Solutions, Inc. and U.S.A. Floral Products,
Inc., each a publicly-held company. In addition, Mr. Mathias sits on a number
of advisory committees for private equity partnerships. From 1971 to 1993, Mr.
Mathias held various positions with T. Rowe Price Associates, Inc., an
investment management organization, most recently as a Managing Director. Mr.
Mathias has served on T. Rowe Price's Board of Directors and was a member of
its Management Committee for over ten years. Mr. Mathias holds a Masters
degree in Business Administration from Harvard Business School and a Bachelors
degree from the University of Pennsylvania.
 
  Musicmaker.com intends to appoint an additional independent director prior
to the consummation of this offering.
 
Classified Board of Directors and Executive Officers
 
  Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three classes of
directors, designated Class A, Class B and Class C directors, serving
staggered three year terms. With respect to the present Board (consisting of
five members), the term of the Class A director,      , will expire at the
2000 annual meeting of stockholders, the terms of the Class B directors,
Mr. Mathias and Mr. Steinberg, will expire at the 2001 annual meeting of
stockholders and the terms of the Class C directors, Mr. Bernardi and Mr.
Puthukarai, will expire at the 2002 annual meeting of stockholders. One
additional independent director will be designated prior to the completion of
this offering in order to fill the vacancy presently existing on the Board of
Directors. Directors will be elected at annual meetings of stockholders to
serve a three year term and until their respective successors are duly elected
and qualify, or until their earlier resignation, removal from office, or
death. The remaining directors may fill any vacancy on the Board of Directors
for an unexpired term.
 
  Executive officers are appointed by and serve at the discretion of the Board
of Directors.
 
                                      37
Committees of the Board of Directors and Compensation
 
  The Board of Directors has designated an Audit Committee of the Board of
Directors, currently consisting of        and Mr. Mathias. The Audit Committee
is responsible for reviewing, along with our independent public accountants,
the scope of our accounting audits, as well as our corporate accounting
practices and policies. The Audit Committee shall also review our accounting
and financial controls, and be available to our independent public accountants
for any necessary consultation.
 
  The Board of Directors has also designated a Compensation Committee of the
Board of Directors, currently consisting of Mr. Bernardi, Mr. Mathias and
      . The Compensation Committee shall review the performance of our
management and recommend and approve the compensation of and the issuance of
stock options to certain executive officers and employees pursuant to our
stock option plan.
 
  Musicmaker.com directors currently do not receive a fee for their service on
the Board of Directors or any committee thereof. Directors receive
reimbursement to cover their reasonable expenses incurred in attending such
meetings. Directors are eligible to receive stock options under
musicmaker.com's stock option plan. Pursuant to the terms of his consulting
agreement, Mr. Steinberg, musicmaker.com's Vice Chairman of the Board,
receives compensation of $1,200 per meeting of the Board of Directors or any
committee.
 
Compensation Interlocks and Insider Participation
 
  The current members of the Compensation Committee are Mr. Bernardi, Mr.
Mathias and       . Accordingly, to date, the Compensation Committee,
including directors who are or were executive officers of musicmaker.com, has
made all determinations concerning compensation of musicmaker.com's executive
officers. During his term on the Compensation Committee, Mr. Bernardi has
agreed not to participate in decisions regarding his own compensation. The
Board of Directors has provided for the reconfiguration of the Compensation
Committee which, upon completion of this offering, will be composed of two
non-employee directors of musicmaker.com. See "--Committees of the Board of
Directors and Compensation" and "--Stock Option Plan."
 
Executive Compensation
 
  The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to musicmaker.com in all capacities during the
fiscal year ended December 31, 1998, by musicmaker.com's chief executive
officer and other executive officers whose salary and bonus for fiscal year
1998 exceeded $100,000 (the "Named Executive Officers").
 
                          Summary Compensation Table
Long-Term
                                                             Compensation Awards
                                                             -------------------
                                        Annual Compensation   Number of Shares
                                        --------------------     Underlying
      Name and Principal Position       Salary ($) Bonus ($)     Options (#)
      ---------------------------       ---------- --------- -------------------
Robert P. Bernardi.....................  $175,000       --         129,870
 Chairman of the Board of Directors and
 Co-Chief Executive Officer
Devarajan S. Puthukarai................  $250,000  $100,000        129,870
 President, Co-Chief Executive Officer
 and Chief Operating Officer
38
The following table sets forth information regarding the grant of options to
purchase musicmaker.com's common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998.
 
                             Option Grants in 1998
Potential Realizable Value
                                                                         at Assumed Annual Rates
                                                                             of Stock Price
                                                                         Appreciation for Option
                                       Individual Grants                        Term (1)
                         --------------------------------------------- ---------------------------
                         Number of  Percentage of
                         Securities Total Options
                         Underlying  Granted to   Exercise
                          Options   Employees in    Price   Expiration
          Name            Granted    Fiscal 1998  Per Share    Date         5%            10%
          ----           ---------- ------------- --------- ---------- ------------- -------------
Robert P. Bernardi......   83,117       23.7%       $5.29      2003    $   1,960,000 $   3,960,000
                           46,753       13.3         4.81      2008        1,125,000     2,250,000
Devarajan S.
 Puthukarai.............   83,117       23.7         5.29      2003        1,960,000     3,960,000
                           46,753       13.3%       $4.81      2008    $   1,125,000 $   2,250,000
--------
(1) Potential Realizable Value assumes that the common stock appreciates at
    the indicated annual rate (compounded annually) from the grant date until
    the expiration of the option term and is calculated based on the
    requirements promulgated by the Securities and Exchange Commission.
    Potential Realizable Value does not represent musicmaker.com's estimate of
    future stock price growth.
 
  The following table sets forth certain information regarding the number and
value of securities underlying options held by each of the Named Executive
Officers at the end of fiscal 1998. No options were exercised by any of the
Named Executive Officers during 1998.
 
             Aggregate Option Exercises and Year-End Option Values
Number of Securities
                                                 Underlying Unexercised
                                              Options at December 31, 1998
                                              --------------------------------
                    Name                       Exercisable      Unexercisable
                    ----                      -------------    ---------------
Robert P. Bernardi...........................          20,780            109,090
Devarajan S. Puthukarai......................          20,780            109,090
Employment Agreements and Consulting Agreements
 
  Mr. Bernardi and Mr. Puthukarai each have employment agreements with initial
terms through December 7, 2002. These agreements require that each commit
substantially all of his time and effort to furthering musicmaker.com's
interests and restrict competition with musicmaker.com during the term of the
agreement and for one year following termination. Under the employment
agreements, Mr. Bernardi and Mr. Puthukarai receive base salaries of $175,000
and $250,000 per annum, respectively. Each is eligible for payment of bonuses
and stock options as determined by the Compensation Committee of the Board of
Directors. Mr. Puthukarai is guaranteed a minimum annual bonus of $100,000.
Upon termination by musicmaker.com without cause, or termination by Mr.
Bernardi or Mr. Puthukarai upon certain non-compliance by musicmaker.com,
their respective employment agreements provide for payment of all accrued
salary, benefits and bonus plus a sum equal to the salary, benefits and bonus
that would have been received if the initial or any renewal term had been
completed, discounted by three percent. Each agreement is automatically
renewable on a year-to-year basis following expiration of the initial term,
and any renewal term unless certain notice of non-renewal is given by either
party. Should musicmaker.com decide not to renew their respective agreements,
Mr. Bernardi and Mr.
 
                                      39
Puthukarai shall be entitled to a severance payment equal to one year's salary
and benefits, as in effect prior to termination.
 
  Under a consulting agreement between musicmaker.com and IHS Corporation, Mr.
Steinberg is required to provide consulting services to musicmaker.com for not
less than fifteen days in any given month. Mr. Steinberg seeks to obtain, on
musicmaker.com's behalf, additional license agreements and content
relationships with record labels in an effort to expand musicmaker.com's music
library. The Steinberg Consulting Agreement is non-exclusive; however, Mr.
Steinberg is restricted from providing consulting services to any of
musicmaker.com's competitors. For his services, Mr. Steinberg is paid a
minimum monthly payment of $9,000. Mr. Steinberg also receives compensation of
$1,200 per day in connection with his attendance at meetings of
musicmaker.com's Board of Directors or any committee thereof.
 
Key Man Insurance
 
  Musicmaker.com has applied for key man insurance covering Mr. Bernardi and
Mr. Puthukarai.
 
Stock Option Plan
 
  Musicmaker.com has adopted a stock option plan for the purpose of promoting
our long-term growth and profitability by (i) providing key people with
incentives to improve stockholder value and contribute to the growth and
financial success of musicmaker.com, and (ii) enabling musicmaker.com to
attract, retain and reward talented and skilled persons for positions of
substantial responsibility. Musicmaker.com has used stock options as a
significant component of compensation for our officers and key employees.
 
  The stock option plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
(including non-qualified options and incentive stock options pursuant to
Section 422 of the Internal Revenue Code) and stock appreciation rights
(including free standing, tandem and limited stock appreciation rights). Under
the stock option plan 779,221 shares of common stock are reserved for
issuance, representing  % of the shares of common stock expected to be
outstanding immediately subsequent to this offering. As of the date of this
prospectus, options to purchase a total of 532,182 shares of common stock were
outstanding, at exercise prices ranging from $0.385 to $5.29 per share. No
options have been exercised and no stock appreciation rights have been granted
to date.
 
  Subsequent to this offering, the stock option plan will be administered by
the Compensation Committee of the Board of Directors, which will include at
least two "disinterested persons," for purposes of Rule 16b-3 under the
Exchange Act, and "outside directors," within the meaning of Section 162(m) of
the Internal Revenue Code. The Compensation Committee will select the
participants and establish the terms and conditions of each option or other
rights granted under the stock option plan, including the exercise price, the
number of shares subject to options or other equity rights and the time at
which such options become exercisable. See "--Committees of the Board of
Directors and Compensation." The exercise price of all "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code,
granted under the stock option plan must be at least equal to 100% of the fair
market value of the option shares on the date of grant. The term of any
incentive stock option granted under the stock option plan may not exceed ten
years. Where the eligible stock option plan participant owns over 10% of the
total combined voting power of all classes of stock of musicmaker.com,
however, the exercise price must be at least equal to 110% of the fair market
value of the option shares on the date of grant and the term cannot exceed
five years.
 
  To the extent required to comply with Rule 16b-3 under the Exchange Act, if
applicable, and in any event in the case of an incentive stock option or stock
appreciation right granted with respect to an incentive stock option, no award
granted under the stock option plan shall be transferable by a grantee
otherwise than by will or by the laws of descent and distribution. Other terms
and conditions of each award are set forth in the grant agreement governing
that award and determined by the Compensation Committee.
 
                                      40
Indemnification of Directors and Officers
 
  Musicmaker.com's Charter and Bylaws provide that it shall indemnify all of
its directors and officers to the full extent permitted by the Delaware
General Corporation Law (the "DGCL"). Under such provisions, any director or
officer who, in his or her capacity as such, is made or threatened to be made
a party to any suit or proceeding, may be indemnified if the Board determines
such director or officer acted in good faith and in a manner such director
reasonably believed to be in, or not opposed to, the best interests of
musicmaker.com. The Charter, Bylaws, and the DGCL further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under our Charter, Bylaws, any agreement, any vote of
stockholders or disinterested directors, or otherwise.
 
  Musicmaker.com has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of
musicmaker.com, or is or was serving at the request of musicmaker.com as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any expense, liability, or
loss incurred by such person in any such capacity or arising out of his status
as such, whether or not musicmaker.com would have the power to indemnify such
person against such liability under the DGCL.
 
