<PAGE>

    As filed with the Securities and Exchange Commission on October 14, 1999
                                                      Registration No. 333-

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                --------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                                --------------
                                EMUSIC.COM INC.
             (Exact name of registrant as specified in its charter)

        Delaware                    3652                    94-3290594
State(or jurisdiction of     (Primary Standard           (I.R.S. Employer
    incorporation or             Industrial            Identification No.)
     organization)

                            Classification Code
                                  Number)
                            1991 Broadway, 2nd Floor
                         Redwood City, California 94063
                                 (650) 216-0200
         (Address and telephone number of principal executive offices)
                                --------------
                               Gene Hoffman, Jr.
                     President and Chief Executive Officer
                                EMusic.com Inc.
                            1991 Broadway, 2nd Floor
                         Redwood City, California 94063
                                 (650) 216-0200
           (Name, address and telephone number of agent for service)

                                   Copies to:
                               Andrew Zeif, Esq.
                               Craig Malina, Esq.
                        Gray Cary Ware & Freidenrich LLP
                              400 Hamilton Avenue
                        Palo Alto, California 94301-1825
                                 (650) 833-2000

                                --------------
    Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
                                --------------

    If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

    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

<TABLE>
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                             Proposed
                                                           Proposed           Maximum
                                                           Maximum           Aggregate
       Title of Each Class of         Amount to be      Offering Price       Offering          Amount of
    Securities to be Registered        Registered        Per Share(1)        Price(1)      Registration Fee
-----------------------------------------------------------------------------------------------------------
 <S>                                <C>               <C>                <C>               <C>
 Common Stock ($0.001 par              13,284,102
  value).........................       shares(2)           $15.75         $209,224,607         $58,165
-----------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457(c) of the Securities Act and based on the average of the
    closing bid and asked prices reported on the Nasdaq National Market on
    October 6, 1999.
(2) Represents shares of common stock (i) issued in connection with the
    conversion of shares of our Series B Preferred Stock; (ii) issuable upon
    exercise of outstanding common stock purchase warrants; (iii) issued in
    connection with certain acquisitions, a share exchange transaction and
    other transactions.
                                --------------
  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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                 Subject to Completion, Dated October 14, 1999

The information contained in this prospectus is not complete and may be
changed. These securities may not be sold 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.

                                 The Resale of
                               13,284,102 Shares

                           [LOGO OF EMUSIC.COM INC.]

                                 Common Stock
  The selling price will be determined by market factors at the time of their
                                    resale

-------------------------------------------------------------------------------
This prospectus relates to the resale by the selling stockholders of up to
13,284,102 shares of common stock. The selling stockholders may sell the stock
from time to time at the prevailing market price or in negotiated
transactions. Of the shares offered:

  .  up to 11,737,000 shares are presently outstanding and were issued upon
     the conversion of the Company's Series B Preferred Stock,

  .  up to 1,255,367 shares are presently outstanding and were issued in
     connection with the acquisition of Creative Fulfillment, Inc. and the
     purchase of certain assets of Nordic Entertainment Worldwide, Inc. and
     certain related partnerships;

  .  up to 110,000 shares are issuable upon the exercise of common stock
     purchase warrants and

  .  up to 181,735 shares issued in connection with a share exchange
     transaction in connection with the acquisition by the Company of its
     predecessor corporation and various other transactions.

Of the shares covered by this prospectus, approximately 13,226,414 shares are
subject to lock-up agreements or other restrictions which precludes the resale
of such shares for 90 days following our September 24, 1999 underwritten
public offering. We will receive no proceeds from the sale of the shares by
the selling stockholders. However, we have received proceeds from the sale of
shares currently outstanding and, if exercised, will receive proceeds equal to
the exercise price of the common stock purchase warrants.

Our common stock is listed on the Nasdaq National Market under the symbol
"EMUS." On October 12, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $15.81 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.

-------------------------------------------------------------------------------

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.

               The date of this prospectus is October   , 1999.
<PAGE>

                               Table Of Contents

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Prospectus Summary.......................................................    4
Risk Factors.............................................................    8
Selling Stockholders.....................................................   19
Plan of Distribution.....................................................   27
Use of Proceeds..........................................................   29
Dividend Policy..........................................................   29
Capitalization...........................................................   30
Selected Financial Data..................................................   31
Management Discussion and Analysis of Financial Condition and Results of
 Operations..............................................................   32
Business.................................................................   38
Management...............................................................   50
Certain Transactions and Relationships...................................   57
Principal Stockholders...................................................   58
Description of Capital Stock.............................................   60
Shares Eligible for Future Sale..........................................   64
Price Range of Common Stock..............................................   65
Changes in and Disagreements with Accountants on Accounting and Financial
 Disclosure..............................................................   65
Legal Matters............................................................   66
Experts..................................................................   66
Where You Can Find More Information About Us.............................   66
Index to Financial Statements............................................  F-1
</TABLE>

                           -------------------------

Prior to June 1999, we operated under the name GoodNoise Corporation. Our
executive offices are located at 1991 Broadway, 2nd Floor, Redwood City,
California 94063, and our telephone number is (650) 216-0200. Our website can
be found at EMusic.com. Our website does not constitute part of this
prospectus.

"EMusic" is a registered trademark of EMusic.com Inc. and the EMusic logo is a
trademark of EMusic.com Inc. All other trademarks or tradenames referred to in
this prospectus are the property of their respective owners.

As used in this prospectus, the terms "we," "us," "our" and EMusic mean
EMusic.com Inc. and the term "common stock" means our common stock, par value
$0.001 per share.

                                       3
<PAGE>

                               Prospectus Summary

This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our common stock. You should read
the entire prospectus carefully, including "Risk Factors" and the financial
statements and related notes, before making an investment decision.

                                  Our Company

EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer music consumers a compelling selection of
music from which they may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. We currently have exclusive, multi-
year, digital download licenses to over 300,000 titles, from over 85 record
labels and over 1,300 recording artists, including selected titles from such
well known artists as The Offspring, They Might Be Giants, Iggy Pop and Ella
Fitzgerald. We currently have over 20,000 titles available for download on our
EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 4,000 unsigned artists. We believe this represents one of the
largest digital music content archives currently licensed for distribution over
the Internet.

Our website enables artists and labels to easily access a global customer base
while providing them with an integrated means of distributing, promoting and
tracking the sales of their recorded music. Recordings are offered for sale on
EMusic.com in the "mp3" format, the most widely-recognized compression standard
for the download of musical recordings. We believe that our combination of
selection, convenience, varied content, improved distribution and tracking
capabilities creates a compelling music purchasing experience for consumers as
well as an attractive distribution alternative for artists and independent
record labels.

The emergence of the Internet as a global communications standard, the growth
of high-speed internet access, the development of audio compression techniques,
such as mp3, and the proliferation of hardware and software that enables the
management and playback of downloadable music is currently driving rapid growth
in the sector. Forrester Research estimates that total online music revenues in
the United States are expected to grow from $89.0 million in 1998 to $7.8
billion in 2003. Of this amount, Forrester further estimates that $1.1 billion
will represent sales of downloadable music in 2003.

We operate a website that allows consumers to quickly and conveniently purchase
music and download it immediately, at a lower price than traditional CDs. We
believe that the limitations associated with the traditional music industry
present us with an opportunity to redefine the music distribution hierarchy and
enable artists and independent labels to access consumer markets at a level
currently only available to the major labels, while protecting the artists'
financial interests and providing consumers with numerous advantages in price,
convenience and music information.

Our solution provides the following benefits:

  .  Benefits to the Consumer. Consumer benefits include convenience, lower
     prices, large selection and music information. Downloadable music can be
     purchased online and used immediately, and can be more easily managed,
     carried and customized than music on physical media. When using the
     Internet as the distribution channel, there are none of the costs
     associated with distributing physical media, and as a result, music can
     be purchased at a lower cost than traditional CDs.

  .  Benefits to Artists and Independent Labels. Benefits to artists and
     independent labels include powerful distribution capability, greater
     understanding of fan base, significant new media exposure and an
     infrastructure to support the payment of royalties. Our solution offers
     global distribution to artists and independent labels, with higher
     margins stemming from lower distribution costs. By tracking the behavior
     of fans on our web site, we are able to offer artists and labels insight
     into who is buying their music, allowing them to focus their creative
     and promotional efforts.


                                       4
<PAGE>

Our goal is to become the leading provider of compelling, downloadable music
directly to consumers over the Internet. Key elements of our strategy include:

    .  Continue to acquire compelling content through agreements with
       independent record labels, owners and distributors of recording
       catalogs and artists;

    .  Create strong brand awareness through offline and online marketing,
       site development and referral fee arrangements;

    .  Leverage strategic relationships to build brand and acquire content;

    .  Improve website functionality with the addition of chat rooms, music
       hubs, more content, more advanced search capabilities and dynamic
       personalization;

    .  Leverage pricing and infrastructure to become a trusted distribution
       channel by designing our technology and structuring our pricing to
       dissuade piracy and track all appropriate royalty payments;

    .  Continue to promote development of the downloadable music market by
       supporting organizations dedicated to the proliferation of
       downloadable music and by providing consumers with a positive
       purchase experience; and

    .  Continue to develop and enhance Internet Underground Music Archive by
       making it easier to access and post songs and information which will
       allow us to establish early relationships with potential music
       content providers.

We are a development stage company and have experienced net losses since
inception in January 1998. We intend to aggressively invest to implement our
strategy, and expect to continue to incur net losses for the forseeable future.


                                       5
<PAGE>

                                  The Offering

Common stock offered by the selling     13,284,102 shares; Includes an
stockholders .........................  indeterminate number of shares of
                                        common stock that may become issuable
                                        to prevent dilution resulting from
                                        stock splits, stock dividends and
                                        conversion price or exercise price
                                        adjustments, which are included
                                        pursuant to Rule 416 promulgated under
                                        the Securities Act of 1933.

Common stock currently outstanding ...  As of the date of this prospectus, we
                                        have approximately 34,000,000 shares of
                                        common stock issued and outstanding.

Use of proceeds.......................  We will not receive any proceeds from
                                        the resale of the shares of common
                                        stock by the selling shareholders. We
                                        will receive proceeds from the payment
                                        of the exercise price of the common
                                        stock purchase warrants if any are
                                        exercised for cash.

<TABLE>
<S>                                             <C>
Nasdaq National Market symbol.................. EMUS
</TABLE>
------------------
These share numbers are based on shares outstanding as of September 30, 1999
and exclude:

  . 6,623,365 shares of common stock issuable upon exercise of outstanding
    options at an average exercise price of $7.93;

  . 2,711,976 shares of common stock issuable upon exercise of outstanding
    warrants at an average exercise price of $14.09; and

  . 4,160,650 shares of common stock issuable upon exercise of options that
    may be granted under our stock option plans.

                                       6
<PAGE>


                      Summary Consolidated Financial Data

<TABLE>
<CAPTION>
                                  January 8, 1998               January 8, 1998
                                  (inception) to   Year ended   (inception) to
                                   June 30, 1998  June 30, 1999  June 30, 1999
                                  --------------- ------------- ---------------
                                    (in thousands, except share and per share
                                                      data)
<S>                               <C>             <C>           <C>
Statement of Operations Data:
Revenues........................            --     $       92     $       92
                                    ----------     ----------     ----------
Gross profit....................            --             65             65
                                    ----------     ----------     ----------
Operating loss..................    $   (1,180)    $  (15,462)    $  (16,642)
                                    ----------     ----------     ----------
Net loss........................    $   (1,180)    $  (15,140)    $  (16,320)
                                    ==========     ==========     ==========
Net loss applicable to common
 shares.........................    $   (1,180)    $  (47,677)    $  (48,857)
                                    ==========     ==========     ==========
Net loss per common share-basic
 and diluted....................    $    (0.12)    $    (3.52)    $    (4.87)
                                    ==========     ==========     ==========
Weighted average common shares
 outstanding-basic and diluted..    10,234,055     13,563,606     10,027,231
Pro forma basic and diluted net
 loss per share.................                   $    (0.95)    $    (1.39)
                                                   ==========     ==========
Pro forma weighted average
 common shares outstanding-basic
 and diluted....................                   16,731,464     12,299,002
                                                   ==========     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                         Quarter Ended
                                         -------------------------------------------------
                                         June 30,  Sept. 30, Dec. 31,  March 31,  June 30,
                                           1998      1998      1998      1999       1999
                                         --------  --------- --------  ---------  --------
                                          (in thousands, all quarterly data unaudited)
<S>                                      <C>       <C>       <C>       <C>        <C>
Quarterly Statement of Operations Data:
Net revenue............................       --     $  12   $     8   $      21  $     51
Gross profit...........................       --        12         4          12        37
Net loss...............................   (1,091)     (849)   (1,125)     (2,289)  (10,877)
Net loss applicable to common shares...  $(1,091)    $(849)  $(1,294)  $ (33,914) $(11,620)
</TABLE>

<TABLE>
<CAPTION>
                                                                    As of
                                                                June 30, 1999
                                                             -------------------
                                                              Actual   Pro Forma
                                                             --------- ---------
                                                               (in thousands)
<S>                                                          <C>       <C>
Balance Sheet Data:
Cash and cash equivalents................................... $  19,002  $97,265
Working capital.............................................    16,593   94,856
Total assets................................................    54,221  132,484
Redeemable convertible preferred stock......................    32,550       --
Total stockholders' equity..................................    18,987  129,801
</TABLE>
------------------
The pro forma weighted average common shares outstanding include preferred
stock on an as converted basis as well as common stock. The pro forma balance
sheet data presented above reflect the receipt of the net proceeds from the
sale of the 5,270,000 shares of common stock sold by us in our underwritten
public offering at the offering price of $16.00 and after deducting
underwriting discounts, commissions and estimated offering expenses as well as
the conversion of our preferred stock.

                                       7
<PAGE>

                                  Risk Factors

Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors and other information contained in
this prospectus before deciding to invest in our stock.

Any of the following risks, if they actually occur, could materially and
adversely affect our business, financial condition or results of operations. In
such an event, the trading price of our common stock could decline, and you
could lose all or part of your investment.

We have a new and unproven business model and it may not generate sufficient
revenue for our business to survive or be successful.

Our model for conducting business and generating revenues is new and unproven
and if it fails to develop as we plan, our business may not succeed. Our
business model depends upon our ability to generate revenue streams from
multiple sources through our website, including:

  . online sales of downloadable music;

  . website advertising fees from third parties;

  . licensing of musical recordings for use by others; and

  . online sales of music-related merchandise.

It is uncertain whether a music-based website such as ours, that relies on
attracting people to purchase and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. This business model may
not succeed or it may not be sustainable as our business grows.

In order for our business to be successful, we must not only develop services
that directly generate revenue, but also provide content and services that
attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We may not
be able to provide consumers with an acceptable blend of products, services,
and informational and community offerings that will attract consumers to our
website frequently. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. Accordingly, we are not certain that our business model
will be successful or that we can sustain revenue growth or be profitable.

We are competing in a new market that may not develop sufficiently to support
our business.

The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services are subject to a high degree of uncertainty and risk. We are
attempting to capitalize on a talent pool of artists underserved by the
traditional recording industry. Consumers may not continue to be interested in
listening to, or purchasing music from, these artists. If this new market fails
to develop, develops more slowly than expected or becomes saturated with
competitors, or our products and services do not achieve or sustain market
acceptance, we may not generate sufficient revenues to become profitable.

The future popularity of downloadable music will depend on consumer acceptance
of downloading music generally. We believe that consumer acceptance is, in
part, dependent on the availability of portable devices to store and play this
music. To the extent that devices are not available at affordable prices, or
consumer acceptance or distribution of these portable devices is delayed, our
potential market, and thus our ability to increase our revenues, may be
reduced.

                                       8
<PAGE>

We have a limited operating history that makes an evaluation of our business
difficult.

We were incorporated in January 1998. During 1998, our operating activities
consisted largely of developing the infrastructure necessary to download music
on the Internet. Our limited operating history makes it difficult to evaluate
our current business and prospects. As a result of our limited operating
history, we do not have meaningful historical financial data upon which to
forecast quarterly revenues and results of operations. Before investing in us,
you should evaluate the risks, expenses and problems frequently encountered by
companies such as ours that are in the early stages of development.

We have incurred substantial losses to date and we expect net losses in the
future.

From inception through June 30, 1999, we had a deficit accumulated during the
development stage of $48.8 million. We expect substantial net losses and
negative cash flow for the foreseeable future. We believe it is critical to our
long-term success that we continue to develop "EMusic" brand awareness and
loyalty through marketing and promotion, expand our artist and consumer
networks, develop our online content and expand our other services. We expect
that our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will need
to generate significant additional revenues to achieve profitability. As a
result, we may never achieve profitability and, if we do achieve profitability
in any period, we may not be able to sustain or increase profitability.

Our quarterly revenues and operating results are subject to fluctuation which
may result in volatility or a decline in the price of our stock.