                                      41
CERTAIN TRANSACTIONS
 
  In July 1996, we sold 551,948 shares of common stock to Mr. Bernardi, our
founder, Chairman of the Board of Directors and Co-Chief Executive Officer,
for nominal cash consideration in connection with musicmaker.com's formation.
 
  In July 1996, we acquired CD Kit, S.A. in exchange for 649,351 shares of
common stock, payable to the stockholders of CD Kit, S.A. In exchange we
received 8,000 shares of CD Kit, SA, all of its outstanding capital stock. In
connection with the acquisition of CD Kit, S.A., Bruno Costa-Marini and Jean
Francois Dockes, each a former stockholder of CD Kit, S.A., became the
beneficial owners of 285,714 and 188,312 of such shares of our common stock,
respectively.
 
  Between December 1996 and May 1997, musicmaker.com sold 12% convertible
notes to accredited investors for $650,000. The notes were convertible into
our common stock at $6.74 per share. Of these investors, Mr. Bernardi and Mr.
Mathias, one of our directors, participated in the offering, purchasing notes
and paying an aggregate consideration of $50,000 and $150,000, respectively.
These purchases were on the same terms as those applying to non-affiliated
investors participating in the convertible notes offering.
 
  In connection with a June 1997 private placement of securities, we converted
the principal and all accrued interest under the terms of the outstanding
convertible notes at a price of $3.85 per share, rather than $6.74 a share as
stated in the original offering. In connection with the conversion of the
notes and the private placement of our common stock, Mr. Bernardi and Mr.
Mathias received 13,815 and 41,446 shares of our common stock, respectively.
The conversion of the notes belonging to Mr. Bernardi and Mr. Mathias was
conducted on the same terms as that provided to non-affiliated investors
participating in the conversion. In addition to the common stock received upon
the conversion above, Mr. Bernardi purchased an additional 6,494 shares of
common stock in the June 1997 private placement at $3.85 per share.
 
  In October 1997, we issued 194,805 common stock warrants to Mr. Puthukarai,
musicmaker.com's President, Co-Chief Executive Officer and Chief Operating
Officer, as part of his compensation and in exchange for services previously
rendered to musicmaker.com. The warrants have an exercise price of $3.85 per
share and expire on October 15, 2007.
 
  In December 1997, musicmaker.com issued and sold 375,701 shares of our
Series A outstanding preferred stock, par value $.01, to Rho Management Trust
I, a venture capital firm. Mr. Bernardi and Mr. Puthukarai also purchased
51,948 and 12,987 shares of our Series A outstanding preferred stock,
respectively. The shares were purchased at a price of $3.85 per share.
Additionally, 715,622, 98,949 and 24,737 Series B outstanding preferred
warrants were issued to Rho, Mr. Bernardi and Mr. Puthukarai, respectively.
The Series B outstanding preferred warrants expire on December 8, 2002 and are
exercisable for Series B outstanding preferred stock, par value $.01 per
share, at an exercise price of $4.62 per share. We also issued 188,103, 26,009
and 6,502 Series C outstanding preferred warrants to Rho, Mr. Bernardi and Mr.
Puthukarai, respectively. The Series C outstanding preferred warrants expire
on December 8, 2001 and are exercisable for Series C outstanding preferred
stock, par value $.01 per share, at an exercise price of $5.78 per share.
Musicmaker.com received $1,696,450 in aggregate consideration from the
investors above in connection with this round of venture financing. In March
and June, 1998, holders of the Series B outstanding preferred warrants
exercised 364,654 warrants which were converted to Series B outstanding
preferred stock at $4.62 per share. Of the 364,654 warrants exercised, Mr.
Bernardi and Mr. Puthukarai received 41,229 and 10,307 shares of Series B
outstanding preferred stock, respectively. Mr. Bernardi and Mr. Puthukarai
received the shares above in exchange for their relinquishment of $133,334 in
accrued salary and $33,333 in accrued bonus, respectively. Rho received an
additional 305,903 shares of Series B outstanding preferred stock, in
connection with the exercise of the warrants.
 
  In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to
 
                                      42
obtaining license agreements with record labels on behalf of musicmaker.com.
These warrants expire January 15, 2008. In August 1998, musicmaker.com issued
25,974 common stock warrants to four members of Mr. Steinberg's family as
record holders. The warrants were granted as compensation for consulting
services rendered to musicmaker.com by Mr. Steinberg and he is the beneficial
owner of such warrants. The warrants are convertible by the holders into
common stock at an exercise price of $4.62 per share and expire on August 15,
2008.
 
  In September 1998, we issued 259,741 shares of our common stock to Platinum
at a value of $1,650,000. In exchange for shares of our common stock and
pursuant to the terms of a stock exchange agreement, dated September 30, 1998,
and each of a licensing agreement and a marketing agreement of even date
therewith, we entered into a strategic marketing and content alliance under
which we market and sell our custom CDs on Platinum's website and have a
license to use their song library. We also received 111,457 shares of
Platinum's common stock, having an aggregate value of $750,000. In November
1998, an additional 83,116 shares of our common stock were issued to Platinum
in connection with, and as payment under, the stock exchange agreement noted
above. See "Business--Marketing."
 
  In December 1998, we loaned $81,519 to Mr. Puthukarai all of which was
outstanding at December 31, 1998, and all of which is currently outstanding.
The loan is to be repaid without interest and upon demand under a note held by
musicmaker.com. The funds were loaned for payment of federal and state income
taxes.
 
  We believe that the above-described transactions are as fair to
musicmaker.com as could have been obtained with unaffiliated parties. We
intend that all future transactions with officers, directors or principal
stockholders of musicmaker.com will be approved or ratified by a majority of
the Board of Directors, including a majority of the disinterested, independent
directors. We intend that such future transactions will be on terms no less
favorable to musicmaker.com than could be obtained from unaffiliated third
parties.
 
                                      43
PRINCIPAL STOCKHOLDERS
 
  The following table sets forth certain information regarding shares of our
common stock beneficially owned as of January 31, 1999, and as adjusted to
reflect the offering by (i) each person or group known to musicmaker.com, that
beneficially owns more than five percent of our outstanding common stock;
(ii) musicmaker.com's directors and Named Executive Officers, and (iii) all of
musicmaker.com's executive officers and directors as a group. Beneficial
ownership is calculated in accordance with Rule 13d-3(d) under the Securities
Exchange Act of 1934. Shares of common stock subject to options and warrants
that are currently exercisable or are exercisable within 60 days of January
31, 1999, are deemed outstanding with respect to the person holding such
options but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated, each
person possesses sole voting and investment power with respect to the shares
identified as beneficially owned. Except as otherwise indicated in the table,
the address of the stockholders listed below is that of musicmaker.com's
principal executive office. See "Risk Factors--Certain existing investors own
a large percentage of our voting securities" and "Certain Transactions."
Shares Beneficially
                          Shares Beneficially Owned          Owned After the
    Name and Address      Prior to the Offering (1)             Offering
    ----------------      -------------------------------- --------------------------
                             Number            Percent       Number        Percent
                          ---------------    ------------- ------------    ----------
Rho Management Trust I..        1,207,864(2)        25.6%     1,207,864
 767 Fifth Avenue
 New York, NY 10053
Robert P. Bernardi......          920,220(3)        21.0%       920,220
Devarajan S.
 Puthukarai.............          448,679(4)        10.0%       448,679
Platinum Entertainment,
 Inc....................          342,857            8.2%       342,857
 2001 Butterfield Rd.
 Suite 1400
 Downers Grove, IL 60515
Bruno Costa-Marini......          294,372(5)         7.0%       294,372(5)
Abdulla Mohammed Al-
 Romaizan...............          259,740(6)         6.1%       259,740(6)
 P.O. Box 768
 Riyadh 11421
 Kingdom of Saudi Arabia
Irwin H. Steinberg......          150,649(7)         3.5%       150,649(7)
Edward J. Mathias.......           67,420            1.6%        67,420
All executive officers
 and directors as a
 group (6 persons)......        1,645,410(8)        34.3%     1,645,410(8)
--------
(1) Shares beneficially owned prior to the offering are as adjusted to reflect
    and include the automatic conversion of (i) all outstanding preferred
    stock and outstanding preferred warrants into common stock and common
    stock warrants, respectively, and (ii) all outstanding convertible notes
    into common stock, upon completion of the offering.
(2) Includes: (i) 375,701 shares of Series A and 305,903 shares of Series B
    outstanding preferred stock to be converted into 375,701 and 305,903
    shares of common stock, respectively, and (ii) 338,156 Series B and
    188,104 Series C outstanding preferred warrants to be converted into
    338,156 and 188,104 common stock warrants, respectively, upon the
    completion of this offering. Rho Management Partners L.P., a Delaware
    limited partnership may be deemed the beneficial owner of shares
    registered in the name of Rho Management Trust I, pursuant to an
    investment advisory relationship by which Rho Management Partners L.P.
    exercises sole voting and investment control over such shares and
    warrants.
(3) Includes (i) 51,948 shares of Series A and 41,229 shares of Series B
    outstanding preferred stock to be converted into 51,948 and 41,229 shares
    of common stock, respectively, and (ii) 117,089 Series B and 26,009 Series
    C outstanding preferred warrants to be converted into 117,089 and 26,009
    common stock
 
                                      44
warrants, respectively, upon the completion of this offering, and (iii)
   64,935 vested options for common stock with exercise prices ranging from
   $4.81 to $5.29 per share.
(4) Includes (i) 194,805 common stock warrants with an exercise price of $3.85
    per share, (ii) 12,987 shares of Series A and 10,307 shares of Series B
    outstanding preferred stock to be automatically converted into 12,987 and
    10,307 shares of common stock, respectively, and (iii) 29,272 Series B and
    6,502 Series C outstanding preferred warrants to be converted into 29,272
    and 6,502 common stock warrants, respectively, upon the completion of this
    offering, and (iv) 64,935 vested options for common stock with exercise
    prices ranging from $4.81 to $5.29 per share.
(5) Includes 8,658 vested options for common stock with an exercise price of
    $3.85 per share.
(6) Includes 51,948 common stock warrants with an exercise price of $4.81 per
    share.
(7) Includes 98,701 common stock warrants with exercise prices ranging from
    $3.85 to $4.62 per share.
(8) Includes: (i) 64,935 shares of Series A and 51,536 shares of Series B
    outstanding preferred stock, to be converted into 64,935 and 51,536 shares
    of common stock, respectively, and (ii) 146,362 Series B and 32,511 Series
    C outstanding preferred warrants to be converted into 146,362 and 32,511
    common stock warrants, respectively, upon completion of this offering.
    Also includes 293,506 outstanding common stock warrants and 136,364 vested
    options for common stock.
 
                                      45
DESCRIPTION OF SECURITIES
 
General
 
  Pursuant to our Charter, musicmaker.com is authorized to issue up to
15,584,415 shares of common stock, par value $.01 and 1,547,924 shares of
preferred stock, par value $.01 per share. Prior to this offering,
2,960,058 shares of common stock were issued and outstanding and an additional
3,091,546 were reserved for issuance pursuant to outstanding options, warrants
and conversion features of other securities issued. As of January 31, 1999,
there were approximately 100 holders of our common stock (after giving effect
to the conversion of all outstanding outstanding preferred stock and
convertible notes upon consummation of this offering).
 
  The following description of our capital stock is a summary and is qualified
in its entirety by the provisions of our Charter, Bylaws and applicable law.
These documents have been filed as exhibits to the registration statement, of
which this prospectus forms a part.
 
Reverse Stock Split
 
  Musicmaker.com's Board of Directors and stockholders have approved a reverse
stock split by which each issued and outstanding share of our common stock
will be reclassified in a one-for-3.85 reverse split to be effected on      ,
1999. The reverse stock split similarly affected the holders of our
outstanding options and warrants for common stock, and the conversion features
of the holders of our outstanding preferred stock, outstanding preferred
warrants, and convertible notes.
 
Common Stock
 
  The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Holders of common stock are
entitled to share in any and all dividends that our Board of Directors, in its
discretion, declares from funds legally available therefor. In the event of
any liquidation or dissolution of musicmaker.com, the holders of common stock
are entitled to participate in and share pro rata in the assets available for
distribution to stockholders. Any such distribution would be subsequent to
payment of our liabilities and may be subject to any preferential rights of
any preferred stock or other senior security then outstanding. The holders of
common stock have no cumulative voting, preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered hereby upon issuance and
sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any shares of preferred stock or
senior securities which musicmaker.com may designate in the future.
 
Preferred Stock
 
  Pursuant to musicmaker.com's Charter, our Board of Directors may, without
further action by stockholders, from time to time, issue one or more series of
preferred stock. Blank check preferred stock may be issued with such rights,
preferences, privileges and limitations as the Board of Directors may
determine and as permitted by the DGCL, including:
 
  .  The number of shares constituting the series and the distinctive
     designation of the series of preferred stock.
 
  .  The dividend rate on such preferred stock, the dates of payment and
     whether such dividends shall be cumulative.
 
  .  The extent of voting rights, if any, to be granted to holders of any
     series of preferred stock.
 
  .  Other rights, privileges and preferences, including conversion into
     common stock, redemption by the holder or musicmaker.com and priority
     upon liquidation, dissolution or winding up of musicmaker.com.
 
                                      46
Registration Rights
 
  Holders of our outstanding preferred stock and outstanding preferred
warrants, including Mr. Bernardi, Mr. Puthukarai, Rho, and an additional
investor, have been granted certain demand registration rights. These demand
registration rights may require musicmaker.com to file, on not more than two
occasions, a registration statement under the Securities Act covering all, or
a portion of their common stock issued or issuable, upon the automatic
conversion of the outstanding preferred stock and outstanding preferred
warrants upon consummation of this offering. In connection with the issuance
to Columbia House of a warrant for 129,870 shares of common stock,
musicmaker.com granted certain registration rights permitting the holders to
require that musicmaker.com, on not more than two occasions, file a
registration statement under the Securities Act covering all, or a portion of
the common stock issued or issuable pursuant to the warrant. Under the terms
of his consulting agreement with musicmaker.com, Mr. Steinberg,
musicmaker.com's Vice Chairman of the Board of Directors, was granted
registration rights equivalent to those received by Mr. Bernardi.
 
  In addition, each of the holders indicated above, the noteholders and Boston
Financial & Equity Corporation, a lessor of certain equipment, have certain
"piggyback" registration rights. If musicmaker.com proposes to register any of
its common stock under the Securities Act (other than pursuant to this
offering or in connection with the registration of securities issuable under
an employee benefit plan or a registered exchange offer) holders of
"piggyback" rights may require that musicmaker.com include all or a portion of
their common stock, issued or issuable pursuant to certain exercise rights, in
such registration. In connection with any such offering, the managing
underwriter thereof, shall have certain rights to limit the number of
securities held by persons with "piggyback" registration rights to be included
in such registration. All expenses incurred in connection with the
registration rights above will be borne by musicmaker.com.
 
  The underwriters have requested that all holders of registration rights
forego any request for registration for a period of 180 days following the
date of effectiveness of this prospectus.
 
Delaware General Corporation Law and certain provisions in our Charter
 
  Our Charter provides that musicmaker.com shall indemnify its currently
acting and former directors and officers against any and all liabilities and
expenses incurred in connection with their services in such capacities to the
maximum extent permitted by the DGCL. Our Charter similarly requires
musicmaker.com to advance expenses to our officers and directors entitled to
indemnification to the maximum extent permitted by the DGCL. Advancement of
expenses to directors and officers is conditioned upon receipt of an
undertaking by such director or officer to repay the amount of any advancement
if it shall ultimately be determined that such person is not entitled to be
indemnified by musicmaker.com. The terms and conditions of such advancement
are to be determined by musicmaker.com's Board of Directors.
 
  Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors and officers, musicmaker.com has been informed that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy, as expressed in the Securities Act, and is therefore
unenforceable.
 
  Our Charter provides that our directors shall not be personally liable to
musicmaker.com or our stockholders for monetary damages to fullest extent
permitted by the DGCL. Section 102(b)(7) of the DGCL currently permits
elimination of a director's personal liability to a corporation and its
stockholders except for liability:
 
  .  For any breach of the director's duty of loyalty to the corporation or
     its stockholders.
 
  .  For acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of the law.
 
  .  Under Section 174 of the DGCL for unlawful dividends, distributions or
     unlawful stock repurchases or redemptions.
 
  .  For any transaction from which the director derives an improper personal
     benefit.
 
  Under our Charter and the DGCL, our directors will be protected from
monetary damages for other negligent acts on their part. Stockholders and
musicmaker.com seeking redress against directors may bring an action for
equitable remedies such as an injunction or rescission based upon a director's
breach of fiduciary
 
                                      47
duties, even where monetary remedies are unavailable. Any amendment to the
DGCL that increases or decreases the protection from monetary damages afforded
directors in Delaware shall be automatically incorporated into our Charter.
 
Charter provisions that could delay or prevent a change in control
 
  Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three separate classes,
with only one class, or roughly one-third of the Board of Directors, standing
for election in any given year. This "staggered" structure of the Board of
Directors may have the effect of delaying the ability of stockholders to
change the composition of the Board of Directors and possibly delaying or
preventing a corresponding change in control of musicmaker.com.
 
  Musicmaker.com's Charter also contains a provision which enables the Board
of Directors to issue preferred stock without the approval of stockholders.
The Board of Directors may fix the rights, preferences, privileges and
limitations of such securities at its discretion. The provision grants to the
Board of Directors the right to issue what is often called "blank check"
preferred stock. The provision may be used to permit the Board of Directors to
institute a rights plan, or "poison pill" by which the Board of Directors
issues preferred stock or grants rights to acquire preferred stock, often with
voting rights, to certain holders of common stock. The effect of such
preferred stock grants may be to deter possible takeovers or acquisitions,
making such a transaction prohibitively expensive for potential acquirers.
Issuance of such preferred stock could discourage potential bids for
musicmaker.com, deny stockholders a potential premium on their shares and may
make a change in control of musicmaker.com more difficult. See "Risk Factors--
Anti-takeover effects of our Charter and Bylaws."
 
                                      48
SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering, we will have outstanding           shares
of common stock. Of these shares, the           shares of common stock sold in
this offering (assuming no exercise of the Underwriter's over-allotment
option) will be freely tradable in the public market without restrictions
under the Securities Act, except that any shares purchased by affiliates of
musicmaker.com, as defined in Rule 144 under the Securities Act, may only be
sold in compliance with the applicable provisions of Rule 144 discussed below.
 
  In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted securities" for at least
one year, including a person who may be deemed an affiliate of musicmaker.com,
is entitled to sell within any three-month period the number of shares of
common stock that does not exceed the greater of (i) one percent of the then
outstanding shares of common stock of musicmaker.com or (ii) the average
weekly trading volume of common stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are subject
to certain restrictions relating to manner of sale, notice and the
availability of current public information about musicmaker.com. Generally, a
person who is not an affiliate of musicmaker.com and who has satisfied a two-
year holding period will be able to sell without any volume limitations. As of
January 31, 1999, the one-year holding period had expired with respect to
2,056,006 shares of common stock. As of January 31, 1999, the two-year holding
period had expired with respect to 1,327,273 shares of common stock.
 
  Shares of outstanding preferred stock, including all outstanding preferred
warrants, shall be automatically converted into shares of common stock and
common stock warrants, respectively, upon completion of this offering. As a
result of this automatic conversion, 819,199 shares of restricted common stock
shall be issued to the former holders of the outstanding preferred stock and
728,725 warrants for common stock shall be issued in exchange for the
outstanding preferred warrants. Outstanding convertible notes shall
automatically convert into 415,584 shares of common stock upon completion of
this offering.
 
  Stockholders holding approximately       of our outstanding common stock and
outstanding options and warrants for common stock, are expected to agree not
to offer, pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any securities of musicmaker.com
they currently hold without prior written consent of the representatives for a
period of 180 days following the date of the final prospectus.
 
  Upon completion of this offering, we will sell to the representatives, for
nominal consideration, warrants entitling the representatives to purchase an
aggregate of         shares of common stock at an initial exercise price equal
to 110% of the initial public offering price. The representatives' warrants
will be exercisable for a period of four years commencing one year after the
effective date of the registration statement of which this prospectus is a
part. Subject to the limitations of Rule 144, the holders of the
representatives' warrants may sell shares of common stock acquired by exercise
of the warrant one year from the date of exercise thereof without
registration. See "Underwriting."
 
  Prior to this offering, there has been no market for our common stock. No
predictions can be made as to the effect, if any, that sales of shares of
common stock under Rule 144 will have on the market price of our common stock.
Sales in the public market of such common stock under Rule 144 could adversely
affect the market price of our common stock or the ability of musicmaker.com
to raise funds through a public offering of its equity securities. See "Risk
Factors--Shares eligible for future sale."
 
                                      49
UNDERWRITING
 
  Subject to the terms and conditions of an underwriting agreement, the
underwriters named below, for whom Ferris, Baker Watts, Incorporated and
Fahnestock & Co., Inc. are acting as the representatives, have severally
agreed to purchase from us, and we have agreed to sell to the underwriters,
the respective number of shares of common stock set forth opposite each
underwriters named below:
Number
         Underwriters                                                 of Shares
         ------------                                                 ---------
Ferris, Baker Watts, Incorporated.................................
   Fahnestock & Co. Inc..............................................
                                                                         ---
     Total...........................................................
                                                                         ===
The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The nature of the underwriter's
obligation is such that they are committed to purchase and pay for all shares
of common stock if any are purchased.
 
  The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of
this prospectus and to certain securities dealers at such price less a
concession not in excess of $    per share. The underwriters may allow, and
such selected dealers may re-allow, a concession not in excess of $    per
share to certain brokers and dealers. After this offering, the price to the
public, concession, allowance and re-allowance may be changed by the
representatives. The representatives have informed us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
 
  We have granted the underwriters an option exercisable during the 30-day
period after the date of this prospectus, to purchase up to     additional
shares of common stock at the initial public offering price solely to cover
over-allotments, if any. To the extent that the underwriters exercise this
option, each of the underwriters will be committed, subject to certain
conditions, to purchase such additional shares of common stock in
approximately the same proportions as set forth in the above table.
 
  The offering of common stock is made for delivery when, as and if accepted
by the underwriters and subject to prior sale to withdrawal, cancellation or
modification of the offer without notice. The underwriters reserve the right
to reject any order for the purchase of common stock.
 
  We have agreed to issue warrants to the representatives to purchase up to
    shares of common stock, at an exercise price per share equal to 110% of
the initial public offering price per share. The representatives' warrants are
exercisable for a period of four years, commencing one year from the effective
date of the registration statement of which this prospectus is a part. The
representatives' warrants will not be sold, offered for sale, transferred,
assigned or hypothecated for a period of one year from the effective date of
the registration statement other than to officers, employees or partners of
the respective representatives and members of the selling group and their
officers and partners. The holders of the representatives' warrants will have
no voting, dividend or other stockholders' rights until the representatives'
warrants are exercised. We have granted the representatives certain demand and
piggyback registration rights related to the representatives' warrants, which
are applicable during the period that the representatives' warrants are
exercisable. We also have agreed to pay the underwriters a nonaccountable
expense allowance of 1% of the gross proceeds of this offering.
 