We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicators of future performance.
Our quarterly operating results are likely to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of our
control, including:

  . the demand for downloadable music content and Internet advertising;

  . the addition or loss of advertisers;

  . the level of traffic on our Internet sites;

  . the amount and timing of capital expenditures and other costs relating to
    the expansion of our operations;

  . the introduction of new sites and services by us or our competitors;

  . seasonal trends in Internet use, purchases of downloadable music, and
    advertising placements;

  . price competition or pricing changes in the industry;

  . technical difficulties or system downtime; and

  . general economic conditions, and economic conditions specific to the
    Internet and Internet media.

In addition, while our revenues may vary significantly, a portion of our
expenses are fixed. As a result, any decrease in revenues will not be
accompanied by a decrease in our fixed operating expenses and our operating
results will suffer. Our quarterly results may also be significantly impacted
by the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at our early stage of development, such accounting
treatment can have a material impact on the results for any quarter. Because of
these and other factors it is likely that our operating results will fall below
expectations in some future quarter and the trading price of our stock may
drop.

Shares eligible for future sale in the open market may depress our stock price.

As of September 30, 1999, there were approximately 34,000,000 shares of common
stock outstanding, of which approximately 10,000,000 were tradable without
restriction under the Securities Act and approximately

                                       9
<PAGE>

11,000,000 were tradable under Rule 144. Upon the effectiveness of this
registration statement, substantially all of our remaining outstanding stock
will be tradable, including shares tradable under Rule 144.

Our stock price has been and may continue to be volatile.

Our common stock is currently traded on the Nasdaq National Market under the
ticker symbol "EMUS." There can be no assurance that an active trading market
will be sustained in the future. In addition to fluctuations in our operating
results, the following factors could cause the price of our securities to be
volatile:

  . development of the downloadable music market;

  . technological innovations;

  . new products;

  . acquisitions or strategic alliances entered into by us or our
    competitors;

  . failure to meet securities analysts' expectations;

  . government regulatory action;

  . patent or proprietary rights developments; and

  . market conditions for internet and technology stocks in general.

If our brand name is not accepted, our ability to attract content and customers
to our website will be harmed.

During the quarter ended June 30, 1999, we began to operate under the name
EMusic.com Inc. and launched a marketing campaign to establish the brand name
"EMusic." We believe that establishing and maintaining the EMusic brand is a
critical aspect of our efforts to attract and expand our Internet audience and
acquire new content and that the importance of brand recognition will increase
due to the growing number of Internet sites and the relatively low barriers to
entry in providing Internet content. We intend to incur significant expenses in
our brand building efforts. If these efforts do not generate increased revenues
our operating results will suffer. If we are unable to provide high quality
content or otherwise fail to promote and maintain our brand, our business will
be harmed.

If we are unable to maintain or expand our contracts for music content, or if
the content we license does not sell, our popularity and business may suffer.

We believe that a primary draw to our website is the ability to access music
from known artists and independent record labels. Currently, we have exclusive
multi-year contracts for much of our music library. However, if we are unable
to sign contracts for new content, or if we are unable to extend the terms of
existing contracts as they expire, our website may fail to attract new, or
retain existing, customers which would harm our business.

For much of the content we license, we pay advances against future royalties
which will be owed on sale of the content. If the content we license does not
sell in sufficient quantities, we may not be able to recover all or part of the
advances we have paid and our business could be harmed.

We rely on a third party for the hosting of our website and if this hosting
service becomes unavailable, our customers will not be able to access our
website.

We currently rely on a third party which hosts our website at a single location
in San Jose, California. We currently do not maintain a redundant website. If
for any reason our current website hosting services become unavailable or if
our hosting service experiences technical problems, customers will not be able
to access our website until these services are restored or until we are able to
make arrangements with an alternate provider.

                                       10
<PAGE>

If we fail to adequately manage our growth, we may not be successful as we may
miss market opportunities.

We expect the scope of our operations and the number of our employees to grow
rapidly. In particular, we intend to hire additional engineering, sales,
marketing, content acquisition and administrative personnel. Additionally,
acquisitions could increase our employee headcount and business activity. We
expect our rapid growth to continue to place significant stress on our
technology, operations, management and employee base. Any failure to
successfully address the needs of our growing enterprise would harm our
business.

Our technology systems must be expanded and enhanced for our business to grow.

In order to support a growing business, we will need to continue to enhance and
expand the technology infrastructure which supports our business. We have
recently begun a conversion of our central database to a new database based
upon technology licensed from Oracle Corporation and we expect to implement a
new accounting system in the first half of calendar year 2000. As our business
continues to grow, we will need to add additional servers and other hardware
and software systems as well as additional sites for website hosting. If we
fail to successfully implement these new and enhanced systems, our operations
could be disrupted, we may become less competitive, our revenues could be
reduced and we may need to incur additional costs to address these issues.

We may have difficulty executing acquisitions and integrating the acquired
companies into our business.

Our business strategy includes entering into strategic alliances and acquiring
complementary businesses, technologies, content or products. In January 1999,
we completed the acquisition of Creative Fulfillment, Inc. and in June 1999, we
completed the acquisition of Internet Underground Music Archive. These and any
other future acquisitions involve risks commonly encountered in acquisitions of
companies, including:

  . exposure to unknown liabilities of acquired companies;

  . incurring acquisition costs and expenses in excess of what we
    anticipated;

  . the occurrence of fluctuations in our quarterly and annual operating
    results due to the costs and expenses of acquiring and integrating new
    businesses or technologies;

  . experiencing difficulties and expenses in assimilating the operations and
    personnel of the acquired businesses;

  . disruption of our ongoing business and diversion of our management's time
    and attention;

  . a possible inability to integrate successfully or to complete the
    development and application of acquired technology and a possible failure
    to achieve the anticipated financial, operating, and strategic benefits
    from these acquisitions;

  . experiencing difficulties in establishing and maintaining uniform
    standards, controls, procedures, and policies;

  . impairment of our relationships with key employees and customers of
    acquired businesses or the loss of these key employees and customers as a
    result of changes in management and ownership of the acquired businesses;
    and

  . acquisitions using the purchase method of accounting, which may result in
    goodwill, creating amortization charges in future periods.

In addition, our shareholders may be diluted if the consideration for future
acquisitions consists of equity securities. We may not overcome these risks or
any other problems encountered in connection with acquisitions. If we are
unsuccessful in doing so, our business could be harmed.


                                       11
<PAGE>

We expect competition to increase significantly in the future and we may not be
able to compete successfully.

The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers, users and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors.

Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.

Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages relative to us, including:

  . longer operating histories;

  . significantly greater financial, technical and marketing resources;

  . greater brand name recognition;

  . larger existing customer bases; and

  . more popular content or artists.

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion, and sale of their products or services than we
can. Websites maintained by our existing and potential competitors may be
perceived by consumers, artists, talent management companies and other music-
related vendors or advertisers as being superior to ours. In addition, we may
not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisement. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.

We may need to obtain additional funds to execute our business plan and if we
are unable to obtain such funds, we will not be able to expand our business as
planned.

We believe that our existing capital resources will be sufficient to fund our
planned level of operating activities, capital expenditures and other
obligations through the next 12 months. Further, we may need to raise
additional funds in order to:

  . finance unanticipated working capital requirements;

  . develop or enhance existing services or products;

  . fund distribution relationships;

  . advertise to build global brand recognition;

  . respond to competitive pressures; or

  . acquire complementary businesses, technologies, content or products.

                                       12
<PAGE>

Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited. If we raise additional
funds by issuing equity or convertible debt securities, the percentage
ownership of our then existing stockholders will be reduced, and these
securities may have rights, preferences or privileges senior to those of our
stockholders.

Our business is dependent on the continued development and maintenance of the
Internet and the availability of increased bandwidth to consumers.

The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Internet access and services. Because global commerce on the
Internet and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace
in the long term.

The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to continue to upload
and download mp3 and other music file formats, as well as to conduct commercial
transactions with us, without significant delays or aggravation that may be
associated with decreased availability of Internet bandwidth and slower access
to our website. Our penetration of a broader consumer market will depend, in
part, on continued proliferation of high speed Internet access. Even compressed
in mp3 format, a typical three minute song file can occupy more than three
megabytes of storage space. This file could take approximately seven minutes to
download over a conventional 56 kbps modem compared to less than one minute
over an xDSL or cable modem.

The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased
frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increases in users or bandwidth requirements may harm the performance of the
Internet. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. This might include outages and delays resulting from
the "year 2000" problem. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of music and music-
related products and services. The infrastructure and complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if
these products or services are developed, the Internet may not become a viable
commercial marketplace for the products or services that we offer.

We must maintain and establish strategic alliances to increase our customer
base and enhance our business.

In an attempt to increase our customer base and traffic on our website, build
brand recognition, attract paid advertising and enhance content, distribution
and commerce opportunities, we have entered into strategic alliances with
various media, hardware device and Internet-related companies such as: Creative
Labs, RealNetworks and Centraal. Our failure to maintain or renew our existing
strategic alliances or to establish and capitalize on new strategic alliances
could harm our business. Our future success depends to a significant extent
upon the success of such alliances. Moreover, we are substantially dependent on
our ability to advertise on other Internet sites and the willingness of the
owners of other sites to direct users to our Internet sites through hypertext
links. We may not achieve the strategic objectives of these alliances, and
parties to strategic alliance agreements with us may not perform their
obligations as agreed upon. Such agreements also may not be

                                       13
<PAGE>

specifically enforceable by us. In addition, some of our strategic alliances
are short term in nature and may be terminated by either party on short notice.
The termination or impairment of these strategic alliances could reduce our
ability to attract new customers.

Our success depends on our retention of key personnel.

Our performance is substantially dependent on the services of Robert H. Kohn,
our chairman, and Gene Hoffman, Jr., our chief executive officer, as well as on
our ability to recruit, retain and motivate other officers and key employees.
Competition for qualified personnel is intense and there are a limited number
of persons with knowledge of and experience in the Internet and music
entertainment industries. The loss of the services of any of our officers or
senior managers could harm our business.

We may not be able to hire and retain a sufficient number of qualified
employees to grow our business as planned.

Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. A large percentage of
our employees have joined us in 1999 and we expect that our rate of hiring will
continue at a very rapid pace. To manage the expected growth of our operations,
we will need to integrate these employees into our business. Our inability to
hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our programs, products and services, and could harm our
business. In addition, companies in the Internet and music industries whose
employees accept positions with competitive companies frequently claim that
their competitors have engaged in unfair hiring practices. We may be subject to
claims in the future as we seek to hire qualified personnel and those claims
may result in material litigation involving EMusic. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to
incur legal costs and diverting management's attention away from our business.

Security concerns regarding credit card or other confidential information
transmitted over the web could limit our growth and subject us to liability.

A significant barrier to e-commerce and communications over the Internet has
been the need for secure transmission of confidential information over public
networks. Internet usage may not increase at the rate we expect unless some of
these concerns are adequately addressed and found acceptable by the market.
Internet usage could also decline if any well publicized compromise of security
occurred. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. Protections
against security breaches may not be available at a reasonable price or at all.
If a third party were able to circumvent our security measures and
misappropriate our users' personal information, it may cause interruptions to
our retail website operation, damage our reputation or subject us to claims by
users. Any compromise of confidential data during transmission over the
Internet may harm our business.

Any failure of our internal security measures could cause us to lose customers
and subject us to liability.

Our business is dependent on maintaining a database of confidential user
information, including credit card numbers. If the security measures that we
use to protect personal information are ineffective, we may lose customers and
our business would be harmed. We rely on security and authentication technology
licensed from third parties. With this technology, we perform real-time credit
card authorization and verification. We cannot predict whether new
technological developments could allow these security measures to be
circumvented. In addition, our software, databases and servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We may need to spend significant resources to protect against
security breaches or to alleviate problems caused by any breaches and we may
not be able to prevent all security breaches.

                                       14
<PAGE>

Our intellectual property protection may be inadequate, and any loss or
reduction in intellectual property protection may harm our business.

Our intellectual property includes our trademarks and copyrights, proprietary
software, and other proprietary rights. We believe that our intellectual
property is important to our success and our competitive position, and we try
to protect it. However, our efforts to protect our intellectual property could
be inadequate. Use of the "EMusic" name by others could dilute our brand
identity and confuse the market. In addition, our ability to conduct our
business may be harmed if others claim we violate their intellectual property
rights. For example, Sightsound.com, Inc. has asserted that many online music
providers, including EMusic, violate patent rights that it allegedly owns
covering the sale of music over the Internet through digital downloads. If
successful, these claims, or similar claims by others, could seriously harm our
business by forcing us to cease using intellectual property that we depend on
to operate our business. Even if unsuccessful, these claims could harm our
business by damaging our reputation, requiring us to incur legal costs and
diverting management's attention away from our business.

Government regulation may require us to change the way we do business.

Laws and regulations directly applicable to Internet communications, commerce
and advertising are becoming more prevalent. The United States Congress has
enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information. The laws
governing the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising. In addition,
the growth and development of the market for Internet commerce may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
over the Internet. Furthermore, the Federal Trade Commission has recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax. For example, changes in copyright law could require us
to change the manner in which we conduct business or increase our costs of
doing business. Because of this rapidly evolving and uncertain regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or forcing us to change
how we do business. In the event the Federal Trade Commission or other
governmental authorities adopt or modify laws or regulations applicable to our
business, including those relating to the Internet and copyright matters, our
business could be harmed.

We may have liability for content on our website and liability for other
materials which we distribute.

We may be liable to third parties for content on our website and any other
materials we distribute if:

  . the music, text, graphics or other content on our website violates their
    copyright, trademark, or other intellectual property rights;

  . our artists or labels violate their contractual obligations to others by
    providing content on our website; or

  . content we distribute is deemed obscene, defamatory or excessively
    violent.

                                       15
<PAGE>

We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.

Liability or alleged liability for content or other materials could harm our
business by damaging our reputation, requiring us to incur legal costs in
defense, exposing us to significant awards of damages, fines and costs and
could divert management's attention away from our business. In particular, in
addition to civil damages, liability for violations of copyright law currently
can result in penalties of up to $10,000 per occurrence.

Imposition of sales and other taxes on e-commerce transactions may impair our
ability to derive financial benefits from e-commerce.

Except for sales of tangible merchandise into certain states, we do not collect
sales or other taxes on sales of our products through our websites. Although
the Internet Tax Freedom Act precludes, for a period of three years ending
January 2002, the imposition of state and local taxes that discriminate against
or single out the Internet, it does not currently impact existing taxes.
However, one or more states may seek to impose sales tax collection obligations
on out-of-state companies such as us, which engage in or facilitate online
commerce. A number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the growth
of electronic commerce and could adversely affect our opportunity to derive
financial benefit from electronic commerce. Moreover, if any state or foreign
country were to successfully assert that we should collect sales or other taxes
on the exchange of merchandise on its system, it could affect our cost of doing
business.

Legislation limiting the ability of states to impose taxes on Internet based
transactions has been proposed in the U.S. Congress. We cannot assure you that
this legislation will ultimately become law or that the tax moratorium in the
final version of this legislation will be ongoing. Failure to enact or renew
this legislation, if enacted, could allow various states to impose taxes on
Internet-based commerce, which could harm our business.

We may have difficulty expanding into international markets which could limit
the growth of our business.

Our future growth and success will depend in part on our ability to generate
international sales. There can be no assurance, however, that we will be
successful in generating international sales of our products. Sales to
customers in certain international countries may be subject to a number of
risks, including: currency exchange rate risk; the risks that agreements may be
difficult or impossible to enforce and receivables difficult to collect through
an international country's legal system; foreign customers may have longer
payment cycles; or foreign countries could impose withholding taxes or
otherwise tax our foreign income, impose tariffs, embargoes, or exchange
controls, or adopt other restrictions on foreign trade. In addition, the laws
of certain countries do not protect our offerings and intellectual property
rights to the same extent as the laws of the United States. If we fail to
compete successfully or to expand the distribution of our offerings in
international markets the growth of our business could be limited.

Development of new standards for the electronic delivery of music may threaten
our business.

We currently rely on mp3 technology as a delivery method for the digital
distribution of music. Mp3 is an open standard adopted by the Moving Picture
Experts Group for the compression of audio files. We do not own or control mp3
technology and are dependent upon a license to obtain rights to certain patents
relating to the technology. The onset of competing industry standards for the
electronic delivery of music could significantly affect the way we operate our
business as well as the public's perception of EMusic as a company. For
example, some of the major recording studios have recently announced a plan to
develop a universal standard for the electronic delivery of music, called the
Secured Digital Music Initiative and have announced their intention to make
this delivery method available by the end of 1999. If new standards are
developed and adopted by consumers, we may not be able to obtain a license to
such technology on favorable terms or at all and our business could be harmed.

                                       16
<PAGE>

Mp3 technology is controversial within certain segments of the traditional
music industry and we may face continued opposition to our use of mp3 which may
slow market development and harm our business.

Certain segments of the traditional music industry have not embraced the
development of the mp3 format to deliver music, in part because users of mp3
technology can download and distribute unauthorized or "pirated" copies of
copyrighted recorded music over the Internet. We believe that our success is
largely dependent upon the ease with which customers can download and play
music. We may face opposition from a number of different music industry sources
including record companies and studios, the Recording Industry Association of
America and certain artists. The adoption of competing standards may slow the
development of the market for downloadable music or result in increased costs
of doing business which could harm our business.