  We have agreed to enter into a financial advisory agreement with GunnAllen
Financial, Inc. whereby we will pay GunnAllen an advisor fee of $125,000 upon
the completion of the offering.
 
                                      50
We have agreed not to issue, and all of our officers and directors, and all
security holders of musicmaker.com are expected to agree not to offer, pledge,
sell, contract to sell, or otherwise transfer or dispose of directly or
indirectly any shares of our capital stock or other equity securities of
musicmaker.com for a period of 180 days after the date of this prospectus
without the prior written consent of Ferris, Baker Watts, Incorporated. In
addition, those officers, directors and each security holder of musicmaker.com
to whom we granted certain registration rights in connection with the issuance
of shares of our common stock or other equity securities of musicmaker.com are
expected to agree not to make any demand for, exercise any right, or file (or
participate in the filing of) a registration statement with respect to the
registration of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Ferris, Baker
Watts, Incorporated.
 
  We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make in respect thereof.
 
  Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
was determined by negotiation among musicmaker.com and the Representatives.
Among the factors considered in determining the public offering price were:
 
  .  The preliminary demand for our common stock.
 
  .  The history of and the prospects for musicmaker.com.
 
  .  The condition of the industry and markets in which we compete.
 
  .  An assessment of our management.
 
  .  Our past earnings and the trend and future prospects of such earnings.
 
  .  The present state of our business operations and development.
 
  .  The general conditions of the securities market at the time of the
     offering; and the market prices of publicly traded common stocks of
     comparable companies in related industries in recent periods.
 
  There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
 
  The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of our
common stock. Such price is subject to change as a result of market conditions
and other factors. We cannot assure you that our common stock can be resold at
or above the initial public offering price.
 
  In order to facilitate this offering, certain persons participating in the
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after the offering in
accordance with Regulation M under the Securities Exchange Act of 1934, as
amended. Specifically, the underwriters may over-allot or otherwise create a
short position in the common stock for their own account by selling more
shares of common stock than have been sold to them by us. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the
price of the common stock by bidding for or purchasing shares of common stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions and use of penalty bids may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages
resales. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
Nasdaq National Market or otherwise and, if continued, may be discontinued at
any time.
 
                                      51
TRANSFER AGENT, ESCROW AGENT AND REGISTRAR
 
  The transfer agent, escrow agent and registrar for the common stock is
                   .
 
                                 LEGAL MATTERS
 
  The legality of the securities offered hereby has been passed upon for
musicmaker.com by its counsel, Venable, Baetjer and Howard, LLP of McLean,
Virginia. Certain legal matters will be passed upon for the underwriters by
its counsel Katten Muchin & Zavis, Washington, D.C. Certain matters in
connection with United States patents and trademarks and international patents
will be passed upon for musicmaker.com by Darby & Darby, P.C. of New York, New
York.
 
                                    EXPERTS
 
  The consolidated financial statements of musicmaker.com, Inc. (formerly The
Music Connection Corporation) at December 31, 1998 and 1997, and for the years
ended December 31, 1998 and 1997 and for the period from April 23, 1996
(inception) through December 31, 1996, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
 
  Certain matters dealing with patents and trademarks set forth in "Risk
Factors--We depend upon intellectual property rights and risk having such
rights infringed" and "Business--Intellectual Property and Proprietary Rights"
have been included in this prospectus in reliance upon the written opinion of
Darby & Darby, P.C. of New York, New York, as experts in such matters. See
"Legal Matters."
 
                            ADDITIONAL INFORMATION
 
  Musicmaker.com has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to musicmaker.com and this offering, reference is made to the
registration statement, including the exhibits filed therewith, copies of
which may be obtained at prescribed rates from the SEC at the public reference
facilities maintained by the SEC at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, D.C. 20549 and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Descriptions
contained in this prospectus as to the contents of any contract or other
documents filed as an exhibit to the registration statement are not
necessarily complete and each such description is qualified by reference to
such contract or document. The SEC maintains a website on the Internet that
will contain all future reports, proxy and information statements and other
information that musicmaker.com is required to file electronically with the
SEC. The address of the SEC's website is http://www.sec.gov.
 
  This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications and the Record Industry
Association of America. These industry publications generally indicate that
they have obtained information from sources believed to be reliable, but do
not guarantee the accuracy and completeness of such information. While we
believe those industry publications to be reliable, we have not independently
verified such data. We also have not sought, in certain circumstances, the
consent of these organizations to refer to their reports in this prospectus.
 
                                      52
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                         INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.............................................. F-2
 
Consolidated Balance Sheets................................................. F-3
 
Consolidated Statements of Operations....................................... F-4
 
Consolidated Statements of Stockholders' Deficit............................ F-5
 
Consolidated Statements of Cash Flows....................................... F-6
 
Notes to Consolidated Financial Statements.................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
 
  We have audited the accompanying consolidated balance sheets of
musicmaker.com, Inc. (formerly The Music Connection Corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the period from April
23, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
musicmaker.com, Inc. (formerly The Music Connection Corporation) at December
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for the period from April 23, 1996 (inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
 
                                          Ernst & Young LLP
 
Vienna, Virginia
February 5, 1999, except Note 11,
as to which the date is      , 1999
 
-------------------------------------------------------------------------------
  The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts for the reverse stock split as
described in Note 11 to the financial statements.
 
                                          /s/ Ernst & Young LLP
 
Vienna, Virginia
February 18, 1999
 
                                      F-2
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                          CONSOLIDATED BALANCE SHEETS
December 31,           Pro Forma
                                      ------------------------   December 31,
                                         1997         1998      1998 (Note 10)
                                      -----------  -----------  --------------
                                                                 (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents.......... $ 1,401,982  $   972,954   $ 2,286,579
  Accounts receivable................      12,750       17,510        17,510
  Related party account receivable
   (Note 8)..........................         --        81,519        81,519
  Prepaid expenses and other current
   assets............................      17,503       25,395        25,395
                                      -----------  -----------   -----------
    Total current assets.............   1,432,235    1,097,378     2,411,003
Property and equipment, net (Note
 2)..................................     297,140      360,709       360,709
Investments (Note 1).................         --       750,000       750,000
Intangibles, net (Note 3)............         --       967,395       855,000
Other assets.........................         --        58,481        58,481
                                      -----------  -----------   -----------
    Total assets..................... $ 1,729,375  $ 3,233,963   $ 4,435,193
                                      ===========  ===========   ===========
    LIABILITIES AND STOCKHOLDERS'
           (DEFICIT) EQUITY
Current liabilities:
  Accounts payable................... $   328,450  $   455,095   $   455,095
  Accrued expenses...................      91,369      261,974       261,974
  Accrued compensation payable to
   related parties (Note 8)..........     761,221      625,219       625,219
  Current portion of long-term
   obligation (Note 4)...............         --        42,857        42,857
                                      -----------  -----------   -----------
    Total current liabilities........   1,181,040    1,385,145     1,385,145
Long-term obligation (Note 4)........         --       214,286       214,286
Convertible notes payable (Note 4)...         --       512,500           --
Commitments (Note 7)
Convertible preferred stock, $0.01
 par value, 1,547,924 shares
 authorized (Note 5):
  Series A convertible preferred
   stock, 454,545 shares designated;
   454,545 shares issued and
   outstanding.......................   1,750,000    1,750,000           --
  Series B convertible preferred
   stock, 865,801 shares designated;
   0 and 364,654 shares issued and
   outstanding.......................         --     1,684,700           --
  Series C convertible preferred
   stock, 227,578 shares designated;
   no shares issued and outstanding..         --           --            --
  Series A convertible preferred
   stock subscribed..................     (50,000)         --            --
Stockholders' (deficit) equity(Note
 5):
  Common stock, $0.01 par value,
   5,194,805 shares authorized;
   2,056,006, 2,707,954 shares issued
   and outstanding, respectively
   (3,942,737 pro forma shares)......      20,560       27,080        39,427
  Additional paid-in capital.........   1,279,244    4,766,488    10,188,841
  Accumulated deficit................  (2,451,469)  (7,106,236)   (7,392,506)
                                      -----------  -----------   -----------
    Total stockholders' (deficit)
     equity..........................  (1,151,665)  (2,312,668)    2,835,762
                                      -----------  -----------   -----------
    Total liabilities and
     stockholders' (deficit) equity.. $ 1,729,375  $ 3,233,963   $ 4,435,193
                                      ===========  ===========   ===========
See accompanying notes.
 
                                      F-3
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
Period from                              Pro Forma
                         April 23, 1996                            Year ended
                         (inception) to Year ended December 31,   December 31,
                          December 31,  ------------------------      1998
                              1996         1997         1998       (Note 10)
                         -------------- -----------  -----------  ------------
                                                                  (unaudited)
Net sales...............   $   8,355    $    13,432  $    74,028  $    74,028
Cost of sales...........      (2,590)        (2,955)     (46,821)     (46,821)
                           ---------    -----------  -----------  -----------
Gross profit............       5,765         10,477       27,207       27,207
Operating expenses:
  Sales and marketing...         --           7,780      929,661      929,661
  Operating and
   development..........      64,029        692,041    1,435,690    1,435,690
  General and
   administrative.......     306,381      1,360,856    2,334,438    2,620,708
                           ---------    -----------  -----------  -----------
                             370,410      2,060,677    4,699,789    4,986,059
                           ---------    -----------  -----------  -----------
Loss from operations....    (364,645)    (2,050,200)  (4,672,582)  (4,958,852)
Other income (expense):
  Interest income.......         --             --        17,815       17,815
  Interest expense......      (2,667)       (33,957)         --           --
                           ---------    -----------  -----------  -----------
                              (2,667)       (33,957)      17,815       17,815
                           ---------    -----------  -----------  -----------
Net loss................   $(367,312)   $(2,084,157) $(4,654,767) $(4,941,037)
                           =========    ===========  ===========  ===========
Basic and diluted net
 loss per share (Note
 9).....................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                           =========    ===========  ===========  ===========
Weighted average shares
 outstanding............     830,076      1,734,328    2,186,488    2,863,521
                           =========    ===========  ===========  ===========
See accompanying notes.
 
                                      F-4
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock    Additional
                         -----------------  Paid-In   Accumulated
                          Shares   Amount   Capital     Deficit       Total
                         --------- ------- ---------- -----------  -----------
Issuance of common
 stock.................. 1,327,273 $13,273 $    8,467 $       --   $    21,740
 Net loss...............       --      --         --     (367,312)    (367,312)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1996................... 1,327,273  13,273      8,467    (367,312)    (345,572)
 Issuance of common
 stock..................   524,415   5,244    435,696         --       440,940
 Issuance of common
 stock and warrants for
  services to non-
 employees..............    25,974     260    150,240         --       150,500
 Conversion of notes
 payable................   178,344   1,783    684,841         --       686,624
 Net loss...............       --      --         --   (2,084,157)  (2,084,157)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1997................... 2,056,006  20,560  1,279,244  (2,451,469)  (1,151,665)
 Issuance of common
 stock..................   651,948   6,520  2,987,782         --     2,994,302
 Issuance of warrants
 and options to non-
  employees.............       --      --     499,462         --       499,462
 Net loss...............       --      --         --   (4,654,767)  (4,654,767)
                         --------- ------- ---------- -----------  -----------
Balance at December 31,
 1998................... 2,707,954 $27,080 $4,766,488 $(7,106,236) $(2,312,668)
                         ========= ======= ========== ===========  ===========
See accompanying notes.
 
                                      F-5
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
                                       April 23, 1996
                                       (inception) to Year ended December 31,
                                        December 31,  ------------------------
                                            1996         1997         1998
                                       -------------- -----------  -----------
Operating activities
 Net loss............................    $(367,312)   $(2,084,157) $(4,654,767)
 Adjustments to reconcile net loss to
   net cash provided by (used in)
   operating activities:
  Depreciation and amortization......        7,700         29,887      203,122
  Conversion of accrued interest to
   common stock......................          --          36,624          --
  Services received in exchange for
   stock and warrants................          --         150,500      499,462
  Changes in operating assets and
   liabilities:
    Accounts receivable..............      (38,387)        25,637       (4,760)
    Related party account
     receivable......................          --             --       (81,519)
    Prepaid expenses and other
     current assets..................       (8,994)        (8,509)      (7,892)
    Other assets.....................          --             --       (58,481)
    Accounts payable.................      166,018        162,432      126,645
    Accrued expenses.................       46,025         45,344      170,605
    Accrued compensation payable to
     related parties.................      217,587        543,634       30,665
    Long-term obligation.............        2,667         (2,667)     257,143
                                         ---------    -----------  -----------
      Net cash provided by (used in)
       operating activities..........       25,304     (1,101,275)  (3,519,777)
Investing activities
 Purchases of property and
 equipment...........................      (34,972)      (299,755)    (217,961)
                                         ---------    -----------  -----------
      Net cash used in investing
       activities....................      (34,972)      (299,755)    (217,961)
Financing activities
 Proceeds from issuance of
 convertible notes payable...........      400,000        250,000      512,500
 Payment of fees on convertible notes
 payable.............................          --             --      (116,125)
 Issuance of convertible preferred
 stock...............................          --       1,700,000    1,568,033
 Issuance of common stock............       21,740        440,940    1,344,302
                                         ---------    -----------  -----------
      Net cash provided by financing
       activities....................      421,740      2,390,940    3,308,710
                                         ---------    -----------  -----------
 Net increase (decrease) in cash and
 cash equivalents....................      412,072        989,910     (429,028)
 Cash and cash equivalents at
 beginning of period.................          --         412,072    1,401,982
                                         ---------    -----------  -----------
 Cash and cash equivalents at end of
 period..............................    $ 412,072    $ 1,401,982  $   972,954
                                         =========    ===========  ===========
Non-cash investing and financing
 activities
 Issuance of common stock............    $  18,230    $       --   $       --
                                         =========    ===========  ===========
 Conversion of notes payable to
 common stock (Note 4)...............    $     --     $   686,624  $       --
                                         =========    ===========  ===========
 Common stock issued for licensing
 agreement (Note 5)..................    $     --     $       --   $ 1,650,000
                                         =========    ===========  ===========
 Conversion of accrued compensation
 to preferred stock (Note 5).........    $     --     $       --   $   166,667
                                         =========    ===========  ===========
See accompanying notes.
 
                                      F-6
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1998
 
1. Summary of Significant Accounting Policies
 
 The Company
 
  Musicmaker.com, Inc. (formerly The Music Connection Corporation) (the
"Company") was incorporated in Delaware on April 23, 1996. The Company is an
e-commerce provider of customized music CD compilations on the Internet. The
Company's website, "www.musicmaker.com," as well as mail-order promotions,
allow customers to order custom compiled music CDs. Customers can also
digitally download songs from the Company's online library directly to their
personal computers.
 
  Since inception, management has been primarily involved in recruiting
personnel, developing the technological infrastructure necessary to create
custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. The Company
continues to rely on outside sources of capital to develop and exploit its
products and markets.
 
  In February 1999, the Company plans to file a registration statement with
the Securities and Exchange Commission relating to the initial public offering
(the "IPO") of the Company's common stock.
 
 Principles of Consolidation
 
  The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, CD Kit, as of December 31, 1996
and 1997. As of December 31, 1998, CD Kit was inactive with no remaining
assets or liabilities. All significant inter-company transactions and balances
have been eliminated in consolidation.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Revenue Recognition
 
  Net sales are recognized at the time merchandise is shipped to customers for
custom CDs and upon execution of orders for digitally downloaded songs.
 
 Cash and Cash Equivalents
 
  The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
 
 Investments
 
  In connection with exclusive music license, stock exchange and marketing
agreements signed with Platinum Entertainment, Inc. ("Platinum") on September
30, 1998, the Company received 111,457 shares of unregistered common stock of
Platinum (see Note 5). The Company's investment in these equity securities was
recorded at the fair market value on the date of the transaction and is
accounted for using the cost method.
 
                                      F-7
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Royalty Advances and Operating and Development Costs
 
  In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to music labels are recorded as an asset if the past
performance and current popularity of the music to which the advance relates
provide a sound basis for estimating the probable future recoupment of such
advances. Advances are then expensed as subsequent royalties are earned. Any
portion of advances that subsequently appear not to be fully recoverable from
future royalties are charged to expense during the period in which the loss
becomes evident.
 
  Operating and development costs relating to the Company's proprietary custom
CD compilation software technology are expensed as incurred. Operating and
development costs also include recoupable but not returnable advances and
network and website costs. The Company has expensed as operating and
development costs royalty advances that were paid upon signing of certain
initial royalty agreements with independent music labels, due to management's
expectations of minimal revenues expected during the one year period following
the signing of the contracts. These charges resulted in increases to operating
and development costs of approximately $447,500 and $614,000 for the years
ended December 31, 1997 and 1998, respectively. The Company is required to
make additional advances upon the anniversaries of the signing of these
initial contracts. The Company will capitalize these future advances and then
amortize the expense to match the revenues. Once significant revenues have
been generated, the Company will classify these costs as costs of sales.
 
 Advertising Costs
 
  The Company expenses all advertising costs as incurred. The Company incurred
$0, $7,800 and $328,959 in advertising costs for the period from April 23,
1996 (inception) to December 31, 1996, and the years ended December 31, 1997
and 1998, respectively.
 
 Fair Value of Financial Instruments
 
  The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash, accounts receivable,
investments, accounts payable and related party payables, to approximate the
fair value of the respective assets and liabilities.
 
 Income Taxes
 
  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
 
Net Loss Per Share
 
  The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," ("SFAS 128") which established new standards for
computing and presenting net income per share information. Basic net loss per
share was determined by dividing net loss by the weighted average number of
common shares outstanding during each period. Diluted net loss per share
excludes common equivalent shares,
 
                                      F-8
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
unexercised stock options and warrants as the computation would be anti-
dilutive. A reconciliation of the net loss available for common shareholders
and the number of shares used in computing basic and diluted net loss per
share is in Note 9.
 
  Basic and diluted loss per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an
initial public offering, be included in the calculation of basic and diluted
loss per share as if they were outstanding for all periods presented. To date,
the Company has not had any nominal issuances or grants at nominal prices.
 
 Stock-Based Compensation
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Bulletin No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25 (see Note 5).
 
 Reclassifications
 
  Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the presentation of the 1998 financial
statements.
 
 Recent Pronouncements
 
  In 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
 
  In 1998, the Company adopted FASB Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes
standards for disclosures about products, geographies and major customers. The
Company's implementation of this standard does not have any effect on its
financial statements.
 
  The Accounting Standards Executive Committee (AcSEC) recently issued SOP 98-
5, "Reporting on the Costs of Start-up Activities." SOP 98-5 is effective for
fiscal years beginning after December 15, 1998 and requires the costs of
start-up activities, including organization costs, to be expensed as incurred.
The Company has elected early adoption of SOP 98-5. However, the early
adoption of the new rules does not have a material effect on the Company's
financial position or results from operations.
 
2. Property and Equipment
 
  Property and equipment are stated at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated
useful life or the lease term, ranging from three to seven years. Depreciation
and amortization expense was $7,700, $29,887 and $154,392 for the period from
April 23, 1996 (inception) through December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively.
 
                                      F-9
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Property and equipment consist of the following:
December 31,
                                                            -------------------
                                                              1997      1998
                                                            --------  ---------
Computer equipment and software......................... $328,166  $ 506,120
   Leasehold improvements..................................      --      36,823
   Furniture and equipment.................................    6,561      9,745
                                                            --------  ---------
                                                             334,727    552,688
   Less accumulated depreciation and amortization..........  (37,587)  (191,979)
                                                            --------  ---------
                                                            $297,140  $ 360,709
                                                            ========  =========
3. Intangibles
 
  In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company recorded an intangible asset for
licensing fees of $900,000 (see Note 5). The asset is the difference in fair
market values of musicmaker.com's common stock issued to Platinum and the
Platinum common stock issued to the Company. The Company is amortizing the
intangible on a straight-line basis over the five year period of the license
agreement. The carrying value of the intangible asset will be reviewed if the
facts and circumstances suggest impairment. If such a review indicates that
the carrying value will not be recoverable as determined based on undiscounted
cash flows over the remaining amortization period, the Company will reduce the
carrying value by the estimated shortfall of cash flows.
 
  In connection with the private placement of convertible notes payable, the
Company recorded loan fees of $116,125 (see Note 4). The Company is amortizing
this intangible through December 31, 2000, the maturity date of the
convertible notes payable.
 
  Intangible assets consist of the following:
December 31,
                                                            -------------------
                                                              1997      1998
                                                            -------- ----------
Licensing fees.......................................... $   --   $  900,000
   Loan fees...............................................     --      116,125
                                                            -------  ----------
                                                                --    1,016,125
   Less accumulated amortization...........................     --      (48,730)
                                                            -------  ----------
                                                            $   --   $  967,395
                                                            =======  ==========
4. Convertible Notes Payable and Long-term Obligations
 
  In December 1996, the Company received $400,000 and issued 12% convertible
notes to certain investors (including the founding stockholders and a director
of the Company). The Company had the right, at its option, between the date of
issuance and June 15, 1997, to convert all of the principal and accrued
interest owed to note holders into shares of the Company's common stock.  In
1997, the Company issued two additional convertible notes totaling $250,000
with the same terms. In June 1997, the Company converted the principal amount
of $650,000 of convertible notes payable plus the accrued interest of $36,624
into 178,344 shares of common stock.
 
  In October 1998, the Company initiated an offering for 8% convertible
secured subordinate promissory notes which are convertible at any time at the
election of the holder and are mandatorily convertible upon the
 
                                     F-10
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
closing of an initial public offering with gross proceeds of $5,000,000 or
more or upon certain mergers and consolidations of the Company. The conversion
price is $4.81 per share of common stock, subject to certain adjustments. The
convertible notes payable are secured by a lien on the assets of the Company
pursuant to a security agreement and the principal and accrued interest are
due on December 31, 2000. As of December 31, 1998, the Company had convertible
notes payable of $512,500 and had recorded loan fees of $116,125 (see Note 3).
 
  On July 1, 1998, the Company entered into a mutual coexistence agreement
with Music Maker Relief Foundation, Inc. ("Music Maker Relief Foundation"), an
unaffiliated not-for-profit corporation that owns the trademark MUSICMAKER and
the Internet domain name MUSICMAKER.ORG. In consideration of avoiding any
possible conflict regarding names, marks, goods and services, the Company
agreed to pay $300,000 to Music Maker Relief Foundation. The Company paid
$42,857 upon signing of the agreement and has a remaining obligation of
$257,143 ($42,857 on April 15th of each of the years 1999 through and
including 2004). The Company expensed $300,000 upon signing of the agreement.
 
5. Common Stock and Convertible Preferred Stock
 
 Common Stock and Warrants
 
  On July 3, 1996, the two founders of the Company purchased a total of
649,351 shares of common stock for $2,500. In July 1996, 649,351 shares of
common stock were issued to the former stockholders of CD Kit, S.A., giving
them a 50% interest in the then issued and outstanding common stock of the
Company. Two outside investors purchased 2,597 and 25,974 shares of common
stock in October and December of 1996, respectively.
 