If we, or third parties on which we rely, fail to achieve year 2000 compliance,
our business could be harmed.

We may discover year 2000 compliance problems in our systems that will require
substantial revision. We have not conducted a year 2000 audit and have relied
only on our internal assessments of our year 2000 needs. Furthermore, we have
not developed contingency plans to respond to potential year 2000 issues. If we
unexpectedly experience failures related to the year 2000 problem or if we fail
to fix or replace any affected systems on a timely basis, our business could be
harmed. In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control, as
well as the general infrastructure of the Internet, may not be year 2000
compliant. Failure of third parties or of the general Internet infrastructure
to be year 2000 compliant could prevent us from publishing our content,
generating sales or collecting revenue, decrease the use of the Internet or
prevent users from accessing our websites for a substantial period of time
which could harm our business. For more information on our state of readiness,
costs and rights associated with year 2000 issues, see "Management Discussion
and Analysis of Financial Condition and Results of Operation--Year 2000
Readiness."

Our executive officers and directors control approximately 20% of our common
stock and have power to influence significant corporate matters, which may
delay, deter or prevent transactions that could benefit our stockholders.

Executive officers and directors, in the aggregate, beneficially own
approximately 20% of our outstanding common stock. These stockholders are able
to significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of EMusic and may make
some transactions more difficult or impossible without the support of these
stockholders.

Anti-takeover provisions in our charter documents could negatively impact our
stockholders.

Our Board of Directors has the authority to issue up to 20,000,000 shares of
preferred stock without need for stockholder approval. The board may also
determine the economic and voting rights, of this preferred stock. The holders
of our common stock could be adversely affected by the issuance of preferred
stock. Issuance of preferred stock could impede or prevent transactions that
would cause a change in control of our company. This might discourage bids for
our common stock as a premium over the market price of our common stock and
adversely affect the trading price of our common stock. We have no current
plans to issue shares of preferred stock. In addition, other provisions in our
charter documents could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.

Our data warehousing and web server systems are vulnerable to natural
disasters, failure of third-party services and other unexpected problems.

Since our data warehousing, web server and network facilities are all located
in California, an earthquake or other natural disaster could affect all of our
facilities simultaneously. An unexpected event such as a power or

                                       17
<PAGE>

telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at our Internet service providers' facilities could
cause the loss of critical data and prevent us from offering our services to
artists and consumers. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, we rely on third parties
to securely store our archived data, house our web server and network systems,
and connect us to the Internet. A failure by any of these third parties to
provide these services satisfactorily could harm our business.

You should not rely on forward-looking statements in this prospectus.

This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including, "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue;" the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks described above and in other parts of this prospectus. These factors
may cause our actual results to differ materially from any forward-looking
statement. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
them to actual results or to changes in our expectations.

                                       18
<PAGE>

                              Selling Stockholders

The following table sets forth certain information with respect to the selling
stockholders as of September 30, 1999. Except as set forth below, none of the
selling shareholders currently is an affiliate of ours, and none of them has
had a material relationship with us during the past three years.

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Citiventure 96
 Partnership, L.P.              1,627,100(/2/)    1,627,100        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners II, L.P.                624,000(/2/)      624,000        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners I, C.V.                  58,300(/2/)       58,300        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners III, L.P.               379,000(/2/)      379,000        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
VantagePoint
 Communication Partners,
 L.P.                           1,111,100(/2/)    1,111,100        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
VantagePoint Venture
 Partners 1996                    555,500(/2/)      555,500        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
VantagePoint Venture
 Advisors, LLC                     16,600(/2/)       16,600        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1002 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
Seligman Communications
 and Information
 Fund, Inc.                     1,000,000(/2/)    1,000,000        0       --
c/o J. & W. Seligman &
 Co., Inc.
Attn: Storm Boswiek
100 Park Avenue, 7th
 Floor
New York, NY 10017
</TABLE>

                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
CTI Limited                   999,900(/2/)         999,900         0       --
c/o Creative Technology
 Ltd.
31 International
 Business Park, Creative
 Resource
Singapore 609921
Phillips-Smith
 Speciality Retail Group
 III, L.P.                    833,300(/2/)         833,300         0       --
c/o Phillips-Smith
 Speciality Retail Group
Attn: G. Michael Machens
5080 Spectrum Drive,
 Suite 805 West
Addison, TX 75001
idealab! Capital
 Partners I-B, L.P.           697,500(/2/)         697,500         0       --
c/o idealab! Capital
 Management I, LLC
Attn: William S. Elkus
130 W. Union Street
Pasadena, CA 91103
idealab! Capital
 Partners I-A, L.P.           136,500(/2/)         136,500         0       --
c/o idealab! Capital
 Management I, LLC
Attn: William S. Elkus
130 W. Union Street
Pasadena, CA 91103
Drake & Co. for the
 account of                   645,000(/2/)         645,000         0       --
Citiventure Private
 Participations III
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Weiss, Peck & Greer
 Venture Associates IV,
 L.L.C.                       490,300(/2/)         490,300         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Enterprise Fund III,
 L.L.C.                       428,800(/2/)         428,800         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Information Sciences
 Entrepreneur Fund, L.P.       19,000(/2/)          19,000         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Venture Associates
 IV Cayman, L.P.               61,900(/2/)          61,900         0       --
c/o BankAmerica Trust &
 Banking Corporation
(Cayman) Limited
Attn: Sarah Holbrook
P.O. Box 1092,
 BankAmerica House, Fort
 Street
George Town, Grand
 Cayman, Cayman Islands,
British West Indies
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Abacus L.P.                    10,000(/2/)          10,000           0     --
c/o TriNet Real Estate
 Trust
Attn: Robert W. Holman
 Jr.
Four Embarcadero Center,
 Suite 3150
San Francisco, CA 94111
Amcito Partners, L.P.          16,600(/2/)          16,600           0     --
Attn: William Brian
 Little
630 Fifth Ave., Suite
 2620
New York, NY 10111
Bank Sal Oppenheim jr &
 cie (Schweiz) AG             250,000(/2/)         250,000           0     --
Attn: Marko Bianchi
Uraniastrasse 28, CH -
 8022
Zurich, Switzerland
Tor Braham                     46,600(/2/)          11,600      35,000      *
10 Cordova Court
Portola Valley, CA 94028
Jorge A. del Calvo and
 Gerine Ongkeko                 8,300(/2/)           8,300           0     --
329 Walsh Road
Atherton, CA 94027
James Chapman                  96,607(/2/)          46,600      50,007      *
3435 Clay Street, #3
San Francisco, CA 94118
Catherine Filippini             3,300(/2/)           3,300           0     --
63 Indian Hill Road
Winnetka, IL 60093
Fisher Capital Ltd.           162,100(/2/)         162,100           0     --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
Craig Foley                    33,300(/2/)          33,300           0     --
7 Locust Lane
Bronxville, NY 10708
GCWF Investment Partners        8,300(/2/)           8,300           0     --
Attn: Greg Gallo
400 Hamilton Avenue
Palo Alto, CA 94301-1825
Roger B. Hackett                8,300(/2/)           8,300           0     --
c/o Go Video, Inc.
7835 East McClaine Drive
Scottsdale, AZ 85260-
 6949
John E. Kelley                  3,300(/2/)           3,300           0     --
c/o Edgewood Management
 Company
675 Third Avenue
New York, NY 10017
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Richard Lawson                  3,300(/2/)           3,300         0       --
1770 Broadway Street -
 Apt. 202
San Francisco, CA 94109
Greg Little                    16,600(/2/)          16,600         0       --
163 Carl Street
San Francisco, CA 94117
Reid Payne                      8,300(/2/)           8,300         0       --
c/o ABN AMRO
199 Bishopsgate
London EC2 M3TY
United Kingdom
PM&S Venture Fund II,
 LLC                           16,600(/2/)          16,600         0       --
c/o Pillsbury Madison &
 Sutro LLP
Attn: Michael J.
 Halloran
235 Montgomery Street
San Francisco, CA 94104
Promethean Service
 Company, LLC                  84,000(/2/)          84,000         0       --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
Bryan Rutberg                   3,300(/2/)           3,300         0       --
1625 Pacific Avenue -
 Apt. 401
San Francisco, CA 94115
Baird Ryan                      8,300(/2/)           8,300         0       --
c/o Gerald Peters
 Gallery Inc.
24 East 78th Street
New York, NY 10021
Sofinnova Venture
 Partners IV, L.P.            333,300(/2/)         333,300         0       --
Attn: Natalie Auber, CFO
140 Geary Street, 10th
 Floor
San Francisco, CA 94108
Edward Straube                  6,600(/2/)           6,600         0       --
67 Murray Avenue
Larkspur, CA 94939
Jason Strober                   3,300(/2/)           3,300         0       --
c/o VantagePoint Venture
 Partners
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
Wingate Capital Ltd.           87,200(/2/)          87,200         0       --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Stanton D. Wong                 5,000(/2/)           5,000         0       --
c/o Pillsbury Madison &
 Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Carm Adimando                  20,300(/2/)          20,300         0       --
47 Cherry Gate Lane
Trumbull, CT 06611
Jose J. Cofino                 20,400(/2/)          20,400         0       --
2735 Nicols Canyon Rd.
Los Angeles, CA 90046
Deborah A. Coleman             40,600(/2/)          40,600         0       --
c/o Merix Corporation
1521 Poplar Lane
Forest Grove, OR 97116
Sheldon Derezin                20,400(/2/)          20,400         0       --
6409 Ridge Manor Ave.
San Diego, CA 92120
Elrod Lawing &
 Sharpless, P.A.,
 Employees Profit              40,800(/2/)          40,800         0       --
Sharing Plan & Trust
Joseph Elrod, Trustee
2900 St. Regis Road
P.O. Box 13566
Greensboro, NC 27415-
 3566
Lawrence Gerbrandt              5,500(/2/)           5,500         0       --
3880 Via Mar Monte
Carmel, CA 93923
Laura Greenstein                5,100(/2/)           5,100         0       --
c/o Martin Greenstein
55 South Market Street,
 Ste. 1630
San Jose, CA 95113
James H. Gregg                 40,800(/2/)          40,800         0       --
580 Viejo Road
Carmel, CA 93932
Kenneth Hess                   20,400(/2/)          20,400         0       --
P.O. Box 5038
Carmel, CA 93921
Chase Bank Custodian,
 IRA fbo Jay C. Huffard        20,400(/2/)          20,400         0       --
Attn: Brenda Jackson AVP
One Chase Manhattan
 Plaza
New York, NY 10081
Brian Kahn                     10,200(/2/)          10,200         0       --
1071 N. Hillcrest Dr.
Beverly Hills, CA 90210
Dennis Levett                   8,100(/2/)           8,100         0       --
c/o Strutz-Levett
 Investment & Holding
 Co.
502 Waverley Street
Palo Alto, CA 94302
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Spencer Leyton                 65,118(/2/)           4,000      61,118       *
1689 Calypso Drive
Aptos, CA 95003
Richard Lipson                 10,200(/2/)          10,200           0      --
c/o Rainbow Leather,
 Inc.
14-15 112th St.
College Point, NY 11256
Raymond L. Ocampo Jr. or
 Sandra O. Ocampo              20,400(/2/)          20,400           0      --
Trustees of the Ocampo
 Family Trust UTA Dated
May 30, 1996
Attn: Raymond L. Ocampo,
 Jr.
500 Roehampton Rd.
Hillsborough, CA 94010
peermusic III, Ltd.            61,400(/2/)          61,400           0      --
3220 Blume Drive, Suite
 290
Richmond, CA 94806
Rand International
 Corporation                  102,300(/2/)         102,300           0      --
770 Lexington Ave., 16th
 Floor
New York, NY
Sensory Sciences              102,000(/2/)         102,000           0      --
c/o Go Video
Attn: Douglas Klein, CFO
7835 East McLain Drive
Scottsdale, AZ 85260-
 1732
Judith Stevens                  5,100(/2/)           5,100           0      --
c/o Martin Greenstein
55 South Market Street,
 Ste. 1630
San Jose, CA 95113
Seymour Svirsky                20,300(/2/)          20,300           0      --
44 Penn Blvd.
Scarsdale, NY 10583
Carl Tiedemann                 40,700(/2/)          40,700           0      --
c/o Tiedemann Investment
 Group
535 Madison Ave., 37th
 Floor
New York, NY 10022
Tiedemann Investment
 Group                         20,300(/2/)          20,300           0      --
Attn: Carl Tiedemann
535 Madison Ave., 37th
 Floor
New York, NY 10022
Samuel S. Trust                20,400(/2/)          20,400           0      --
P.O. Box 22274
Carmel, CA 92921
Neil & Lydia Weiss             10,200(/2/)          10,200           0      --
511 San Felicia Way
Los Altos, CA 94022
Norbert R. Wirsching           20,300(/2/)          20,300           0      --
303 E. 57th St. Apt. 22L
New York, NY 10022-2947
</TABLE>

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
<S>                       <C>                   <C>            <C>      <C>
Chambers Wong (Hong
 Kong)                            20,300(/2/)       20,300           0      --
c/o Jasper Ace Limited
Flat A, 9-F Tower 1,
 Regent on the Park
9 Kennedy Rd, Hong Kong
HFTP Investment LLC              304,800(/3/)      304,800           0      --
c/o Promethean
 Investment Group,
 L.L.C.
Attn: James F. O'Brien,
 Jr.
40 West 57th Street,
 Suite 1520
New York, NY 10019
Mark S. Chasan                   658,058(/1/)      538,058      120,000     --
21414 Arcos Dr.
Woodland Hills, CA 91364
Dan Barrett                          645(/1/)          645           0      --
c/o Nordic Entertainment
2512 Jefferson St.
Napa, CA 94558
Scott Bergevin                       461(/1/)          461           0      --
c/o Nordic Entertainment
2512 Jefferson St.
Napa, CA 94558
Fred and Rosalyn Chasan           36,896(/1/)       36,896           0      --
13633 Pasco De La Huerta
Poway, CA 92064
Griffith Emery                       153(/1/)          153           0      --
c/o Get Travel
 Corporation
3355 Vincent Road
Pleasant Hill, CA 94523
Trent George                      13,836(/1/)       13,836           0      --
6398 Flamingo Drive
Buena Park, CA 90620
Get Travel Corporation             2,950(/1/)        2,950           0      --
3355 Vincent Road
Pleasant Hill, CA 94523
Goff Johnson LLP                   6,301(/1/)        6,301           0      --
c/o Wayne Johnson
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Lochelle Harrison                    368(/1/)          368           0      --
1012 Charlson Way
Napa, CA 94558
Marilyn Jarrells                   1,752(/1/)        1,752           0      --
1716 Caton Avenue, #35
Brooklyn, NY 11226
Phil Jones                           461(/1/)          461           0      --
1452 Loma Drive
Hermosa Beach, CA 90254
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                   Maximum Number
                               Beneficial           of Shares of   Shares  Percentage
                              Ownership of          Common Stock   Owned     Owned
                             Common Stock as        Offered for    after     after
Name and Addresses        of September 30, 1999         Sale      Offering  Offering
------------------        ---------------------    -------------- -------- ----------
<S>                       <C>                      <C>            <C>      <C>
Jamie Riggs                          276(/1/)             276         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Skunk New Media                    2,767(/1/)           2,767         0        --
1437 Seventh Street,
 Suite 300
Santa Monica, CA 90401
David Walton                         922(/1/)             922         0        --
499 Albacete Drive
Vacaville, CA 95688
Ralph Whitmore                     1,844(/1/)           1,844         0        --
222 N. Sepulveda Blvd.,
 Suite 150
El Segundo, CA 90245
Curt Zirzow                          645(/1/)             645         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Roger B. Goff                      2,661                2,661         0        --
c/o Wayne R. Johnson,
 Esq.
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Wayne R. Johnson                   3,991                3,991         0        --
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Kent Kiefer                      645,188(/1/)(/4/)    645,188         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Gene Hoffman, Sr.                118,000(/5/)         118,000         0        --
13232 Idlewild Road
Matthews, NC 28105
Concord Records                   63,735(/6/)          63,735         0        --
2450-A Stanwell Drive
Concord, CA 94520

Silicon Valley Bank               10,000(/7/)          10,000         0        --
3003 Tarman Drive
Santa Clara, CA 95054
</TABLE>
------------------
 *  Represents less than 1%
(1) Represents shares issued in connection with an acquisition or purchase of
    assets.
(2) Represents shares issued upon the conversion of our Series B preferred
    stock.
(3) Represents 100,000 shares to be issued upon exercise of outstanding common
    stock purchase warrants and 204,800 shares issued upon the conversion of
    our Series B preferred stock.
(4) Approximately 526,829 of such shares are beneficially owned by partners of
    various partnerships for which Mr. Kiefer is the general partner. Mr.
    Kiefer disclaims beneficial ownership except to the extent of his pecuniary
    interest.
(5) Represents shares issued in connection with the acquisition by the Company
    of its predecessor corporation.
(6) Represents shares issued in connection with a share exchange transaction.
(7) Represents shares issuable upon the exercise of common stock purchase
    warrants.

Tor Braham, a selling stockholder, is also a member of our Board of Directors.

Ralph Peer, II, a member of our Board of Directors and a selling stockholder,
is affiliated with peermusic III, Ltd., also a selling stockholder.