  In 1997, 524,416 shares of common stock were issued to both outside
investors and the founding stockholders at prices ranging from $0.04 per share
to $3.85 per share. The Company also issued 25,974 shares of common stock for
services to consultants valued at $50,500. Additionally, the Company issued
25,974 warrants to purchase common stock at an exercise price of $3.85 per
share to a consultant for services related to signing royalty agreements with
record labels and valued at $100,000. The Company recorded $150,500 of expense
related to the issuance of these shares of common stock and warrants to
consultants for services. The Company also issued 194,805 warrants to purchase
common stock at an exercise price of $3.85 per share to a stockholder and
officer of the Company for services related to signing royalty agreements with
record labels. All of these warrants expire on October 15, 2007.
 
  In 1998, the Company issued a total of 309,091 shares of common stock at
$4.81 per share to seven investors for a total of $1,487,500. The Company paid
a finders fee of $143,198 related to this private placement and is obligated
to issue 46,764 warrants in 1999 related to the completion of the private
placement (see Note 11). The Company also issued warrants to purchase 51,948
shares of common stock at an exercise price of $4.81 per share to one of the
investors and recorded an expense of $88,000 for the value of the warrants.
 
  On June 12, 1998, the Company signed an agreement with Columbia House with a
three year term beginning September 1, 1998, under which the Company will
offer custom CDs for sale to Columbia House's customers through Columbia
House's websites and promotional inserts in Columbia House's mailings. The
Company will design and supply promotional material to Columbia House,
manufacture the custom CDs and process all orders (shipping, billing and
collecting) and will pay a share of the net profits derived from the sale of
CDs to Columbia House's customers to Columbia House. In connection with this
agreement, the Company issued 129,870 warrants to purchase common stock at an
exercise price of $4.62 per share to Columbia House and recorded an expense of
$160,000 for the value of the warrants. These warrants expire on September 1,
2001.
 
                                     F-11
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In January 1998, a stockholder and officer of the Company returned 72,727
stock options to the Company in exchange for warrants to purchase 72,727
shares of common stock with an exercise price of $3.85 per share and valued at
$148,400. These warrants expire on January 15, 2008. This individual is also
the beneficial owner of warrants for 25,974 shares of common stock granted to
members of his family as compensation for his consulting services in August
1998 with an exercise price of $4.62 per share valued at $64,000. The Company
recorded an expense of $212,400 related to the issuance of these warrants.
These warrants expire on August 15, 2008.
 
  In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company issued 342,857 shares of common
stock to Platinum (valued at $1,650,000) and Platinum issued 111,457 shares of
its unregistered common stock to the Company (having an aggregate value of
$750,000). The Company recorded the difference in the fair market values of
the two stocks as licensing fees (see Note 3).
 
 Convertible Preferred Stock and Warrants
 
  On December 8, 1997, the Company sold 389,610 shares of the Company's Series
A preferred stock at $3.85 per share. Additionally, 64,935 shares of the
Company's Series A preferred stock were purchased by two existing stockholders
at $3.85 per share. The Company did not receive payment for 12,987 shares of
the Series A preferred stock until 1998 and has therefore shown a reduction to
the preferred stock on the accompanying December 31, 1997 balance sheet.
 
  The Company also issued 865,801 warrants to purchase Series B preferred
stock at a price of $4.62 per share, and 227,578 warrants to purchase Series C
preferred stock at a price of $5.78 per share. The warrants to purchase Series
B preferred stock are exercisable, in whole or in part, at any time commencing
on the date of grant through the fifth anniversary thereof. The warrants to
purchase Series C preferred stock are exercisable, in whole or in part, at any
time commencing on the date of grant through the fourth anniversary thereof.
 
  Each holder of preferred stock is entitled to vote on all matters as if
their shares of preferred stock were converted to voting common stock. All
outstanding shares of preferred stock have an automatic conversion feature
upon the consummation of a firm commitment underwritten public offering of at
least $15 million with a valuation of the Company greater than $50 million
immediately prior to the initial public offering, or upon an affirmative vote
of the holders of at least 50.1% of the outstanding shares of preferred stock
to complete such a conversion. The conversion ratio is initially on a one-for-
one basis for all series of preferred stock; however, the conversion price of
each series shall be subject to adjustment for certain diluting issues as
described in the Company's Restated Certificate of Incorporation.
 
  The preferred stock is redeemable at the election of at least 50.1% of the
preferred stock holders in two equal installments, if notice is provided to
the Company on or before October 8, 2002. The redemption price would be $3.85
per share, $4.62 per share and $5.78 per share plus a further amount per share
equal to any declared and unpaid dividends for Series A, Series B and Series C
preferred stock, respectively. The first installment would be on or about
December 8, 2002, and the second installment would be on or about December 8,
2003, subject to the Company having funds legally available. If sufficient
funds are not legally available for redeeming the preferred stock at either of
the installment dates, the Company will have to apply the available funds to
redeem the preferred stock on a ratable basis and then redeem the remaining
shares as soon as practicable after the Company has the funds legally
available.
 
                                     F-12
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the preferred stock shall be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to holders of the common stock, $3.85 per share plus declared
and unpaid dividends on Series A preferred stock, $4.62 per share plus
declared and unpaid dividends on Series B preferred stock and $5.78 per share
plus declared and unpaid dividends on Series C preferred stock.
 
  On March 16, 1998, an investor exercised 89,453 warrants to purchase Series
B preferred stock at a price of $4.62 per share for $413,272 in cash. Two
officers of the Company were required to exercise 15,461 warrants to purchase
Series B preferred stock at the same price.
 
  On June 30, 1998, two investors exercised 223,665 warrants to purchase
Series B preferred stock at a price of $4.62 per share for $1,033,333 in cash.
Two officers of the Company were required to exercise 36,075 warrants to
purchase Series B preferred stock at the same price. The exercise of the
36,075 warrants was offset by a reduction to accrued liabilities for
consulting services.
 
 Stock Option Plan
 
  The 1996 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in 1996. The purpose of the Plan is
to promote the long-term growth and profitability of the Company by providing
key people with incentives to contribute to the growth and financial success
of the Company. The aggregate number of shares of common stock for which
options may be granted under the Plan shall not exceed 779,221 shares (see
Note 11). Additional information with respect to stock option activity is
summarized as follows:
Year ended December 31,
                                              ----------------------------------
                                                    1997             1998
                                              ---------------- -----------------
                                                      Weighted          Weighted
                                                      Average           Average
                                                      Exercise          Exercise
                                              Shares   Price   Shares    Price
                                              ------- -------- -------  --------
Outstanding at beginning of year..........  19,480  $0.39   215,298   $3.54
   Options granted........................... 195,818  $3.85   389,611   $4.88
   Options exercised.........................     --   $ --        --    $ --
   Options canceled or expired...............     --   $ --    (72,727)  $3.85
                                              -------  -----   -------   -----
   Outstanding at end of year................ 215,298  $3.54   532,182   $4.48
                                              =======  =====   =======   =====
   Exercisable at end of year................  19,480  $0.39   126,312   $3.79
                                              =======  =====   =======   =====
The options outstanding at December 31, 1998 range in price from $0.39 per
share to $5.29 per share and have a weighted average remaining contractual
life of 7.6 years.
 
  The Company applies APB 25 in accounting for its stock option plan and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS 123's fair value method to the
Company's stock-based awards results in net losses of $372,951, $2,093,571 and
$4,872,452 in 1996, 1997 and 1998, respectively, with a net loss per share of
$0.45, $1.21 and $2.23, respectively. The weighted average fair value of the
options granted in 1997, used as a basis for the above pro forma disclosures,
was estimated as $1.69 as of the date of grant using a minimum value method
option pricing model. The weighted average fair value of the options granted
during 1998 was estimated as $1.95 as of the date of grant using the Black-
Scholes option-
 
                                     F-13
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
pricing model with the following assumptions: dividend yield 0%, volatility of
25%, risk-free interest rate of 6.5% and expected lives of 5 or 10 years. The
effect of applying SFAS 123 on 1997 and 1998 pro forma net loss as stated
above is not necessarily representative of the effects on reported net income
for future years due to, among other things, the vesting period of the stock
options and the fair value of additional stock options in future years.
 
 Warrants
 
  The following table summarizes all common and preferred stock warrant
activity:
Year ended December 31,
                                                         -----------------------
                                                            1997        1998
                                                         ----------- -----------
Outstanding at beginning of year.....................         --    1,314,158
   Warrants issued......................................   1,314,158     280,519
   Warrants exercised...................................         --      364,654
                                                         ----------- -----------
   Outstanding at end of year...........................   1,314,158   1,230,023
                                                         =========== ===========
The weighted average fair value of the warrants granted during 1998 was
estimated as $1.66 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 25%, risk-free
interest rate of 6.5% and expected lives ranging from 3.5 to 10 years.
 
6. Income Taxes
 
  At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $4,260,000. The timing and manner in which the operating loss
carry-forwards may be utilized in any year will be limited to the Company's
ability to generate future earnings and by limitations imposed due to change
in ownership. Current net operating loss carry-forwards will expire in the
year 2018. As the Company has not generated earnings and no assurance can be
made of future earnings, a valuation allowance in the amount of the deferred
tax assets has been recorded. The change in the valuation allowance was
$1,748,542. There was no current or deferred provision for income taxes for
the period from April 23, 1996 (inception) through December 31, 1996 or the
years ended December 31, 1997 or 1998.
 
  Net deferred tax assets consist of:
December 31,
                                                        ----------------------
                                                          1997        1998
                                                        ---------  -----------
Deferred tax assets:
     Start up expenses................................. $ 555,944  $   460,108
     Deferred compensation.............................   287,365      237,583
     Warrants..........................................    57,189      227,795
     Trademark expense.................................       --       114,000
     Net operating loss carry-forward..................    10,985    1,620,539
                                                        ---------  -----------
     Deferred tax assets before valuation allowance....   911,483    2,660,025
   Less valuation allowance............................  (911,483)  (2,660,025)
                                                        ---------  -----------
   Net deferred tax assets............................. $     --   $       --
                                                        =========  ===========
The Company has not paid any income taxes since inception.
 
                                     F-14
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to the loss before income taxes due to the
effects of the following:
Period from
                                      April 23, 1996
                                      (inception) to Year ended December 31,
                                       December 31,  ------------------------
                                           1996         1997         1998
                                      -------------- ----------- ------------
Expected tax benefit at federal
    statutory tax rate..............    $(124,886)   $ (708,613) $ (1,582,621)
   Future state benefit, net of
    federal benefit.................      (16,305)      (79,801)     (186,191)
   Nondeductible expenses and
    other...........................      (12,943)       31,065        20,270
   Increase in valuation allowance..      154,134       757,349     1,748,542
                                        ---------    ----------  ------------
                                        $     --     $      --   $        --
                                        =========    ==========  ============
7. Commitments
 
 Royalty Agreements
 
  The Company has signed contracts with record labels for non-exclusive rights
to manufacture, advertise, market, promote, distribute and sell custom CDs and
digitally downloaded songs over the Internet. The agreements contain a master
use royalty rate of 15% of the selling price less any sales, excise or similar
taxes. If the Company enters into a more favorable royalty rate with another
licensor, the majority of these contracts contain clauses allowing the
licensor to also receive the more favorable royalty terms. As discussed in
Note 1, the majority of the contracts require advances upon the anniversary
dates of the signing of the contracts. The more recent agreements provide for
the Company to pay advances based on actual royalties earned by the label in
the previous year, as opposed to a fixed amount.
 