Spencer Leyton and Jim Chapman, both selling stockholders, are currently
officers of EMusic.

                                       26
<PAGE>

                              Plan of Distribution

We will not receive any proceeds from the sale of the common stock through this
prospectus. We will receive proceeds from the payment of the exercise price of
the common stock purchase warrants if any are exercised for cash. We have
agreed to pay the expenses of registration of the common stock offered hereby,
including legal and accounting fees, but excluding underwriter's discounts and
commissions, if any.

The offered shares may be sold from time to time at

  . negotiated prices,

  . fixed prices which may be changed,

  . market prices prevailing at the time of sale or

  . prices related to prevailing market prices.

The selling stockholders may effect such transactions

  . in privately negotiated sales in the over-the-counter market or any
    exchange on which the securities are listed,

  . by selling the shares to or through broker-dealers, including block
    trades in which brokers or dealers will attempt to sell the shares as
    agent but may position and resell the block as principal, and

  . in one or more underwritten offerings on a firm commitment or best effort
    basis.

Sales of selling stockholders' shares may also be made pursuant to Rule 144
under the Securities Act, where applicable.

To the extent required under the Securities Act, the following information will
be set forth in an accompanying prospectus supplement

  . the aggregate amount of selling shareholders' shares being offered and
    the terms of the offering,

  . the names of any such agents, brokers, dealers, transferees or
    underwriters and

  . any applicable fee or commission with respect to a particular offer.

Each selling stockholder will be responsible for paying compensation owed by it
to any underwriters, dealers, brokers or agents participating in the
distribution of its shares, regardless of whether such compensation is in the
form of underwriting discounts, concessions, commission or fees. This
compensation might be in excess of customary commissions. The aggregate
proceeds to a selling stockholder from the sale of its shares offered by this
prospectus will be the purchase price of such shares less any discounts or
commissions.

If selling stockholders pledge, hypothecate or grant a security interest in
some or all of the shares, then the pledgees, secured parties or persons to
whom such securities have been hypothecated shall, upon foreclosure in the
event of default, be deemed to be selling stockholders under this prospectus.
Similarly, if the selling stockholders transfer, pledge, donate or assign
shares to lenders or others, then each of such persons will be deemed to be a
selling stockholder for purposes of this prospectus. The number of shares
beneficially owned by the selling stockholders will decrease if and when a
selling stockholder transfers, pledges, donates or assigns shares. The plan of
distribution for selling stockholders' shares sold by this prospectus will
otherwise remain

                                       27
<PAGE>

unchanged, except that the transferees, pledgees, donees or other successors
will be selling shareholders under this prospectus. There is, however, no
assurance that any selling stockholder will sell any or all of the shares
described in this prospectus, and any selling stockholder may transfer, devise
or gift such securities by other means not described in this prospectus.

A selling stockholder may also use this prospectus in the following ways:

  . to sell short, from time to time, shares of our common stock and, in such
    instances, this prospectus may be delivered in connection with such short
    sales and the shares offered hereby may be used to cover such short
    sales,

  . to enter into hedging transactions with broker-dealers, and the broker-
    dealers may engage in short sales of the shares in the course of holding
    the positions they assume with such selling stockholder, including,
    without limitation, in connection with distribution of the shares by such
    broker-dealers,

  . to enter into option or other transactions with broker-dealers that
    involve the delivery of the shares to the broker-dealers, who may then
    resell or otherwise transfer such shares, and

  . to loan or pledge the shares to a broker-dealer and the broker-dealer may
    sell the shares as loaned or upon a default may sell or otherwise
    transfer the pledge shares.

The selling stockholders, any underwriter, any broker-dealer or any agent that
participates with the selling stockholders in the distribution of the shares
may be deemed to be "underwriter" within the meaning of the Securities Act. As
a result thereof, any discounts, commissions or concessions received by them
and any profit on the resales of the shares purchased by them may be deemed to
be underwriting commissions under the Securities Act.

To comply with securities laws of certain states, if applicable, the shares
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, in certain states the shares may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available.

Pursuant to a registration rights agreement entered into in connection with our
Series B preferred stock financing, we have agreed to keep the registration
statement of which this prospectus is a part continuously effective until the
earlier of the date that all of the shares issued upon the conversion of the
Series B preferred stock or exercise of the warrants have been resold or until
three years from the effectiveness of the registration statement of which this
prospectus is a part. In this regard, we are required to supplement and/or
amend the registration statement of which this prospectus is a part if more
shares than are registered for resale hereby are issued upon exercise of the
warrants or to supplement or change the list of selling stockholders hereunder.

                                       28
<PAGE>

                                Use Of Proceeds

We will not receive any of the proceeds from the sale of shares of common stock
by the selling stockholders. If any warrants are exercised by selling
stockholders for cash, we will receive proceeds equal to the exercise price of
the warrants. We will use the net proceeds received upon the exercise of any
warrants for general corporate purposes, including working capital.

                                Dividend Policy

We have never declared or paid any cash dividends on our common stock. We
anticipate that we will retain earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our common stock in the foreseeable future.

                                       29
<PAGE>

                                 Capitalization

The following table shows:

  . the capitalization of EMusic on June 30, 1999; and

  . the capitalization of EMusic on June 30, 1999, pro forma giving effect to
    our underwritten public offering and the use of net proceeds from such
    offering, the conversion of Series B preferred stock and the payment of
    the accrued dividends on Series B preferred stock of $569,000.

<TABLE>
<CAPTION>
                                                              June 30, 1999
                                                            ------------------
                                                                        Pro
                                                             Actual    Forma
                                                            --------  --------
                                                             (in thousands,
                                                            except share and
                                                             per share data)
<S>                                                         <C>       <C>
Redeemable convertible preferred stock:
  Series B, $0.001 par value; 120,000 shares authorized;
   117,570 shares issued and outstanding actual; no shares
   issued and outstanding, pro forma....................... $ 32,550  $    --
  Undesignated, $0.001 par value; 380,000 shares
   authorized; no shares issued and outstanding actual, pro
   forma...................................................      --
Stockholders' equity:
  Common stock, $0.001 par value; 200,000,000 shares
   authorized; 16,804,237 shares issued and outstanding,
   actual; and 33,831,237 shares issued and outstanding,
   pro forma...............................................       17        34
  Additional paid-in capital...............................   67,827   178,624
  Note receivable from employee............................      --
  Accumulated deficit......................................  (48,857)  (48,857)
                                                            --------  --------
   Total stockholders' equity..............................   18,987   129,801
                                                            --------  --------
    Total capitalization................................... $ 51,538  $129,801
                                                            ========  ========
</TABLE>

------------------
The number of outstanding shares in the preceeding table excludes 1,752,800
shares of common stock issuable upon the exercise of outstanding warrants with
a weighted average exercise price of $13.37 per share, 6,297,750 shares of
common stock issuable upon the exercise of outstanding stock options with a
weighted average exercise price of $7.12 per share and 4,656,850 shares of
common stock reserved for future issuance under our stock option plans.

                                       30
<PAGE>

                            Selected Financial Data

This section presents our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.

The statement of operations data for the year ended June 30, 1999 and periods
from our inception on January 8, 1998 to June 30, 1998 and 1999, and the
balance sheet data at June 30, 1998 and 1999, are derived from our audited
financial statements, which are included elsewhere in this prospectus.
Historical results are not necessarily indicative of future results. The pro
forma balance sheet data as of June 30, 1999 gives effect to our underwritten
public offering and the use of the net proceeds from such offering, the
conversion of our Series B preferred stock and the payment of accrued dividends
amounting to $569,000. We have paid no cash dividends on our common stock.

<TABLE>
<CAPTION>
                                   January 8, 1998               January 8, 1998
                                   (inception) to   Year ended   (inception) to
                                    June 30, 1998  June 30, 1999  June 30, 1999
                                   --------------- ------------- ---------------
                                     (in thousands, except share and per share
                                                       data)
<S>                                <C>             <C>           <C>
Statement of Operation Data:
Revenues.........................    $       --     $        92    $        92
Cost of revenues.................            --              27             27
                                     -----------    -----------    -----------
Gross loss.......................            --              65             65
Operating expenses:
  Product development............            961         11,690         12,651
  Selling and marketing..........            --             556            556
  General and administrative.....            219          1,599          1,818
  Amortization of trade names....            --           1,682          1,682
                                     -----------    -----------    -----------
   Total operating expenses......          1,180         15,527         16,707
                                     -----------    -----------    -----------
Operating loss...................         (1,180)       (15,462)       (16,642)
Interest income..................            --             359            359
Interest expense.................            --             (37)           (37)
                                     -----------    -----------    -----------
Net loss.........................    $    (1,180)   $   (15,140)   $   (16,320)
                                     -----------    -----------    -----------
Accretion of Series A and B
 preferred to redemption value...            --            (247)          (247)
Beneficial conversion charge,
 Series A and B preferred stock..            --         (31,721)       (31,721)
Dividend on Series B preferred
 stock...........................            --            (569)          (569)
                                     -----------    -----------    -----------
Net loss applicable to common
 shares..........................    $    (1,180)   $   (47,677)   $   (48,857)
                                     ===========    ===========    ===========
Net loss per common share--basic
 and diluted.....................    $     (0.12)   $     (3.52)   $     (4.87)
                                     ===========    ===========    ===========
Weighted average common shares
 outstanding--basic and diluted..     10,234,055     13,563,606     10,027,231
                                     ===========    ===========    ===========
Pro forma net loss per common
 share...........................                   $     (0.95)   $     (1.39)
                                                    ===========    ===========
Weighted average common shares
 outstanding used in computing
 pro forma basic and diluted net
 loss per share..................                    16,731,464     12,299,002
                                                    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                 June 30, 1999
                                     June 30, 1998 June 30, 1999   Pro Forma
                                     ------------- ------------- -------------
<S>                                  <C>           <C>           <C>
Balance Sheet Data:
Cash and cash equivalents...........     $510         $19,002      $ 97,265
Working capital.....................      396          16,593        94,856
Total assets........................      582          54,221       132,484
Redeemable convertible preferred
 stock..............................       --          32,550           --
Total stockholders' equity..........      447          18,987       129,801
</TABLE>

                                       31
<PAGE>

                     Management Discussion and Analysis of
                 Financial Condition and Results of Operations

You should read this discussion together with the financial statements and
other financial information included in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in these forward-
looking statements.

Results of Operations

We were incorporated on January 8, 1998 and are a development stage company.
Through June 30, 1999, we incurred costs to organize and develop an Internet
website to conduct our business. We began selling musical recordings over the
Internet in July 1998 and began our first significant selling and marketing
initiatives in the quarter ended June 30, 1999. We may experience significant
fluctuations in operating results in future periods due to a variety of
factors, including:

  . the demand for downloadable music content and Internet advertising;

  . the addition or loss of advertisers;

  . the level of traffic on our Internet sites;

  . the amount and timing of capital expenditures and other costs relating to
    the expansion of our operations;

  . the introduction of new sites and services by us or our competitors;

  . seasonal trends in Internet use, purchases of downloadable music and
    advertising placements;

  . price competition or pricing changes in the industry;

  . technical difficulties or system downtime; and

  . general economic conditions and economic conditions specific to the
    Internet.

Because of our limited history, we believe that period-to-period comparisons of
our operations are not meaningful. Accordingly, we have not included
comparisons in the discussions set forth below.

                                       32
<PAGE>

The following table shows for the periods presented the dollar amounts of
selected line items from our unaudited statements of operations. Because the
revenues are limited, expenses stated as a percentage of revenue are not
meaningful.

<TABLE>
<CAPTION>
                                              Quarter Ended
                          ----------------------------------------------------------
                           June 30,   Sept. 30,    Dec. 31,   March 31,    June 30,
                             1998        1998        1998        1999        1999
                          ----------  ----------  ----------  ----------  ----------
                             (in thousands, except share and per share data)
<S>                       <C>         <C>         <C>         <C>         <C>
Revenues................  $      --   $       12  $        8  $       21  $       51
Cost of revenues........         --          --            4           9          14
                          ----------  ----------  ----------  ----------  ----------
Gross profit............         --           12           4          12          37
Operating expenses:
 Product development....         919         667         925       1,654       8,444
 Selling and marketing..         --          --          --          --          556
 General and
  administrative........         172         197         205         314         883
 Amortization of trade
  names.................         --          --          --          334       1,348
                          ----------  ----------  ----------  ----------  ----------
  Total operating
   expenses.............       1,091         864       1,130       2,302      11,231
                          ----------  ----------  ----------  ----------  ----------
Loss from operations....      (1,091)       (852)     (1,126)     (2,290)    (11,194)
Interest income, net....         --            3           1           1         317
                          ----------  ----------  ----------  ----------  ----------
Net loss................  $   (1,091) $     (849) $   (1,125) $   (2,289) $  (10,877)
Accretion of Series A
 preferred stock to
 redemption value.......         --          --          (25)        --          --
Beneficial conversion
 charge, Series A
 preferred stock........         --          --         (144)        --          --
Accretion of B preferred
 stock to redemption
 value..................         --          --          --           (8)       (214)
Beneficial conversion
 charge, Series B
 preferred stock........         --          --          --      (31,577)        --
Dividend on Series B
 preferred stock........         --          --          --          (40)       (529)
                          ----------  ----------  ----------  ----------  ----------
Net loss applicable to
 common stockholders....  $   (1,091) $     (849) $   (1,294) $  (33,914) $  (11,620)
                          ==========  ==========  ==========  ==========  ==========
Net loss per common
 share, basic and
 diluted................  $    (0.08) $    (0.06) $    (0.09) $    (2.31) $    (1.02)
                          ==========  ==========  ==========  ==========  ==========
Weighted average common
 shares outstanding,
 basic and diluted......  12,847,724  14,591,336  14,581,212  14,674,372  11,437,948
                          ==========  ==========  ==========  ==========  ==========
</TABLE>

Net Revenues

We are a development stage company. We earned no revenue from inception through
June 30, 1998. For the year ended June 30, 1999, our revenues totaled $92,000.
Our revenues to date have been comprised of advertising and sales of physical
merchandise and downloadable music recordings. In the future, we expect sales
of merchandise to be limited.

Cost of Revenues

Cost of revenues for the year ended June 30, 1999 include the cost of
merchandise sold, credit card processing fees, royalties and other costs
related to downloadable music revenues. Costs related to physical merchandise
exceeded related revenues during this period. We believe that the sale of
physical merchandise will become an increasingly smaller portion of our future
sales. As sales of physical merchandise become a lower portion of our revenues,
we expect that our gross margins will improve.


                                       33
<PAGE>

Product Development Expenses

We began our development efforts in February 1998. Product development expenses
principally consist of:

  . website development, including software engineering, audio production and
    graphic design;

  . telecommunications charges;

  . salaries, rent, depreciation and other expenses related to building our
    music distribution business; and

  . amortization of music content.

Product development expenses were $11,690,000 for the year ended June 30, 1999,
compared to $961,000 for the year ended June 30, 1998. They were $12,651,000
from inception through June 30, 1999. These changes reflect the increase in our
product development efforts, particularly in software engineering, graphic
design and development of the infrastructure required to deliver downloadable
music to customers.

Included in the amount above is an expense relating to the fair value of fully-
vested options to advisors to purchase up to 666,000 shares of common stock at
exercise prices ranging from $5.75 to $13.625 per share. We also issued
warrants to individuals operating in the music industry to purchase up to
1,338,300 common shares at exercise prices ranging from $7.10 to $13.625 per
share. All of these options and warrants were issued at the closing market
price on the date of issue. Using the Black Scholes model, we estimated the
total fair value of these options to be $2,379,000 and the warrants to be
$5,682,000. We charged the combined total of $8,061,000 to product development
expense in 1999. During the period January 8, 1998 (inception) to June 30, 1999
we recorded $752,000 in respect of the fair value of 280,000 options granted to
advisors.

Although we can not predict the timing or amounts, we expect to continue to
issue options and warrants to advisors in the future and to record significant
charges as a result.

Selling and Marketing Expenses

We incurred no significant selling and marketing costs from inception through
March 31, 1999. Commencing with the launch of our EMusic brand in the quarter
ended June 30, 1999, we began an extensive selling and marketing campaign. As a
result, selling and marketing expenses for the quarter and year ended June 30,
1999 were $556,000. We also expect to enter into various strategic alliances,
begin other targeted advertising and direct promotion campaigns, attend trade
shows and begin other activities to attract new customers. As a result, we
expect to incur significant sales and marketing expenses in future periods.

General and Administrative Expenses

General and administrative expenses consist primarily of executive management,
finance, legal, administrative and related overhead costs, such as rent,
insurance, and depreciation. We have incurred costs of $1,818,000 from
inception through June 30, 1999, related to general and administrative
expenses. Of these costs, $1,599,000 was incurred in the year ended June 30,
1999. In April 1999, we moved our headquarters to new facilities located in
Redwood City, California, resulting in an increase in rent and facilities
related expenses of approximately $200,000 per quarter. We expect general and
administrative expenses to continue to increase as we expand our staff and
incur additional costs related to the growth of our business.

Amortization of Trade Names

During 1999, we purchased the "EMusic" and "IUMA" trade names for a combined
total of $26,362,000 in cash and stock. We began amortizing these costs over
three-year lives, resulting in an amortization expense of $1,682,000 in the
year ended June 1999. Future amortization related to these trade names will be:

<TABLE>
<CAPTION>
            Year ending                                           Amortization
             June 30,                                               Expense
            -----------                                           ------------
            <S>                                                   <C>
             2000                                                  $9,132,000
             2001                                                   9,132,000
             2002                                                   6,416,000
</TABLE>


                                       34
<PAGE>

Liquidity and Capital Resources

We had a cash balance of $19,002,000 at June 30, 1999. For the period from
inception through June 30, 1999, net cash of $5,297,000 was used for operating
activities consisting of net losses of $16,320,000, substantially offset by:

  . non-cash expense of $3,131,000 associated with stock and stock options
    granted to advisors;

  . non-cash expense of $5,682,000 associated with warrants granted to
    advisors; and

  . non-cash expense of $1,682,000 associated with amortization of trade
    names.

Additionally, we purchased approximately $1,128,000 in capital equipment from
inception through June 30, 1999. We expect to incur negative cash flow from
operations for the foreseeable future, as we continue to develop our business.

In October 1998, we raised proceeds of approximately $500,000 through the sale
of 500 shares of Series A preferred stock and warrants to purchase 100,000
shares of the our common stock. The Series A shares were subsequently converted
into shares of Series B preferred stock.

During the period from December 1998 through March 1999, we received loans in
the form of convertible notes payable totaling $1,743,000. The notes, which
bore interest at 10% per annum and were to mature on March 31, 1999,
represented bridge loans in advance of the Series B preferred stock financing.
All outstanding principal and accrued interest due under these notes converted
into an aggregate of 7,109 shares of Series B preferred stock upon the closing
of the Series B financing.

On March 23, 1999, we completed a private placement of approximately 117,570
shares of Series B convertible preferred stock, which includes the conversion
of outstanding convertible notes and Series A shares into Series B shares.
Total proceeds, including proceeds from the convertible notes, were
$31,577,000, net of issuance costs of approximately $2,724,000, of which
approximately $100,000 remained in accrued liabilities at June 30, 1999. The
Series B preferred stock was convertible at anytime at the option of the
holders into 11,757,000 shares of our common stock. As a result of the
beneficial conversion feature given to the holders of the Series B preferred
stock, we recorded a charge, limited to the net proceeds received, in the
quarter ended March 31, 1999.

In April 1999, we entered into a five-year lease agreement for new office
space. Under the terms of the agreement, we will make minimum monthly lease
payments of approximately $67,000 for a period of 60 months beginning in April
1999. This monthly amount includes certain maintenance costs associated with
the leased space, and is subject to annual increases based on the Consumer
Price Index.

On September 24, 1999 we completed a public offering of 5,270,000 shares of
common stock resulting in proceeds of $79,682,000, net of issuance costs of
approximately $1,109,000, of which $1,069,000 remained in accrued liabilities
at September 30, 1999.

We believe that our existing capital resources will be sufficient to fund our
current level of operating activities, capital expenditures and other
obligations through the next 12 months. However, if during that period or
thereafter we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations liquidity and financial condition.

Year 2000 Readiness

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in 99, the common two-digit reference for 1999. As a result, as we
transition from the 20th century to the 21st century, computer systems and
software

                                       35
<PAGE>

used by many companies and organizations in a wide variety of industries will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the year 2000 issue.

State of Readiness. Although we have not conducted a formal audit internally or
by any third party, based on our current assessment, we believe our internal
systems are year 2000 compliant. We are currently conducting additional reviews
of our internal management information and other computer systems to identify
any year 2000 problems, and have begun to communicate with the external vendors
that supply us with material software and information systems and with our
significant suppliers to determine their year 2000 readiness. We have not
completed our year 2000 investigation and overall compliance initiative.

Costs. To date, we have not incurred any material costs directly associated
with our year 2000 compliance efforts, except for compensation expenses
associated with our salaried employees who have devoted some of their time to
our year 2000 assessment. We do not expect the total cost of year 2000 problems
to be material to our business. However, during the months prior to the century
change, we will continue to evaluate new software and information systems
provided to us by third parties and any new infrastructure systems that we
acquire to determine whether they are year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could substantially harm our business. We
currently have no contingency plans to address the risks associated with
unremediated year 2000 problems.

Risks. We are not currently aware of any year 2000 readiness problems relating
to our internally-developed proprietary systems that would substantially harm
our business. We may discover year 2000 readiness problems in these systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into our material systems may need to be
revised or replaced, all of which could be time-consuming and expensive. Our
failure to fix or replace our internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could substantially harm our business.
Moreover, our failure to adequately address year 2000 readiness issues in our
internally developed proprietary software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, governmental
agencies, utility companies, Internet access companies, third-party service
providers and others outside of our control may not be year 2000 ready. The
failure by these entities to be year 2000 ready could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our customers, decrease the use of the Internet or prevent users from accessing
websites.

In particular, we rely on Card Service International for credit card processing
and AboveNet Communications for website hosting. We have not yet received any
written assurance from Card Service or AboveNet as to their readiness for year
2000 issues. Because we have not received written assurance, we have assumed
that Card Service and AboveNet may not be ready for the year 2000 before
January 1, 2000, and that their credit card processing and website hosting
capabilities could fail at that time. Based on this assumption, we believe such
failures would be the most reasonably likely worst case year 2000 scenarios. If
the Card Service services fail, we would seek to complete credit card
transaction manually using temporary staff. If Card Service were unable to
restore service promptly, we believe switching to another financial institution
for automated credit card processing would require approximately 15 days. If
the AboveNet services fail, we would not be able to operate our business until
AboveNet restored its service or until we were able to obtain another web
hosting arrangement. We believe that it would require approximately three days
to establish a new web hosting arrangement.

Contingency Plan. As discussed above, we are engaged in an ongoing year 2000
assessment and have not yet developed any contingency plans. The responses
received from third-party vendors and service providers will be taken into
account in determining the nature and extent of any contingency plans we adopt.

                                       36
<PAGE>

Quantitative and Qualitative Disclosures About Market Risk

We have considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
We had no holdings of derivative financial or commodity instruments at June 30,
1999. However, we are exposed to financial market risks, including changes in
interest rates. All of our revenue and capital spending is transacted in U.S.
dollars. Our investments portfolio comprises amounts invested in short term
cash deposits and therefore we believe that the fair value of our investment
portfolio or related income would not be significantly impacted by increases or
decreases in interest rates due mainly to the short-term nature of our
investment portfolio. However, a sharp increase in interest rates could have a
material adverse effect on the fair value of our investment portfolio.
Conversely, sharp declines in interest rates could seriously harm interest
earnings of our investment portfolio.

The table below presents principal amounts by expected maturity (in U.S.
dollars) and related weighted average interest rates by year of maturity for
our investment portfolio.

<TABLE>
<CAPTION>
                                               1999      Thereafter    Total
                                            -----------  ---------- -----------
   <S>                                      <C>          <C>        <C>
   Cash.................................... $19,002,000     $ --    $19,002,000
     Weighted Average Interest Rate........        5.18%      --
   Total Portfolio......................... $19,002,000     $ --    $19,002,000
                                            ===========     ====    ===========
</TABLE>

Recent Accounting Pronouncements

In March 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-1 or SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our
financial statements and related disclosures.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities."
This standard requires companies to expense the costs of start-up activities
and organization costs as incurred. In general, SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. We believe the adoption of SOP
98-5 will not have a material impact on our results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities.

                                       37
<PAGE>

                                    Business

Overview

EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer a compelling selection of music from which
our customers may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. The recordings available for download
at EMusic.com are provided through our relationships with a growing roster of
recording artists and independent record labels. We currently have exclusive,
multi-year, digital download licenses to over 300,000 titles, from over 85
record labels and over 1,300 recording artists, including selected titles from
such well known artists as The Offspring, They Might Be Giants, Iggy Pop, and
Ella Fitzgerald. We currently have over 20,000 titles available for download on
our EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 4,000 unsigned artists. We believe this represents one of the
largest digital music content archives currently licensed for distribution over
the Internet.

Our website enables these artists and labels to easily access a global customer
base, while providing them with an integrated means of distributing, promoting
and tracking the sales of their recorded music. Recordings are offered for sale
on EMusic.com in the "mp3" format, the most widely-recognized compression
standard for the download of musical recordings. We believe that our
combination of selection, convenience, varied content, improved distribution
and tracking capabilities creates a compelling music purchasing experience for
consumers as well as an attractive distribution alternative for artists and
independent record labels.

Industry Background

 Recorded Music Industry

According to a report by Market Tracking International, worldwide retail sales
in the music industry were $39.7 billion in 1997 and are expected to grow to
$46.9 billion by 2004. The music industry can be divided into two kinds of
record companies or "labels"-- the "major" record labels and the "independent"
record labels. According to Billboard, the five major record labels and their
affiliates currently account for approximately 79% of all recorded music sales
worldwide. These companies are BMG Entertainment, EMI Music, Sony Music
Entertainment, Universal Music Group and Warner Music Group. These companies
have substantial investments in the distribution infrastructure which supports
the manufacturing, distribution and retailing of records and compact discs and
through which the substantial majority of current recorded music sales take
place. Historically, the major record labels have been reluctant to participate
in any alternative distribution model which would restructure the current music
distribution hierarchy due to their investment in the current physical
distribution infrastructure and their relationship with the retail channel.

Thousands of independent record labels account for most of the remaining
recorded music sales. In contrast to the major record labels, independent
record labels generally do not have substantial existing CD and record
distribution investments and, as a result, physical distribution can be more
difficult and costly to arrange. Independent record labels also typically have
less capital available. Without the established distribution networks,
independent record labels often pay higher royalties to artists to secure
publishing and distribution rights.

 Development of the Downloadable Music Industry

The Internet has emerged as a global platform that allows millions of people to
share information, communicate and conduct business. International Data
Corporation estimates that the number of Internet users worldwide who make
purchases over the Internet will grow from approximately 31 million users in
1998 to more than 183 million in 2003, representing 36% of all Internet users.
The Internet presents a significant opportunity for the rapid and cost-
effective distribution, promotion and sale of recorded music. Downloading music
files is also facilitated by the increased use of high-speed connections to the
Internet, such as digital cable modems, ISDN and digital subscriber lines.
According to Forrester Research, the number of subscribers using cable, xDSL or
ISDN modems is projected to reach 22 million by 2003.

                                       38
<PAGE>

Forrester estimates that total online music revenues in the United States are
expected to grow from $89.0 million in 1998 to $7.8 billion in 2003. Of this
amount, Forrester further estimates that $1.1 billion will represent sales of
downloadable music in 2003. According to Market Tracking International, music
sold through the Internet will account for 8% or approximately $4.0 billion of
the $46.9 billion worth of music expected to be sold worldwide in 2004.

In addition to the development of the Internet, we believe that other
technological advances will drive rapid growth of the market for downloadable
music, including the adoption of open standards-based Internet audio, the
introduction of new hardware and improved digital compression technology. Prior
to the introduction of new digital compression technologies, it was impractical
to transmit high quality audio using the Internet because recordings in digital
format can be very large. Advances in compression techniques, however, have
greatly reduced the size of digitally stored recordings. For example, if not
compressed, a three minute song can occupy more than thirty megabytes of
storage. In contrast, the mp3 open standard can compress music files to one-
tenth their original size while maintaining their audio integrity at near-CD
quality levels. Mp3 playback software is currently available on most operating
environments such as Microsoft Windows 95/98, Windows NT and MacOS, most major
versions of UNIX and other operating environments for Internet enabled devices.
In addition, free copies of mp3 playback software like RealNetworks'
RealJukebox and America Online's WinAmp are widely available on the Internet.
Forrester estimates that there are already over 50 million mp3-capable users
today.

In recent years, consumers have increasingly used their computers to play and
store music. Dataquest estimates that in 1998, 50% of U.S. households had
multimedia PCs with a sound card, speakers and either a CD-ROM or DVD-ROM
drive. Consumers can now play CDs on their computers with the ease and fidelity
formerly associated only with high-end stereo systems. Consumer electronics
companies and technology companies have capitalized on the growing popularity
of digital music by introducing portable music devices. The Rio, introduced in
November 1998 by Diamond Multimedia Systems has already sold over 300,000
units. Other manufacturers, including Creative Labs, Sensory Sciences,
RCA/Thomson, Samsung, Toshiba and LG Electronics have released, or have
announced plans to release, portable mp3 players. In addition, other
manufacturers have produced, or have announced plans to produce, other devices
for playing and storing mp3 recordings, including the Empeg Car (a removable
audio system capable of holding over 5,000 titles), Clarion's AutoPC (an auto
mp3 audio player) and Lydstrom's Songbank (a home stereo component that stores
and supports mp3 files).

 Our Opportunity

We believe that a number of inefficiencies in the current structure of the
music industry leave three underserved constituencies: consumers, independent
record labels and artists.

Consumers pay higher prices than necessary for music in order for record labels
to recoup the high costs associated with distribution of music on a physical
media through traditional channels. In addition, the current dependence on
physical media limits consumer convenience by forcing them to purchase music at
retail outlets or through catalogs or Internet sites that use mail-order.
Further, physical media is less portable and harder to customize than
downloadable music. Increasingly, we believe that these shortcomings will drive
consumers to the solution of purchasing downloadable music direct from the
Internet.

We believe consumer adoption of downloadable music creates an excellent
opportunity for independent record labels to supplement or replace their
physical distribution networks with electronic channels. Currently, most
independent record labels rely on the distribution infrastructure of major
record labels to distribute their offerings. They are subject to constraints of
these physical channels, such as higher distribution costs driving lower
margins, limited shelf space and subordination to the offerings of the major
record labels, as well as more limited promotional capabilities. While the
promise of an electronic distribution infrastructure is compelling, most
independent record labels lack the resources and expertise to create a viable
proprietary

                                       39
<PAGE>

electronic distribution channel. We believe that these independent record
labels will seek to partner with established providers of downloadable music to
leverage their branding, site traffic and technology.

By supporting independent record labels, we believe downloadable music creates
a compelling solution for artists. In return for access to the powerful
distribution and promotion capabilities of the major record labels, major label
artists are generally required to lock themselves into long-term contracts that
can reduce their royalty rates, limit their creative control and limit their
ability to promote and sell their music online. Artists who work with an
independent record label tend to enjoy less restrictive contracts, but must
face risks associated with an independent record label's less effective
distribution and promotion capabilities. Additionally, physical channels
require costly promotional efforts, making it difficult for some artists to
promote their offerings to a large audience. We believe that the cost and
contractual constraints of the major record labels and the limitations of
independent record labels using traditional distribution channels will
encourage many artists, including some major artists, to offer their music in
downloadable format, either on their own or through an independent record label
with electronic distribution capability.

Creating an infrastructure to handle royalty payments for downloadable music is
difficult, and the lack of this infrastructure has slowed acceptance of the
downloadable music distribution channel by artists, labels and songwriters.
Rights in the music industry focus on two levels; the underlying song and the
sound recording. The purchase of one song usually requires at least two
separate royalty payments, one to the songwriter and one to the performer. We
believe that the ability to accurately track and make royalty payments to the
correct parties is crucial to the proliferation of the downloadable music
distribution channel as a viable alternative to their physical counterparts.

The EMusic Solution

We are a leading provider of downloadable music. Our website allows consumers
to quickly and conveniently purchase music online at a lower price than most
traditional music CDs. Our website also allows consumers to download and listen
to music immediately. We believe that the limitations associated with the
traditional music industry present us with an opportunity to redefine the music
distribution hierarchy and enable artists and independent labels to access
consumer markets at a level currently only available to the major labels, while
protecting the artists' financial interests and providing consumers with
numerous advantages in price, convenience and music information.

We believe that our solution provides the following benefits:

 Benefits to Consumers

Convenience. Through our website, consumers can download music at any time, 24
hours a day, seven days a week. Consumers can register to make purchases from
our site in a few easy steps, and can purchase titles on multiple visits to our
site without having to re-enter personal and credit card information. Consumers
can search our site using various easy to use indices and generally have the
flexibility to make purchases song by song or by album. When they make their
purchase, consumers can download and listen to their music immediately, or they
can wait until a more convenient time to download their purchased titles. Once
downloaded, digital technology allows the consumer to organize their purchased
titles into play lists. Play lists allow users to organize and play their
titles in any order they desire. Consumers can easily copy music to their
laptops or mp3 devices for greater portability, without having to carry
physical media with them. In addition, mp3 devices have no moving parts and, as
a result, do not skip and can be used in situations where traditional music CDs
are not optimal, such as running or mountain biking.

Lower Prices. Our ability to deliver music electronically eliminates the
extensive infrastructure required by the traditional music industry to
distribute physical media. This greatly reduces our costs and allows us to
offer our music at a significantly lower price to consumers.