  Fixed royalty commitments on contracts entered into as of December 31, 1998
are as follows:
Year ended December 31,
   -----------------------
1999.............................................................. $527,500
     2000..............................................................  183,333
                                                                        --------
                                                                        $710,833
                                                                        ========
Operating Leases
 
  The Company leases its office facility, certain computer equipment and
office furniture under operating lease agreements that were entered into
during 1998. Operating lease expense for the period from April 23, 1996
(inception) to December 31, 1996, and the years ended December 31, 1997 and
1998 was $1,800, $21,000, and $110,000, respectively.
 
 Financial Consulting Agreement
 
  In connection with the Company's planned IPO, the Company signed an
agreement on December 23, 1998 obligating it to pay $125,000 at the closing of
the IPO.
 
                                     F-15
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Future minimum lease payments as of December 31, 1998 are as follows:
Year ended December 31,
   -----------------------
1999.............................................................. $188,912
     2000..............................................................  164,656
     2001..............................................................  115,297
     2002..............................................................  118,584
     Thereafter........................................................  299,618
                                                                        --------
                                                                        $887,067
                                                                        ========
8. Related Party Transactions
 
  Accrued compensation of $756,221 and $625,219 as of December 31, 1997 and
1998, respectively, are amounts due to stockholders for consulting services
rendered to the Company. Additionally, in December 1998, the Company advanced
a stockholder and officer $81,519 against his 1999 bonus.
 
9. Net Loss Per Share
 
  The following table sets forth the computation of basic and diluted net loss
per share:
Period from
                            April 23, 1996 Year ended   Year ended    Pro Forma
                            (inception to   December     December     Year ended
                             December 31,      31,          31,      December 31,
                                 1996         1997         1998          1998
                            -------------- -----------  -----------  ------------
                                                                     (Unaudited)
Numerator:
     Net loss..............   $(367,312)   $(2,084,157) $(4,654,767) $(4,941,037)
                              =========    ===========  ===========  ===========
   Denominator:
     Denominator for basic
      net loss per share--
      weighted average
      shares...............     830,076      1,734,328    2,186,488    2,863,521
   Effect of dilutive
    securities:
     Preferred stock.......         --             --           --           --
     Stock options.........         --             --           --           --
     Warrants..............         --             --           --           --
                              ---------    -----------  -----------  -----------
   Dilutive potential
    common shares..........         --             --           --           --
   Denominator for diluted
    net loss per share--
    adjusted weighted
    average shares.........     830,076      1,734,328    2,186,488    2,863,521
                              =========    ===========  ===========  ===========
   Basic net loss per
    share..................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                              =========    ===========  ===========  ===========
   Diluted net loss per
    share..................   $   (0.44)   $     (1.20) $     (2.13) $     (1.73)
                              =========    ===========  ===========  ===========
F-16
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
Period from
                            April 23, 1996                            Pro Forma
                            (inception) to  Year ended   Year ended   Year ended
                             December 31,  December 31, December 31, December 31,
                                 1996          1997         1998         1998
                            -------------- ------------ ------------ ------------
                                                                     (Unaudited)
Preferred stock:
     Series A..............        --        454,545      454,545           --
     Series B..............        --            --       364,654           --
   Preferred stock
    warrants:
     Series B..............        --        865,801      501,147           --
     Series C..............        --        227,578      227,578           --
   Stock options...........     19,480       215,298      532,182       532,182
   Warrants................        --        220,779      501,298     1,230,023
10. Pro Forma Financial Information (unaudited)
 
  The financial statements include pro forma information as of December 31,
1998 to give effect to (i) the one-for-3.85 reverse stock split to be effected
prior to the completion of the IPO, (ii) the automatic conversion, upon the
completion of the IPO, of all outstanding shares of convertible preferred
stock into 819,199 shares of common stock, (iii) the automatic conversion of
all outstanding convertible notes payable into 415,584 shares of common stock
($512,500 of convertible notes payable outstanding at December 31, 1998 and
$1,487,500 of convertible notes payable issued in January 1999), and (iv) the
write-off of all capitalized loan fees related to the convertible notes
payable ($112,395 capitalized at December 31, 1998 and $173,875 capitalized in
January 1999).
 
11. Subsequent Events
 
  On November 20, 1998, the Board of Directors approved an increase in the
aggregate number of shares of common stock for which options may be granted
under the Stock Option Plan to be 779,221 shares, subject to the approval of
the stockholders. The stockholders approved the authorized shares increase in
February 1999. The stockholders also authorized the Company's Amended and
Restated Certificate of Incorporation in February 1999, which increased the
total number of authorized shares of common stock to 15,584,416 shares.
 
  In January 1999, the Company completed its private placement of convertible
notes payable and received an additional $1,487,500. In connection with the
convertible notes payable issued in January, the Company recorded loan fees of
$173,875 and issued a warrant to purchase 41,558 shares of common stock at an
exercise price of $4.81, which expires on January 11, 2004.
 
  In January 1999, the Company completed its common stock private placement
and issued an additional 252,104 shares of common stock at $4.81 per share for
a total of $1,213,250 in cash. The Company paid a commission of approximately
$97,000 related to this private placement and issued a warrant to purchase
46,764 shares of common stock with an exercise price of $4.81, which expires
on January 14, 2004.
 
                                     F-17
musicmaker.com, Inc.
                  (formerly The Music Connection Corporation)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  On January 8, 1999, the Company signed a lease line agreement which provides
leasing for computer and related equipment as well as CD fabrication equipment
up to $200,000 between the signing of the agreement and June 8, 1999. Any
equipment leased under this agreement will have a 24 month lease term, and at
the end of the lease term the Company will either be obligated to buy the
equipment at 10% of the original equipment cost or extend the lease term for
an additional 24 months. The Company also signed the first lease under this
agreement which will have a monthly rental payment of $8,261. As part of the
lease line agreement, the Company issued a warrant to purchase 6,234 shares of
its common stock at $4.81 per share which expires on January 8, 2009.
 
  On February 12, 1999, the Company signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. The credit
facility matures six months from the date of the loan unless $5,000,000 in new
equity has been raised prior to maturity. In that case, the portion of the
credit facility used for equipment and software purchases will be termed-out
for 24 months. If the term of the credit facility is extended, the financial
institution will have the right to purchase warrants equal to 4% of the
commitment amount.
 
  In February 1999, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock in the IPO.
 
  On     , 1999, the Board of Directors approved a one-for-3.85 reverse stock
split of the Company's common stock, which will become effective on       .
All references in the accompanying financial statements to the number of
shares of common stock and per-share amounts have been restated to reflect the
split. Additionally, all references in the accompanying financial statements
to the number of shares of preferred stock and per-share amounts have been
restated to reflect the split in accordance with the Company's Restated
Articles of Incorporation.
 
  Immediately upon completion of the IPO, all outstanding shares of Series A,
Series B and Series C convertible preferred stock will convert into 819,199
shares of common stock and all outstanding convertible notes payable will
convert into 415,584 shares of common stock.
 
                                     F-18
Part II
 
                    Information Not Required in Prospectus
 
Item 13. Other Expenses of Issuance and Distribution.
 
  We estimate that our expenses to be paid in connection with the offering
(other than underwriting discounts, commissions and reasonable expense
allowances) will be as follows:
SEC registration fee........................................... $ 8,340
        NASD filing fee................................................ $ 3,500
        Nasdaq National Market listing fee............................. $75,625
        Printing and engraving expenses................................ $     *
        Accounting fees and expenses................................... $     *
        Legal fees and expenses........................................ $     *
        Miscellaneous.................................................. $     *
                                                                        -------
              Total.................................................... $     *
                                                                        =======
--------
* To be filed by amendment.
 
Item 14. Indemnification of Directors and Officers.
 
  Musicmaker.com is organized under the laws of the State of Delaware.
Musicmaker.com's Charter and Bylaws provide that musicmaker.com shall
indemnify and advance expenses to its directors, officers, employees and
agents, and all persons who at any time served as directors, officers,
employees or agents of musicmaker.com, to the fullest extent permitted, and in
the manner provided under the laws of the State of Delaware.
 
  The DGCL provides that a Delaware corporation has the power generally to
indemnify its directors, officers, employees and other agents serving, or who
have served, musicmaker.com (each, a "Corporate Agent") against expenses and
liabilities (including amounts paid in settlement) in connection with any
proceeding involving such person by reason of his being a Corporate Agent,
other than a proceeding by or in the right of the corporation, if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal proceeding, such person had no reasonable cause to believe his
conduct was unlawful.
 
  In the case of an action brought by or in the right of the corporation,
indemnification of a Corporate Agent is permitted if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation; however, no indemnification is permitted in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that
the Court of Chancery or the court in which such proceeding was brought shall
determine upon application that despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to such indemnification.
 
  To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in the defense of such
proceeding, whether or not by or in the right of the corporation, or in the
defense of any claim, issue or matter therein, the corporation is required to
indemnify such person for expenses in connection therewith. Expenses incurred
by a Corporate Agent in connection with a proceeding may, under certain
circumstances, be paid by the corporation in advance of the final disposition
of the proceeding as the corporation deems appropriate. Musicmaker.com's
Charter permits the advancement of expenses by musicmaker.com to officers or
directors defending a qualified civil or criminal action upon receipt of an
undertaking by such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification.
The terms and conditions of such advancement are to be determined by
musicmaker.com's Board of Directors.
 
 
                                     II-1
The power to indemnify and advance the expenses under the DGCL does not
exclude other rights to which a Corporate Agent may be entitled to under the
certificate of incorporation, by laws, agreement, vote of stockholders or
disinterested directors or otherwise.
 
  Pursuant to Delaware law and musicmaker.com's Charter, a director, officer,
employee or agent of musicmaker.com that is successful on the merits or
otherwise in defense of any action, suit or proceeding, or in defense of any
claim, issue or matter therein, may require musicmaker.com to provide
indemnification for expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
 
  Unless ordered by a relevant court, indemnification for qualified persons
shall be authorized on behalf of musicmaker.com by: (i) a majority of a quorum
of the Board of Directors, if a quorum consisting of the directors not party
to such action suit or proceeding can be obtained; or (ii) by independent
legal counsel in a written opinion, if a quorum of (i) above is not obtainable
or if such disinterested quorum so directs; or (iii) stockholder approval.
 
  Under the DGCL and musicmaker.com's Charter, musicmaker.com is permitted to
purchase and maintain insurance on behalf of Corporate Agents of
musicmaker.com or persons serving at the request of musicmaker.com as
Corporate Agents of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and
incurred by him or her in such capacity or arising out of his or her status as
such, whether or not musicmaker.com would have had the power to indemnify such
person.
 
  The purpose of these provisions is to assist musicmaker.com in retaining
qualified individuals to serve as officers, directors or other Corporate
Agents by limiting their exposure to personal liability for serving as such.
 
Item 15. Recent Sales of Unregistered Securities.
 
  During the past three years, the following securities were issued by
musicmaker.com without registration under the Securities Act:
 
  In July 1996, in connection with its formation, musicmaker.com issued and
sold 551,948 and 97,403 shares of common stock to Mr. Bernardi,
musicmaker.com's founder, Chairman of the Board of Directors and Co-Chief
Executive Officer, and an accredited investor, respectively, for nominal
consideration.
 
  In July 1996, musicmaker.com issued 649,351 shares of common stock to seven
foreign stockholders in connection with the acquisition of all of the
outstanding securities of CD Kit, S.A.
 
  Between December 1996 and May 1997, musicmaker.com issued and sold 12%
convertible notes to eight accredited investors for $650,000. The notes were
convertible into common stock.
 
  Between October 1996 and May 1997, musicmaker.com issued and sold 353,247
shares of common stock to various accredited investors for total aggregate
consideration of approximately $13,510. In May 1997, 12,987 shares of common
stock were issued in exchange for, and as compensation for services rendered
to musicmaker.com.
 