                                       40
<PAGE>

Compelling Music Selection. We currently have exclusive, multi-year, digital
download licenses to over 300,000 titles, from over 85 record labels and over
1,300 recording artists, including selected titles from such well known artists
as The Offspring, They Might Be Giants, Iggy Pop and Ella Fitzgerald. We
currently have over 20,000 titles available for download on our EMusic.com
website. In addition, IUMA offers our customers access to over 4,000 unsigned
artists. We believe this represents one of the largest digital music content
archives currently licensed for distribution over the Internet. Furthermore,
our downloadable music format allows us to carry hard-to-find, out-of-
production or international titles that are not commercially viable to produce
or stock in a physical format.

Varied Information and Content. Visitors to our website can access music news,
as well as links to concert information, sites for free mp3 software downloads
and other information on downloadable music. We provide our consumers with the
opportunity to sample titles before purchasing them. This enables them to
explore new music without cost and may result in them purchasing additional or
lesser-known titles. In addition, we are beginning to offer other services to
our customer base, including online concerts, organizing online chat sessions
with their favorite artists and "undiscovered" talent, and other initiatives
that we believe will offer a more direct connection between artists and
consumers.

 Benefits to Artists and Independent Labels

Powerful Distribution Capabilities. Our website provides a powerful
distribution solution to artists and independent labels by allowing them access
to a broad range of music listeners. Because we are not dependent on physical
media, we can provide artists and independent record labels with much lower
distribution costs, creating higher margins for labels and allowing independent
record labels to pay artists higher royalties and publishing rates. In
addition, our distribution capabilities can allow artists to directly
distribute their offerings to the public, such as the new They Might Be Giants
mp3-only album which was recently released exclusively on our website.

Greater Understanding of Fan Base. By tracking the behavior and purchasing
patterns of users on our website, we are able to provide artists and
independent labels a level of feedback that was previously unavailable through
traditional music distribution channels. Artists and independent labels may use
our data to evaluate which songs receive the most interest, the location on the
Internet where they receive the best reception and how their music compares to
other music in the same genre or in other genres. Artists and labels may use
this information to target specific regions, increase the focus of promotional
efforts and provide a means to better connect with their fan base.

Significant New Media Exposure. The Internet is emerging as an important
promotional tool for artists and independent labels. In addition to the global
distribution of their music, we are currently beginning initiatives that will
enable us to offer artists significant exposure to their fan bases. This
includes concerts broadcast online, chat rooms featuring artists and fans, and
other exposure on our website. This relatively inexpensive promotion on a
global basis is a significant benefit to artists and independent labels.

Protection of Financial Interests. We believe that by closely tracking royalty
payments, and pricing our music low enough to discourage piracy, we provide a
valuable, trusted solution to artists and labels that will enable us to become
the preferred distribution channel for downloadable music. We have established
a proprietary database of artists, songwriters and labels that allows us to
seamlessly track and generate royalty payments to the appropriate parties. We
are currently licensed by the Harry Fox Agency, ASCAP, BMI and SESAC;
organizations dedicated to protecting the rights of, and collecting royalties
due to, artists and songwriters.

EMusic Business Strategy

Our objective is to become the leading provider of compelling, downloadable
music directly to consumers over the Internet. Our strategy is to leverage our
first-to-market advantage together with our established music

                                       41
<PAGE>

industry relationships as we take advantage of the growing market for the
digital distribution of music. The following are key elements of our strategy:

Continue to Acquire Compelling and Varied Content. We will continue to increase
the number of musical selections available on our website in order to build our
global consumer base and increase the number of online music purchases. We are
pursuing a "best of breed" content acquisition strategy, focused on acquiring
exclusive rights to title libraries from leading independent record labels in
each well known music genre. We intend to continue to aggressively pursue the
acquisition of music content from, among others, independent record labels,
owners and distributors of recording catalogs, and established recording
artists.

Create Strong Brand Awareness. Building brand awareness of EMusic is
fundamental to expanding our global Internet user base and our ability to
attract providers of music content. We promote our brand through traditional
media, event sponsorships, online media and other marketing activities as well
as leveraging strategic relationships within the industry. We intend to enhance
brand awareness of our website by providing original and proprietary content,
aggressively expanding our online and offline marketing activities, enabling
consumers to purchase music and related merchandise, and establishing strategic
and referral fee relationships whereby other websites engage us as an online
music retail source and content provider.

Leverage Strategic Partnerships and Industry Relationships. We believe that our
strategic relationships with distribution and technology companies and our
strong relationships with media and music companies will help attract users,
significantly increase brand awareness of our website and help us to add new
content. We will seek to develop additional relationships with online music
retailers, Internet portal site companies and content providers. In addition,
we plan to establish retail relationships with other online distributors to
share commissions for sales generated from such websites.

Continue to Enhance Our Website. We intend to devote substantial resources to
improving the quality of our consumer users' experience on our website.
Features we intend to incorporate into future versions of our website include:
chat-rooms, music hubs, additional music-related content, more advanced search
capabilities and dynamic site personalization. We believe that a user-friendly
website with compelling and varied content will be a key differentiator of the
EMusic brand.

Become a Trusted Distribution Channel to the Music Industry. We intend to
further develop our technology infrastructure to be readily scaleable to
support our rapidly growing sales of online music, including the calculation of
royalty payments, while maintaining the speed and reliability of our site.
Furthermore, we intend to maintain low pricing to provide an attractive legal
alternative to piracy among the general public. We believe that providing a
reliable, trusted technology and payment infrastructure will position us more
favorably with record labels and artists as the premiere provider of
downloadable music.

Continue to Promote Development of Downloadable Music Market. We believe that
the development of the downloadable music market will be enhanced by educating
consumers about the benefits of downloadable music and by improving the
processes through which consumers purchase music online and use downloadable
music. We currently are active members of the Digital Media Association and
Electronic Frontier Foundation, organizations dedicated to, among other
matters, improving the ease of consumer acquisition and use of downloadable
music. We intend to continue to participate in programs which promote customer
and market awareness about downloadable music as well as industry groups which
are setting open standards for delivery. We intend to refine and simplify the
downloadable music purchasing experience through the continued development of
our website, which is designed to encourage purchases and repeat visits,
demonstrating to record labels and artists the value of the downloadable music
market.

Continue to Develop and Enhance IUMA. We believe that Internet Underground
Music Archive which allows unsigned artists to post music and related
information for access by the general public online, represents a competitive
advantage. IUMA promotes the development of the online music community and
allows us to establish early relationships with potential future music content
providers. We intend to continue to expand and

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<PAGE>

improve IUMA so as to make it easier for artists to participate and for
consumers to access, search and preview the content on the site.

Content Acquisition

We have acquired, and intend to continue to aggressively seek, download rights
to master recordings owned by independent record labels and other owners and
distributors of significant recording catalogs. These exclusive, multi-year
license agreements typically include all existing and future recordings created
during the term of the agreement. Initially, we have focused on partnering with
independent record labels and established recording artists. We are actively
identifying and targeting independent record labels spanning every well known
music genre, including, hip hop, rap, jazz, classical, country, blues, heavy
metal and alternative rock.

We have adopted a "best of breed" approach with respect to acquiring
downloadable music licenses. In many distinctly defined genres of music, we
have successfully acquired the exclusive multi-year, digital download rights to
the market sales leaders, and are aggressively continuing those efforts in each
new genre of music we add to our expanding online catalog. The following is a
sampling of labels with which we have signed exclusive content deals with genre
market leaders:

  . Epitaph Records, one of the largest selling and most distinct brand names
    in punk rock and alternative music, represents top Billboard artists such
    as The Offspring, Tom Waits and Pennywise.

  . King Biscuit Flower Hour, which is currently aired on 180 radio stations,
    is the longest running syndicated live concert radio show. Their catalog
    features live recordings from such artists as The Who, David Crosby, Iggy
    Pop, Elton John and Rod Stewart.

  . Crunch Music Ltd., one of the United Kingdom's premier sources for
    independent UK music in the mp3 format, whose content focuses on dance,
    techno and hip-hop.

  . Jetset Records and spinART Records, which are recognized in numerous
    college magazines as the dominant music providers in the college music
    niche.

  . DRG Records, which owns the largest Broadway show recording library,
    including numerous Grammy and Tony Award winners.

  . Rykodisc, one of the largest independent recording catalogs, which
    represents artists such as Elvis Costello, Frank Zappa and Robert Cray.

  . Quicksilver Records, which features live recordings from The Monterey
    Jazz Festival and the Palo Alto Jazz catalog.

  . Fiction Music, which features new and never before released tracks from
    The Cure.

We have also entered into contracts giving us the exclusive right to allow our
customers to download music from a variety of recognizable, brand name artists.
Included in the content catalog are recordings from Frank Zappa, Louis
Armstrong, Ella Fitzgerald, Judy Garland, Shirley Bassey, Kool Keith, Kansas,
Foghat and thousands of others.

In June 1999, we purchased the Jewel-Paula-Ronn catalog of master recordings
with such Blues and R&B artists as B.B. King, John Lee Hooker, Aretha Franklin
and Lightnin' Hopkins. When we acquire masters, we will seek to work with label
partners to exploit the physical distribution rights while also selling the
music in downloadable form on our website.

Strategic Partnerships

 Distribution and Marketing Partnerships

We are aggressively pursuing a variety of partnerships aimed at building a
channel of distribution for our downloadable music and music-related products
and services across the Internet. To accomplish this, we are

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<PAGE>

developing strategic relationships and alliances with high-traffic Internet
sites to feature our brand and exclusive content and in some cases offer our
content for sale.

  . Examples of existing marketing and advertising relationships include
    Comedy Central, CNET, Centraal, E!Online, Listen.com, ZDNet and CMJ
    Online.

  . In May 1999, RealNetworks and EMusic announced that mp3 tracks would be
    featured in RealJukebox Music Showcase and that there would be links to
    our website highlighted in the RealGuide music download section.

  . In July 1999, we announced a new strategic partnership and equity
    investment with Crunch Music Ltd., one of the United Kingdom's premier
    sources for independent UK music in the mp3 format. Under the new
    relationship, the two companies will work together on marketing,
    promoting and co-branding their websites, label partners and artists on
    both sides of the Atlantic. Launched in March 1999, Crunch has quickly
    established itself as one of the leading sites in the UK for downloading
    music and plans to expand to the rest of Western Europe. The Crunch site
    hosts music from leading UK independent record labels including Dorado,
    Filter, Pussyfoot, Platipus, The End, Tummy Touch, Marine Parade, TCR and
    Ochre. Notable artists include Echo and The Bunnymen's Will Sargant, pka
    as Glide, U2 producer DJ Howie B, Jacknife Lee, Art of Trance and Union
    Jack.

In addition, we are also working with our label partners to offer them a
solution for selling our catalog directly from their websites. These label
partners can choose to sell only their own music, or the entire EMusic catalog
on EMusic created co-branded websites. Beginning in the fall of 1999, we plan
to launch a grass roots affiliate program designed to make it easy for any
website to become an affiliate and sell the EMusic catalog from their websites.

 Hardware/Software/OEM Partnerships

We are building relationships with various manufacturers of computers and
consumer electronics devices, as well as software and book publishers to create
additional visibility as a source for downloadable music. As part of our
overall customer acquisition strategy, we are typically providing sample
titles, promotional coupons and other content to improve our partners' offering
to the music consumer and to continue to promote the downloadable music market.

  . We have established relationships with digital audio device manufacturers
    such as Creative Labs (Nomad), Diamond Multimedia (Rio) and Sensory
    Sciences (Rave). In each partnership, we are featured on the outside of
    the box as the premier source for downloadable music and provide sample
    titles with the installation software. Beginning in mid-1999, we will
    begin a marketing program with Creative Labs whereby a discount coupon
    for our content will be supplied or shipped with each product supplied by
    Creative Labs, including the Nomad portable mp3 player, Soundblaster
    sound cards and Cambridge Soundworks speaker systems.

  . In January 1999, we announced a technology and marketing alliance with
    Adaptec aimed at promoting the growth of downloadable music sales in the
    popular mp3 format. Adaptec is the developer of the market-leading CD-
    recording software products, Easy CD Creator, DirectCD and Toast. Under
    the terms of the agreement, EMusic and Adaptec will jointly sell and
    promote each other's products and services. EMusic and Adaptec will focus
    on technology solutions that allow consumers to easily purchase and
    download mp3 music from the Internet and make their own music CDs.

  . As an additional way to attract customers, promote downloadable music and
    distribute our label partners' music effectively, we plan to introduce
    certain marketing initiatives and alliances with OEM computer suppliers,
    sound card, high fidelity speaker and computer peripheral suppliers and
    wireless product manufacturers. Some of these programs will target the
    "back to school" and holiday seasons.

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<PAGE>

 Industry Relationships

The reporting of information relating to the sales and performance of music is
a legally required and complex aspect of the worldwide music industry. To
facilitate our compliance with these requirements, we have focused on building
strong relationships and alliances with the following organizations:

  . In February 1999, we announced a licensing agreement with the Harry Fox
    Agency, or HFA, a wholly-owned licensing subsidiary of the National Music
    Publishers' Association. Under this agreement, HFA will grant us the
    first Digital Phonorecord Delivery License for delivering songs in the
    mp3 format. Accordingly, we will submit regular reports to HFA, account
    for each song purchased and pay the appropriate statutory payments to HFA
    for distribution to copyright owners. This agreement helps ensure that
    songwriters and music publishers will receive royalty payments for music
    distributed electronically.

  . We have entered into agreements with ASCAP, BMI and SESAC, the major
    rights reporting organizations in the United States. Under each of these
    agreements, we pay music performance royalties to the copyright holders
    or performers.

  . We have an agreement with peermusic, one of the world's largest private
    music publishing companies. Pursuant to this agreement, peermusic
    provides music publishing administration services to us. We will share
    peermusic income derived from music publishing rights acquired by us. We
    have also licensed certain recordings from the peermusic catalog.

IUMA--Internet Underground Music Archive

In June 1999, we completed the acquisition of IUMA. IUMA was founded in 1993
and pioneered the delivery of music on the Internet. The IUMA website
(iuma.com) features more than 4,000 artists on individual websites with unique
URLs (bandname.iuma.com). IUMA artist websites enable audio sampling in mp3 and
RealAudio formats, and offer options for the sales of physical products and
downloadable music. IUMA artist websites also feature other content, including
artist biographies, cover art, lyrics, photos and tour dates. IUMA has received
worldwide media attention, including articles in Rolling Stone, Newsweek, USA
Today and the Financial Times, as well as spots on MTV and CNN.

The following are key elements of our strategy with respect to IUMA:

Enhance Content and Build Traffic. We believe that by increasing IUMA's brand
recognition in the unsigned artist community through aggressive marketing
efforts, IUMA can become a premier Internet destination for unsigned artists
and fans of those artists.

Leverage the IUMA Platform to Develop New Artists. We believe that by creating
an efficient environment for unsigned artists and fans to interact, the IUMA
website will allow promising artists to surface more quickly. These artists
will then be exposed to our label partners. We believe that by facilitating the
process of signing unsigned artists, we will be promoting a new generation of
artists with a greater appreciation of the value of digital downloading of
music. Consequently, this will encourage the growth of the market as well as
position EMusic to obtain additional downloadable music rights.

Sales and Marketing

Our sales and marketing objective is to sell downloadable music and music-
related products and services through EMusic.com and other websites, build
brand awareness, attract new visitors and convert them to loyal customers. To
accomplish this objective, our marketing strategy includes an aggressive
advertising campaign, high visibility promotions and sponsorships, strategic
public relations, a focused interactive marketing campaign, distribution
partnerships and broad loyalty programs.


                                       45
<PAGE>

The following are key elements to our sales and marketing strategy:

Enhance the EMusic.com Website. The focus of the website is to make the
consumer's experience finding, purchasing and downloading music as simple as
possible. We are regularly adding new elements designed to improve content,
navigability and the overall buying process.

Corporate Branding Campaign. We have recently launched an aggressive corporate
branding campaign. The campaign is initially targeted at early adopters, music
enthusiasts, record labels and the Internet business community. We have
designed a comprehensive media campaign, including network and cable TV ads,
billboards and print media. The campaign is also designed to attract new users
to the EMusic.com website and encourage trial download and purchases. Using the
tag line, "The Way To Download," the campaign features a mix of media vehicles
designed to reach our target audience.

Sponsorships and Promotions. We intend to sponsor highly-visible events
including concert tours, conferences and trade shows. We also plan to offer
creative promotions on EMusic.com and other websites designed to encourage
consumers to establish an account and purchase tracks.

Other elements of our sales and marketing initiatives include the introduction
of loyalty programs, such as rebates and incentives, online advertising to our
target demographic, genre specific marketing initiatives and the introduction
of co-marketing agreements with labels.

We also sell advertising on our website. This advertising is generally related
to our music offerings either by the product or music oriented nature of their
promotion. We currently use the Doubleclick Dart program to manage, track and
report our advertising sales to our advertising customers.

Operations

Our integrated systems, services and tools provide functionality in the
following areas:

Digital Asset Management. The continued development of a database management
system that indexes, retrieves and manipulates our growing multimedia content
is central to our digital asset management system. This scalable system allows
us to, among other things, track user preferences to enable effective marketing
programs and maintain an efficient royalty accounting program. We are in the
process of converting our system to Oracle database technology running on Sun
Microsystems' Enterprise equipment and Linux webservers.