  Between July 1997 and November 1997, musicmaker.com issued and sold 167,273
shares of common stock to investors for total aggregate consideration of
$303,440. In July 1997, 12,987 shares of common stock were issued to a
consultant in exchange for, and as compensation for services rendered to
musicmaker.com.
 
  In July 1997, the outstanding notes issued between December 1996 and May
1997 were converted to 178,344 shares of common stock at a conversion price of
$3.85 per share. Also, five note holders including one of our officers
invested $25,000 each and each received 6,494 shares.
 
  In October 1997, musicmaker.com issued 194,805 common stock warrants to Mr.
Puthukarai, musicmaker.com's President, Co-Chief Executive Officer and Chief
Operating Officer and a warrant for 25,974
 
                                     II-2
shares of common stock to another investor. The warrants are exercisable by
the holders into common stock at an exercise price of $3.85 per share.
 
  In December 1997, musicmaker.com issued and sold 454,545 shares of Series A
preferred stock to Rho, Mr. Bernardi and Mr. Puthukarai, and another investor
at a price of $3.85 per share. Additionally, musicmaker.com issued 865,801
Series B and 227,578 Series C preferred warrants to the persons above. The
Series B preferred warrants are exercisable into Series B preferred stock at
an exercise price of $4.62 per share and the Series C preferred warrants are
exercisable into Series C preferred stock at an exercise price of $5.78 per
share. Musicmaker.com's outstanding preferred stock and outstanding preferred
warrants shall automatically convert into common stock, and warrants therefor,
upon completion of the offering.
 
  Effective February 18, 1999, musicmaker.com's stockholders approved and
adopted an amendment to our stock option plan which authorized musicmaker.com
to grant options to purchase up to 779,221 shares of common stock. As of
January 31, 1999, 532,182 options for shares of common stock were granted and
outstanding. No shares of common stock have been issued pursuant to the
exercise of options under the stock option plan. The exercise price of the
options for musicmaker.com's common stock ranges from $0.385 to $5.29 per
share.
 
  In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to obtaining
license agreements with record labels on behalf of musicmaker.com. These
warrants expire January 15, 2008. In August 1998, musicmaker.com issued 25,974
common stock warrants to four members of Mr. Steinberg's family as record
holders. The warrants were granted as compensation for consulting services
rendered to musicmaker.com by Mr. Steinberg. The warrants are convertible by
the holders into common stock at an exercise price of $4.62 per share and
expire on August 15, 2008.
 
  In June 1998, musicmaker.com issued a warrant for 129,870 shares of common
stock to Columbia House in connection with entering into a marketing alliance.
The warrant is convertible by the holder into common stock at an exercise
price of $4.62 per share.
 
  In September 1998, musicmaker.com issued 259,740 shares of common stock to
Platinum at a value of $1,650,000 in connection with a marketing agreement,
licensing arrangement and a stock exchange agreement under which
musicmaker.com purchased 111,457 shares of common stock of Platinum. In
November 1998, an additional 83,117 shares of common stock were issued
pursuant to the terms of the stock exchange agreement above.
 
  Between September 1998 and January 1999, musicmaker.com issued shares of its
common stock in a private placement to accredited investors at $4.81 per
share. Musicmaker.com used the financial advisory services of Ryan, Lee &
Company, Incorporated, on a best efforts basis, which received a 7% commission
and warrants for 46,764 shares of our common stock exercisable at $4.81 per
share as compensation for their assistance in the private placement.
Musicmaker.com received consideration in connection with this private
placement of approximately 701,494. The offering closed on January 14, 1999.
 
  Between November 1998 and January 1999, musicmaker.com issued an aggregate
value of $2,000,000 8% convertible notes to accredited investors. The
convertible notes were issued at a cost of $25,000 per note and each note is
convertible into 5,195 shares of musicmaker.com's common stock at $4.81 per
share. Musicmaker.com received consideration in connection with the above sale
of convertible notes of approximately $1,800,000. Musicmaker.com utilized the
services of GunnAllen Financial, Inc., on a best efforts basis, which received
a 10% discount and commission for their assistance in the sale above, and
41,558 warrants for our common stock with an exercise price of $4.81 per
share. The offering of convertible notes above closed on January 11, 1999.
 
 
                                     II-3
All the above transactions were exempt from registration pursuant to
Sections 3(b), 4(2) or 4(6) of the Securities Act.
 
Item 16. Exhibits.
 
  The following exhibits are filed as part of this registration statement:
Page
   Exhibit No.                        Description                          No.
   -----------                        -----------                          ----
1.1        Form of Underwriting Agreement between musicmaker.com and
               Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
               Inc. as Representatives.*
    3.1        Restated Certificate of Incorporation.*
    3.2        Bylaws.*
    4.1        Form of Common Stock Certificate.*
    4.2        Representatives' Warrant Agreement.*
    5.1        Opinion of Venable, Baetjer and Howard, LLP regarding
               legality.*
    5.2        Opinion of Darby & Darby, P.C.*
   10.1        Amended and Restated Employment Agreement between the
               Company and Robert P. Bernardi, as amended, dated
               February 12, 1999.
   10.2        Amended and Restated Employment Agreement between the
               Company and Devarajan S. Puthukarai, as amended, dated
               February 12, 1999.
   10.3        Consulting Agreement dated January 23, 1997, between the
               Company and Irwin H. Steinberg, as amended on January 1,
               1998, and by letters to the Company dated August 28, 1998
               and August 31, 1998.
   10.4        Letter Agreement dated June 12, 1998, between the Company
               and The Columbia House Company.
   10.5        The Company's Amended Stock Option Plan.*
   10.6        Marketing Agreement dated September 30, 1998, between
               Platinum Entertainment, Inc. and the Company.
   10.7        Memorandum of Understanding between the Company and Audio
               Book Club, Inc. dated January 18, 1999.
   10.8        Office/Warehouse/Showroom Lease dated January 15, 1998
               between the Company and Century Properties Fund XX.
   10.9        Form of Lock-up Agreement.*
   10.10       Letter Agreement dated February 12, 1999 between the
               Company and Imperial Bank.*
   10.11       Master Equipment Lease dated January 8, 1999 between the
               Company and Boston Financial & Equity Corporation.*
   23.1        Consent of Ernst & Young LLP, independent auditors.
   23.2        Consent of Venable, Baetjer and Howard, LLP (included in
               Exhibit 5.1).*
   23.3        Consent of Darby & Darby, P.C.
   24          Power of Attorney.
   27          Financial Data Schedule.
--------
* To be filed by amendment.
 
Item 17. Undertakings.
 
  (a) The undersigned musicmaker.com hereby undertakes:
 
    (1) To file, during any period in which offers or sales are being made, a
  post-effective amendment to this registration statement;
 
      (i) To include any prospectus required by Section 10(a)(3) of the
    Securities Act;
 
                                     II-4
(ii) To reflect in the prospectus any facts or events arising after
    the effective date of the registration statement (or the most recent
    post-effective amendment thereof) which, individually or in the
    aggregate, represent a fundamental change in the information set forth
    in the registration statement). Notwithstanding the forgoing, any
    increase or decrease in volume of securities offered (if the total
    dollar value of securities offered would not exceed that which was
    registered) and any deviation from the low or high end of the estimated
    maximum offering range may be reflected in the form of prospectus filed
    with the Commission pursuant to Rule 424(b) if, in the aggregate, the
    changes in volume and price represent no more than a 20% change in the
    maximum aggregate offering price set forth in "Calculation of
    Registration Fee" table in the effective registration statement;
 
      (iii) To include any material information with respect to the plan of
    distribution not previously disclosed in the registration statement or
    any material change to such information in the registration statement;
 
    (2) That, for the purpose of determining any liability under the
  Securities Act, each such post-effective amendment shall be deemed to be a
  new registration statement relating to the securities offered therein, and
  the offering of such securities at that time shall be deemed to be the
  initial bona fide offering thereof.
 
    (3) To remove from registration by means of a post-effective amendment
  any of the securities being registered which remain unsold at the
  termination of the offering.
 
  (b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
 
  (c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
 
  (d) The undersigned Registrant hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of prospectus filed as part of this
  registration statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective.
 
    (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
                                     II-5
SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Reston, Virginia, on the 17th day of
February 1999.
 
 
                                          MUSICMAKER.COM, INC.
 
                                                  /s/ Robert P. Bernardi
                                          By__________________________________:
                                                    Robert P. Bernardi
                                             President and Co-Chief Executive
                                                          Officer
 
                               POWER OF ATTORNEY
 
  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert P. Bernardi and Devarajan S.
Puthukarai and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
 
                                     II-6
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Robert P. Bernardi         Chairman and Co-Chief      February 17, 1999
______________________________________  Executive Officer
          Robert P. Bernardi            (Principal Executive
                                        Officer)
 
          /s/ Mark A. Fowler           Director of Finance and    February 17, 1999
______________________________________  Administration and Chief
            Mark A. Fowler              Financial Officer
                                        (Principal Financial and
                                        Accounting Officer)
 
        /s/ Irwin H. Steinberg         Vice Chairman              February 8, 1999
______________________________________
          Irwin H. Steinberg
 
     /s/ Devarajan S. Puthukarai       Co-Chief Executive         February 6, 1999
______________________________________  Officer, President, Chief
       Devarajan S. Puthukarai          Operating Officer and
                                        Director
 
        /s/ Edward J. Mathias          Director                   February 17, 1999
______________________________________
Edward J. Mathias
 
 
 
                                      II-7
EXHIBIT INDEX
Page
   Exhibit No.                        Description                          No.
   -----------                        -----------                          ----
1.1        Form of Underwriting Agreement between musicmaker.com and
               Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
               Inc. as Representatives.*
    3.1        Restated Certificate of Incorporation.*
    3.2        Bylaws.*
    4.1        Form of Common Stock Certificate.*
    4.2        Representatives' Warrant Agreement.*
    5.1        Opinion of Venable, Baetjer and Howard, LLP regarding
               legality.*
    5.2        Opinion of Darby & Darby, P.C.*
   10.1        Amended and Restated Employment Agreement between the
               Company and Robert P. Bernardi, as amended, dated
               February 12, 1999.
   10.2        Amended and Restated Employment Agreement between the
               Company and Devarajan S. Puthukarai, as amended, dated
               February 12, 1999.
   10.3        Consulting Agreement dated January 23, 1997, between the
               Company and Irwin H. Steinberg, as amended on January 1,
               1998, and by letters to the Company dated August 28, 1998
               and August 31, 1998.
   10.4        Letter Agreement dated June 12, 1998, between the Company
               and The Columbia House Company.
   10.5        The Company's Amended Stock Option Plan.*
   10.6        Marketing Agreement dated September 30, 1998, between
               Platinum Entertainment, Inc. and the Company.
   10.7        Memorandum of Understanding between the Company and Audio
               Book Club, Inc. dated January 18, 1999.
   10.8        Office/Warehouse/Showroom Lease dated January 15, 1998
               between the Company and Century Properties Fund XX.
   10.9        Form of Lock-up Agreement.*
   10.10       Letter Agreement dated February 12, 1999 between the
               Company and Imperial Bank.*
   10.11       Master Equipment Lease dated January 8, 1999 between the
               Company and Boston Financial & Equity Corporation.*
   23.1        Consent of Ernst & Young LLP, independent auditors.
   23.2        Consent of Venable, Baetjer and Howard, LLP (included in
               Exhibit 5.1).*
   23.3        Consent of Darby & Darby, P.C.
   24          Power of Attorney (Contained on the signature page).
   27          Financial Data Schedule.
--------
* To be filed by amendment.