Ordering and Fulfillment. Our website includes an ordering system that is
designed to be easy-to-use and that facilitates convenient purchasing of
downloadable music. In order to maintain high customer satisfaction, we place
an emphasis on website and download reliability. At any time during a visit to
our website, a customer is able to click a "buy now" button to immediately
place a song or album in their personal "shopping cart." The customer can then
continue to shop on our website and add additional items if desired. New
customers are prompted to register with us at the time of purchase and to enter
their email addresses and passwords. Customers then securely submit their
credit card information online to purchase the music. The customers' email
addresses and passwords are used to identify them in the future, eliminating
the need to resubmit credit card and billing information for subsequent orders.

Audio Encoding and Delivery. We use a variety of audio compression technologies
for our audio samples and downloads, tailoring them to specific applications.
We currently use the mp3 format for digital distribution of our downloadable
music. In light of current user patterns, we use RealNetworks' popular
RealAudio format for delivering real-time streaming 30-second audio previews
and feature-length web broadcasts. Mp3 is also used for real-time preview
samples. We are exploring other download formats and plan to adjust the format
of our content to stay current with industry trends and customer preferences.
We may need to obtain a third party license to use a newly adopted format.

Infrastructure. Our hardware and software are built upon a distributed
transaction processing model which allows software to be distributed among
multiple parallel servers. Web servers are deployed in large numbers on
inexpensive Intel platforms, managed by Cisco load-balancing technology, and
served by Solaris database

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<PAGE>

servers. Our servers are currently based in an AboveNet Communications co-
location facility in San Jose, California. Our architecture allows us to scale
by either adding new servers or increasing the capacity of existing servers
while maintaining both user performance and cost per transaction. The system's
template technology and modular database design allows the addition or
replacement of server-based applications such as multimedia formats and
delivery systems, and search and retrieval engines. This architecture also
enables low-cost, rapid deployment of additional websites that integrate with
our existing sites.

Competition

The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors, including:

  . providers of online music content such as MP3.com, MusicMaker.com and
    various private companies;

  . providers of music news and community such as Launch Media, Inc.,
    Tunes.com and various private companies;

  . companies offering mp3 or other audio compression formats, such as those
    of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation
    and RealNetworks, Inc. Certain of these companies also offer customers
    the ability to download music from their websites;

  . online destination sites with greater resources than us such as online
    music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
    like America Online, Excite and Yahoo!; and

  . traditional music industry companies, including BMG Entertainment, a unit
    of Bertelsmann AG, EMI Music, a unit of EMI Group plc, Sony Music
    Entertainment, a unit of Sony Corporation, Warner Music Group, a unit of
    Time Warner Inc., and Universal Music Group, a unit of the Seagram
    Company Ltd. Certain of these companies have recently entered the online
    commercial community and are currently backing the SDMI security format.

Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.

We believe that we compete primarily on the bases of:

  . the quality and variety of our digital content, including access to known
    artists;

  . the price of the downloaded content;

  . the ease of use and consumer acceptance of the compression system;

  . the ability to effectively promote brand equity; and

  . the ease of use and speed of our website.

Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages to us, including:

  . longer operating histories;

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<PAGE>

  . significantly greater financial, technical and marketing resources;

  . greater brand name recognition;

  . larger existing customer bases; and

  . more popular content or artists.

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion, and sale of their products or services
than we can. Websites maintained by our existing and potential competitors may
be perceived by consumers, artists, talent management companies and other
music-related vendors or advertisers as being superior to ours. In addition, we
may not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisements. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.

Intellectual Property

Our success and ability to compete are substantially dependent on our
internally developed technology. We pursue the registration of our trademarks
in the United States and internationally. We currently hold a registered
trademark from the United States Patent & Trademark Office for "EMusic." While
we rely on trademark, service mark, copyright and trade secrets laws and
restrictions in the United States and other jurisdictions, together with
contractual restrictions, to protect our proprietary rights, such trademark,
service mark, copyright and trade secret protection may not be available in
every jurisdiction in which we distribute or make available our musical content
and technology through the Internet. Although we believe that the use of
material on our websites is protected under current provisions of copyright
law, legal rights to certain aspects of Internet content and commerce are not
clearly settled. We may not be able to maintain rights to information,
including webcasting of popular sound recordings, downloadable music samples,
and artist, entertainment and other information. The failure to be able to
offer such information would harm our business.

While we have generally entered into confidentiality or license agreements with
our employees, consultants, and corporate partners in order to limit access to
and distribution and disclosure of our proprietary information, we cannot
assure you that the steps we have taken will adequately protect or prevent
misappropriation of our proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States. Despite our efforts, unauthorized parties may
attempt to copy or otherwise obtain and use our products and technology.
Policing unauthorized use is difficult.

There are no pending lawsuits against us regarding infringement of any existing
patents or other intellectual property rights or any material notices that we
are infringing the intellectual property rights of others. However, there can
be no assurance that such infringement claims will not be asserted by third
parties in the future. Any such claims could result in litigation subjecting us
to significant liability for damages, or in invalidation of our proprietary
rights. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management attention and resources,
or require us to enter into royalty or licensing agreements.

Employees

As of September 30, 1999, we had 70 full-time employees, including 30 in
content acquisition and marketing, 23 in engineering and product development,
14 in finance and operations and 3 in other administrative functions. Our
future success depends, in significant part, upon the continued service of our
key technical, editorial, product development, and senior management personnel
and on our ability to attract and retain highly qualified technical and
management personnel, for whom competition is intense. None of our employees
are represented by a collective bargaining unit, and we have never experienced
a work stoppage. Our relations with our employees are good.

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<PAGE>

Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising
out of our operations. We are not currently engaged in any legal proceedings
that, individually or in the aggregate, we expect would have a material adverse
effect on our business.

Facilities

Our corporate headquarters are located in approximately 20,000 square feet in
Redwood City, California occupied under a lease expiring in April 2004. We
believe that our existing facilities will be adequate for the foreseeable
future, and that suitable additional facilities will be available in the future
as needed on commercially reasonable terms.

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<PAGE>

                                   Management

Executive Officers, Directors and Key Employees

Our current executive officers and directors as well as certain members of our
senior management, and their ages and positions as of September 30, 1999 are as
follows:

<TABLE>
<CAPTION>
Name                   Age                     Position(s)
----                   ---                     -----------
<S>                    <C> <C>
Robert H. Kohn *......  42 Chairman and Secretary
Gene Hoffman, Jr. *...  24 President, Chief Executive Officer, and Director
Joseph H. Howell *....  47 Executive Vice President and Chief Financial Officer
Peter M. Astiz *......  41 Executive Vice President and General Counsel
James R. Chapman *....  32 Executive Vice President, Corporate Strategy
Gary Culpepper........  50 Executive Vice President, Business Affairs
Spencer Leyton........  51 Senior Vice President, Sales
Brian Brinkerhoff.....  36 Vice President, Content Acquisition
Steve Grady...........  33 Vice President, Marketing
Peter Harter..........  31 Vice President, Global Public Policy and Standards
Marv Su...............  36 Vice President, Interactive Marketing
Brett A. Thomas.......  29 Vice President, Technology
Tor Braham............  42 Director
Ralph Peer, II........  55 Director
Ed Rosenblatt.........  64 Director
</TABLE>
------------------
*Executive Officer

Robert H. Kohn, a co-founder of EMusic, has been Chairman of the Board and
Secretary since January 1998. From October 1996 to December 1997, Mr. Kohn was
Vice President, Business Development and General Counsel of Pretty Good
Privacy, Inc., a developer and marketer of Internet encryption and security
software. From March 1987 to September 1996, he was Senior Vice President of
Corporate Affairs, Secretary, and General Counsel of Borland International,
Inc., a software company. Mr. Kohn also served as chief legal counsel for
Ashton-Tate Corporation. Prior to Ashton-Tate, he was an attorney at the
Beverly Hills law offices of Rudin & Richman, an entertainment law firm whose
clients included Frank Sinatra, Liza Minelli, Cher and Warner Brothers Music.
He was also Associate Editor of the Entertainment Law Reporter, for which he
continues to serve as a member of the Advisory Board. A member of the
California Bar Association, Mr. Kohn co-authored Kohn On Music Licensing, a
treatise on music industry law for lawyers, music publishers, and songwriters.
He graduated from Loyola Law School, Los Angeles and received a Bachelor of
Arts degree in Business Administration from California State University at
Northridge. Mr. Kohn is also an adjunct professor of law at Monterey College of
Law, where he teaches Corporate Law.

Gene Hoffman, Jr., a co-founder of EMusic, has been President, Chief Executive
Officer, and a Director since January 1998. From November 1996 to December
1997, Mr. Hoffman was Director of Business Development and Director of
Interactive Marketing of Pretty Good Privacy. From October 1995 to November
1996, he was founder, director and Executive Vice President of PrivNet, Inc.,
an Internet privacy software company. From August 1993 to October 1995, Mr.
Hoffman was a student at the University of North Carolina, Chapel Hill.

Joseph H. Howell joined EMusic in April 1998 as Executive Vice President and
Chief Financial Officer. From January 1995 to April 1998, Mr. Howell was Senior
Vice President and Chief Financial Officer of Merix Corporation, a manufacturer
of multilayer printed circuit boards. From May 1988 to January 1995, Mr. Howell
served as Vice President and Controller of Borland. He also served as Borland's
acting Chief Financial Officer in 1994. Mr. Howell received a Bachelor of Arts
degree in Political Science from the University of Michigan and a Masters of
Science in Accounting from Eastern Michigan University.


                                       50
<PAGE>

Peter M. Astiz joined EMusic in July 1999 as Executive Vice President and
General Counsel. From October 1996 to July 1999, Mr. Astiz was a partner of
Gray Cary Ware & Freidenrich LLP, a law firm. From July 1989 until October
1996, Mr. Astiz was a partner of the law firm of Baker & McKenzie. Mr. Astiz
received a Bachelor of Science degree in Business Administration from the
University of California in 1979 and a J.D. from the University of San
Francisco.

James R. Chapman joined EMusic in April 1999 as Executive Vice President,
Corporate Strategy. From April 1997 to April 1999, Mr. Chapman was Director of
the Global Private Capital Group at Warburg Dillon Read LLC (formerly UBS
Securities LLC), a major investment bank. Prior to joining UBS Securities, from
July 1995 to April 1997 Mr. Chapman was President and Founder of Ashley Capital
Management, a private equity and advisory firm focused on principal investments
in emerging growth companies located in the Pacific Northwest and Rocky
Mountain States. From September 1994 to July 1995, Mr. Chapman was a partner of
Jacobson Partners, a boutique merchant bank focused on middle market buyouts
and direct equity investments. From May 1990 to September 1994, Mr. Chapman
also worked as an associate in the technology and healthcare investment banking
groups of Oppenheimer & Co. and PaineWebber Incorporated. Mr. Chapman received
a Bachelor of Arts degree in Economics from Middlebury College.

Gary Culpepper joined EMusic in April 1998 as Executive Vice President,
Business Affairs. From May 1995 to March 1998, Mr. Culpepper was in private law
practice, specializing in music and entertainment transactions for recording
artists, producers, and songwriters. From April 1994 to April 1995, Mr.
Culpepper was Senior Counsel for Sony Pictures/Columbia/TriStar Home Video. Mr.
Culpepper previously served as Vice President, Business Affairs/Music for
Paramount Pictures Corporation, where he was responsible for the negotiation,
structuring, and administration of all music-related rights for all film and
soundtrack licensing agreements, budget planning, and financial analysis for
all music-related deal-making activities. Prior to that, Mr. Culpepper was
Director, Business Affairs for Capitol Records, Inc. He was also Senior Counsel
for Casablanca Records & Filmworks, Assistant General Counsel for ABC Records,
Inc., and Manager, A&R Administration for A&M Records. He is a member of the
California Bar Association, graduated cum laude from University of California,
Los Angeles, and received his law degree from Southwestern University.

Spencer Leyton joined EMusic in April 1999 as Vice President, Corporate
Development, M&A and was appointed Senior Vice President, Sales, in August
1999. From 1997 until April 1999, Mr. Leyton worked as an independent business
consultant. From 1995 through 1996, Mr. Leyton served as Vice President,
Mergers & Acquisitions for Sybase, Inc., a software company. From 1989 through
1994, Mr. Leyton served as Senior Vice President, Business Development for
Borland. Mr. Leyton received a Bachelors of Arts degree in geography from
California State University, Hayward.

Brian Brinkerhoff joined EMusic in November 1998 as Vice President, Content
Acquisition. From January 1995 to November 1998, Mr. Brinkerhoff was Head of
Creative Music Publishing at the Walt Disney Company, a multinational
entertainment company. From January 1992 to December 1994, he was a principal
of Vis-a-Vis Entertainment Company, a music publishing company. From May 1989
to December 1991, Mr. Brinkerhoff was Product Manager, Kodak Interactive
Systems, a developer and marketer of personal computer software. Mr.
Brinkerhoff received a Bachelors of Arts degree in Economics from the
University of California at Davis.

Steve Grady joined EMusic in June 1998 as Vice President, Corporate
Communications and was promoted to Vice President, Marketing in January 1999.
From July 1997 to May 1998, Mr. Grady was Director, Corporate Communications
for Borland, where he was responsible for public relations and investor
relations. From July 1996 to July 1997, he was Director, Marketing
Communications for Infoseek Corporation. From 1992 to June 1995, he served as
Director, Corporate Communications for Borland. Prior to Borland, Mr. Grady
served in a variety of corporate communications and marketing positions with
Ashton-Tate, TeraData, and Lotus Development. Mr. Grady received a Masters
degree in Communications Studies from Emerson College and a Bachelor of Arts
degree in Public Communications from Ashland University.

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<PAGE>

Peter Harter joined EMusic in March 1999 as Vice President, Global Public
Policy and Standards. From November 1995 through March 1999, Mr. Harter was
Global Public Policy Counsel for Netscape Communications Corp. From June 1994
through November 1995, Mr. Harter was Executive Director and General Counsel
for the National Public Telecomputing Network (NPTN) in Cleveland, Ohio. Mr.
Harter was a founder of the Internet Law and Policy Forum (ILPF), an ad-hoc
body of over twenty companies from around the world focused on developing open
draft legal standards for a variety of Internet law and policy matters.
Mr. Harter received a Bachelor of Arts degree in Rhetoric & Government from
Lehigh University and a J.D. from Villanova Law School.

Marv Su joined EMusic as Vice President, Interactive Marketing in February
1999. From January 1998 through January 1999, Mr. Su served as director of
Small Business Internet Marketing and Community at Intuit, Inc., a software
company. From February 1996 through December 1997, Mr. Su served as Senior
Director of Advertising Operations at Infoseek. From August 1991 through
February 1996, Mr. Su held various management and marketing positions at Apple
Computer. He received a Bachelor of Science in Electrical Engineering from
Stanford University and a Master of Science in Management from the M.I.T. Sloan
School of Management.

Brett A. Thomas joined EMusic in April 1998 as Vice President, Technology. From
November 1996 to January 1998, Mr. Thomas was Principal Engineer for Pretty
Good Privacy, where he was responsible for the design and implementation of PGP
4.5 and 5.0 for Win32, PGP for Unix and its key server software. Previously,
Mr. Thomas was a senior engineer for NCR, where he developed their check
processing software. Prior to NCR, he wrote automated document processing
programs for MCI, internal management software for an insurance company, and
inventory control systems under contract to IBM. Since 1994, Mr. Thomas has
been involved in the Linux software community, maintaining websites operating
on Linux platform and making several modifications to the source code of the
core of the Linux operating system.

Tor Braham, a Director since May 1999, is Managing Director and Head of the
Technology Mergers & Acquisitions Department for Warburg Dillon Read. From
February 1984 until November 1997, Mr. Braham was a partner of the law firm of
Wilson Sonsini Goodrich & Rosati. Mr. Braham received a Bachelor of Science
degree in English from Columbia University and a J.D. from the New York
University Law School.

Ralph Peer, II, a Director since June 1998, is Chairman and Chief Executive
Officer of peermusic, a global network of music publishing and production
companies. In addition, Mr. Peer is Vice President and Director of the National
Music Publishers' Association (U.S.A.) and the Harry Fox Agency. He is a
lifetime director and past president of the Country Music Association and a
publisher/director of ASCAP. Mr. Peer is also a director of Fox Agency
International (Singapore) and a consultant to the board of the Mechanical
Copyright Protection Society, U.K. He is a past president and a current
director of the International Confederation of Music Publishers and in 1997 was
elected "President d'Honneur" of the Confederation.

Ed Rosenblatt, became a Director in 1999. From 1994 until his retirement in
1999, Mr. Rosenblatt served as Chairman of Geffen Records. Mr. Rosenblatt
helped found Geffen Records in 1980, and served as its President and Chief
Operating Officer until 1994. Prior to Geffen Records, Mr. Rosenblatt served as
Senior Vice President of sales and promotion for Warner Brothers Records. Mr.
Rosenblatt received a degree in Applied Arts from Brooklyn College.

Board of Directors

The terms of the board of directors are divided into three classes: Class I,
whose term will expire at the annual meeting of stockholders to be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Robert Kohn and Tor
Braham, the Class II directors are Gene Hoffman, Jr. and Ed Rosenblatt, and the
Class III director is Ralph Peer. At each annual meeting of stockholders, the
successors to directors whose term expires will be elected to serve a term of
three years. This classification of directors may have the effect of delaying
or preventing changes in our control. Our board of

                                       52
<PAGE>

directors consists of five members. Our amended and restated bylaws provide
that the authorized number of directors may be changed by resolution of the
board of directors.

Executive officers are elected by the board of directors annually. There are no
family relationships among any of our directors, officers or key executives.

Board Committees

We have established an Audit Committee and a Compensation Committee. The Audit
Committee, which currently consists of Messrs. Braham, Peer and Rosenblatt,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The Compensation Committee,
which currently consists of Messrs. Braham, Peer and Rosenblatt, reviews and
recommends to the Board of Directors the compensation and benefits of our
executive officers, establishes and reviews general policies relating to our
compensation and benefits and administers our stock plans.

Director Compensation

Directors do not receive cash compensation for their services as directors or
members of committees of the board of directors, but are reimbursed for
reasonable expenses incurred in attending meetings of the board. In May 1998,
we granted Mr. Peer a fully-vested, nonqualified stock option to purchase
100,000 shares of our common stock at an exercise price of $5.00 per share. In
June 1999, we granted Messrs. Braham and Rosenblatt fully-vested, nonqualified
stock options to purchase 35,000 and 100,000 shares of our common stock,
respectively, at an exercise price of $13.63 per share.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of the board of directors.

Change of Control Arrangements and Employment Agreements

Pursuant to agreements with Messrs. Kohn and Hoffman, upon any acquisition of
EMusic or if their employment is terminated other than for cause, the
repurchase right in favor of EMusic which applies to certain unvested shares
owned by them will terminate. Pursuant to agreements with Messrs. Howell, Astiz
and Chapman, upon any acquisition of EMusic, all unvested stock options held by
each will become vested in full. Further each executive officer is entitled to
twelve months severance in the event their employment is terminated other than
for cause.

Executive Compensation

 Summary Compensation Information

The following table sets forth information concerning the compensation we paid
for services rendered during the fiscal years ended June 30, 1998 and 1999 by
our Chief Executive Officer:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                 Long Term
                                                               Compensation
                                   Annual Compensation            Awards
                                -------------------------- ---------------------
        Name and                              Other Annual Securities Underlying
   Principal Position      Year Salary  Bonus Compensation        Options
   ------------------      ---- ------- ----- ------------ ---------------------
<S>                        <C>  <C>     <C>   <C>          <C>
Gene Hoffman, Jr., Presi-
 dent and Chief            1999 $82,291   --       --             250,000
 Executive Officer.......  1998  31,250   --       --                 --
</TABLE>


                                       53
<PAGE>

The stock option granted to Mr. Hoffman vests ratably over a four year term. No
other executive officer received a total salary and bonus during fiscal year
1998 or 1999 in excess of $100,000.

 Option Grants

The following table provides information regarding stock option grants made
during fiscal 1999 to Mr. Hoffman. Options may terminate before their
expiration date upon the termination of optionee's status as an employee or
upon the optionee's death or disability.

                       Option Grants in Fiscal Year 1999

<TABLE>
<CAPTION>
                                                                           Potential Realizable
                                                                             Value at Assumed
                                                                              Annual Rates of
                         Number of     % of Total                               Stock Price
                         Securities      Options                             Appreciation for
                         Underlying    Granted to     Exercise                Option Term(2)
                          Options     Employees in    Price Per Expiration ---------------------
          Name            Granted   Fiscal 1999(a)(1)   Share      Date       5%         10%
          ----           ---------- ----------------- --------- ---------- --------- -----------
<S>                      <C>        <C>               <C>       <C>        <C>       <C>
Gene Hoffman, Jr. ......  250,000          5.9%        $13.63    6/10/09   $ 941,429 $ 2,080,312
</TABLE>
------------------
(1) Based on an aggregate of 4,216,000 shares subject to options granted in
    fiscal 1999.
(2) Potential realizable values are net of exercise price, but before taxes
    associated with exercise. Amounts represent hypothetical gains that could
    be achieved for the options if exercised at the end of the option term. The
    assumed 5% and 10% rates of stock price appreciation are provided in
    accordance with rules of the SEC and do not represent our estimate or
    projection of the future common stock price.

 Option Exercises and Year-End Holdings

There were no option exercises by Mr. Hoffman during fiscal 1999. The following
table sets forth information concerning unexercised options held as of June 30,
1999 by Mr. Hoffman.

   Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values

<TABLE>
<CAPTION>
                                  Number of Securities     Value of Unexercised
                                       Underlying              In-the-Money
                                       Unexercised              Options at
                                   Options at 6/30/99             6/30/99
                                  -----------------------  ----------------------
               Name                Vested     Unvested      Vested    Unvested
               ----               ---------  ------------  ----------------------
<S>                               <C>        <C>           <C>      <C>
Gene Hoffman, Jr.................        --       250,000       --  $   1,750,000
</TABLE>

We have not awarded stock appreciation rights to any employee of ours and we do
not have any multi-year incentive plans.

Stock Plans

1998 Stock Option Plan. Our 1998 stock option plan was approved by the board of
directors in March 1998 and was subsequently approved by our stockholders. The
1998 option plan provides for the grant to employees of incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended, and for grants of nonstatutory stock options to employees, non-
employee directors and consultants. Because non-employee directors are eligible
to receive grants under the 1998 option plan, we have not adopted a separate
plan which provides for the formula grant of stock options to non-employee
directors.

The 1998 option plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1998 option plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:

 . the number of shares of common stock covered by the option;

                                       54
<PAGE>

 . when the option becomes exercisable;

 . the per share option exercise price, which in the case of incentive stock
   options must be at least equal to the fair market value of a share of
   common stock on the grant date (or 110% of such fair market value for
   incentive stock options granted to 10% shareholders), and, in the case of
   nonstatutory stock options, must be at least 85% of the fair market value
   of a share of common stock on the grant date; and

 . the duration of the option (which may not exceed ten years, or, with
   respect to incentive stock options granted to 10% shareholders, five
   years).

Generally, options granted under the 1998 option plan become exercisable as the
underlying shares vest. Options granted under the 1998 option plan generally
vest over four years, although the board or committee may specify a different
vesting schedule for a particular grant. Options granted under the 1998 option
plan are non-transferable other than by will or the laws of descent and
distribution.

In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1998 option plan. The outstanding options will terminate to the extent that
such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.

As of September 30, 1999, six million shares are reserved for issuance under
the 1998 option plan, 195,985 shares have been issued upon the exercise of
options, options to purchase of a total of 2,796,165 shares at a weighted
average exercise price of $3.95 per share were outstanding and 3,007,850 shares
were available for future option grants.

1998 Nonstatutory Stock Option Plan. Our 1998 nonstatutory stock option plan
was approved by the board of directors in December 1998. The nonstatutory plan
provides for the grant of nonstatutory stock options to employees (who are not
officers or directors) and consultants.

The nonstatutory plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the nonstatutory plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:

 . the number of shares of common stock covered by the option;

 . when the option becomes exercisable;

 . the per share option exercise price, which must be at least equal to 85% of
   the fair market value of a share of common stock on the grant date; and

 . the duration of the option (which may not exceed ten years).

Generally, options granted under the nonstatutory plan become exercisable as
the underlying shares vest. Options granted under the nonstatutory plan
generally vest over four years, although the board or committee may specify a
different vesting schedule for a particular grant. Options granted under the
nonstatutory plan are non-transferable other than by will or the laws of
descent and distribution.

In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the nonstatutory plan. The outstanding options will terminate to the extent
that such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.

As of September 30, 1999, five million shares are reserved for issuance under
the nonstatutory plan, 20,000 shares have been issued upon the exercise of
options, options to purchase of a total of 3,827,200 shares at a weighted
average exercise price of $10.85 per share were outstanding and 1,152,800
shares were available for future option grants.

                                       55
<PAGE>

1999 Employee Stock Purchase Plan. A total of 250,000 shares of common stock
have been reserved for issuance under our 1999 employee stock purchase plan,
none of which have been issued as of the effective date of this offering. The
purchase plan, which is intended to qualify under section 423 of the Internal
Revenue Code, is administered by the board or by a committee thereof. Our
employees (including our officers and employee directors) and those of any of
our subsidiaries designated by the board for participation in the purchase plan
are eligible to participate in the purchase plan if they are customarily
employed for more than 20 hours per week and more than five months per year.
The purchase plan will be implemented by sequential offerings of approximately
six months duration. We have not yet determined when the first offering period
will commence. Shares will be purchased on the last day of each offering
period. The board may change the dates or duration of one or more offerings,
but no offering may exceed 27 months. The purchase plan permits eligible
employees to purchase common stock through payroll deductions at a price no
less than 85% of the lower of the fair market value of the common stock on (a)
the first day of the offering, or (b) the purchase date. Participants generally
may not purchase more than 1,000 shares in a six-month offering period or stock
having a value (measured at the beginning of the offering) greater than $25,000
in any calendar year. In the event of certain changes in control of EMusic, the
board may accelerate the purchase date of the then current offering period to a
date prior to the change in control unless the acquiring or successor
corporation assumes or replaces the purchase rights outstanding under the
purchase plan.

Limitation of Liability and Indemnification

Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. Our amended and restated certificate of
incorporation and bylaws provide that we shall indemnify our directors,
officers, employees and agents to the full extent permitted by Delaware General
Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law. In addition, we intend to enter
into separate indemnification agreements with our directors and officers which
would require us, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature). We also
intend to continue to maintain director and officer liability insurance, if
available on reasonable terms. These indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of our officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.

At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents in which indemnification is
being sought nor are we aware of any threatened litigation that may result in a
claim for indemnification by any of our directors, officers, employees or other
agents.

                                       56
<PAGE>

                     Certain Transactions and Relationships

We were formed on January 8, 1998 as a Delaware corporation under the name
GoodNoise Corporation. In February 1998, we issued 3,100,000 shares of common
stock to each of Robert Kohn, our chairman of the board, and Gene Hoffman, Jr.,
our chief executive officer and a member of our board, and 900,000 shares of
common stock to Gary Culpepper, our executive vice president of business
affairs. All such shares were issued at $0.001 per share. Of the shares issued
to Mr. Culpepper, approximately 600,000 shares were subject to repurchase
pursuant to a restricted stock purchase agreement. As of July 15, 1999, the
restricted stock purchase agreement provides us with the right to repurchase
approximately 311,000 of these shares at a nominal price subject to ratable
vesting over three years ending February 2001.

In February 1998, we entered into an agreement to borrow $10,000 from Mr. Kohn
and $50,000 from peermusic, and entity controlled by Ralph Peer, II, one of our
directors, through the issuance of promissory notes bearing interest at 10.0%
per annum, due in December 1998. On May 1, 1998, these notes were converted
into an aggregate of 150,000 shares of common stock at $0.40 per share.

On May 11, 1998, GoodNoise Corporation, a Florida corporation, formerly
Atlantis Ventures Corporation entered into an Agreement and Plan of
Reorganization pursuant to which it acquired GoodNoise Corporation, a Delaware
corporation. In connection with such acquisition, the Florida corporation
exchanged 11,015,300 shares of its common stock for all outstanding stock of
the Delaware corporation and assumed all outstanding options of the Delaware
corporation for the purchase of an additional 2,032,550 shares of the Florida
corporation's common stock. Following such transaction, the directors and
officers of the Delaware corporation became the directors and officers of the
Florida corporation. Of the shares issued as part of such transaction,
8,555,000 shares were issued to such directors and officers. The shareholders
of the Florida corporation prior to the Merger had no affiliation with the
Delaware corporation and following the Merger ceased to be affiliates of the
Florida corporation.

On March 23, 1999, we sold shares of Series B preferred stock through Warburg
Dillon Read LLC, a placement agent. Mr. Tor Braham was a managing director of
Warburg Dillon Read LLC at this time. Mr. Braham subsequently became a member
of our board of directors on May 5, 1999. Of the 117,570 shares of Series B
preferred stock sold on March 23, 1999, we sold 614 shares to peermusic III,
Ltd. which is affiliated with Ralph Peer, II, a member of our board of
directors. We also sold 33,334 and 16,832 shares of our Series B preferred
stock to affiliates of Invesco Private Capital and VantagePoint Venture
Partners, respectively. As a result, Invesco Private Capital and VantagePoint
are deemed to own over five percent of our outstanding common stock.

Also in connection with the sale of our Series B preferred stock, on March 23,
1999 we entered into a shareholders' agreement with Mr. Kohn and Mr. Hoffman,
as well as the purchasers of the Series B preferred stock. This agreement
provides, among other things, that the shares of our common stock owned by
Messrs. Kohn and Hoffman be held subject to a right of repurchase in favor of
EMusic. As of September 30, 1999, 2,335,916 and 2,010,598 shares of our common
stock owned by Messrs. Kohn and Hoffman, respectively, were subject to this
right of repurchase. This amount decreases by 72,726 and 62,598 shares monthly,
respectively, until March of 2002, when the right of repurchase expires.

                                       57
<PAGE>

                             Principal Stockholders

The following table sets forth the beneficial ownership of our voting stock,
including optioned shares, as of September 30, 1999 by:

 . each person or entity who is known by us to beneficially own more than 5%
   of our outstanding common stock;

 . each of our directors and executive officers; and

 . all executive officers and directors as a group.

Unless otherwise indicated, the address for each of the named individuals is
c/o EMusic.com Inc., 1991 Broadway, 2nd Floor, Redwood City, California 94063.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.

Applicable percentage ownership in the table is based on shares of common stock
outstanding as of September 30, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Shares of
common stock subject to options that are presently exercisable or exercisable
within sixty (60) days of September 30, 1999 are deemed outstanding for the
purpose of computing the percentage ownership of the person or entity holding
such options, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person or entity. To the extent that any
shares are issued upon exercise of options, warrants or other rights to acquire
our capital stock that are presently outstanding or granted in the future or
reserved for future issuance under our stock plans, there will be further
dilution to new public investors. The number of shares of common stock
beneficially owned includes shares which are being registered for resale
pursuant to this registration statement.

<TABLE>
<CAPTION>
                                                          Number of
                                                          Shares of
                                                         Common Stock
                                                         Beneficially
Beneficial Owner                                            Owned     Percent(1)
----------------                                         ------------ ----------
<S>                                                      <C>          <C>
5% Stockholders
Citiventure 96 Partnership, L.P.
 c/o Invesco Private Capital
 1166 Avenue of the Americas, Suite 2700
 New York, NY 10036 (2).................................  3,333,400       8.0%
VantagePoint Venture Partners
 1001 Bayhill Drive, Suite 140
 San Bruno, CA 94066 (3)................................  1,686,500       5.0%
Directors and Executive Officers
Robert H. Kohn..........................................  2,881,700       8.5%
Gene Hoffman, Jr. ......................................  3,202,000       9.4%
Joseph H. Howell (4)....................................    211,401       *
Peter M. Astiz..........................................    216,000       *
James R. Chapman (5)....................................     96,607       *
Tor Braham (6)..........................................     46,600       *
Ralph Peer, II (7)......................................    308,900       *
Ed Rosenblatt (8).......................................    100,000       *
Executive officers and directors as a group
 (8 persons) (9)........................................  7,063,208      20.5%
</TABLE>
------------------
* Less than 1%

                                       58
<PAGE>

(1) Percentage of beneficial ownership excludes up to 6,162,957 shares issuable
    upon exercise of outstanding stock options and warrants.
(2) Represents shares owned by Invesco related partnerships as follows: 58,300
    shares owned by Chancellor Private Capital Offshore Partners I, C.V.;
    624,000 shares owned by Chancellor Private Capital Offshore Partners II,
    L.P.; 379,000 shares owned by Chancellor Private Capital III, L.P.;
    1,627,100 shares owned by Citiventure 96 Partnership, L.P.; and 645,000
    shares owned by Drake & Co. for the account of Citiventure Private
    Participations III.
(3) Represents shares owned by VantagePoint related partnerships as follows:
    3,300 shares owned by Jason Strober; 1,111,100 shares owned by VantagePoint
    Communications Partners, L.P.; 16,600 shares owned by VantagePoint Venture
    Advisors, LLC; and 555,500 shares owned by VantagePoint Venture Partners
    1996.
(4) Includes 175,401 shares issuable upon exercise of outstanding options.
(5) Includes 50,007 shares issuable upon exercise of outstanding options.
(6) Includes 35,000 shares issuable upon exercise of outstanding options.
(7) Includes 100,000 shares issuable upon exercise of outstanding options.
    Includes 61,400 shares of common stock held by peermusic III, Ltd. which
    are issuable upon conversion of shares of Series B preferred stock. Mr.
    Peer disclaims beneficial ownership of the shares held by peermusic III,
    Ltd. except to the extent of his pecuniary interest therein.
(8) Represents shares issuable upon exercise of outstanding options.
(9) Includes 460,408 shares issuable upon exercise of outstanding options.

                                       59
<PAGE>

                          Description of Capital Stock

Our authorized capital stock consists of 200,000,000 shares of common stock,
par value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share.

This summary does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of our amended and restated certificate of
incorporation where such rights are set forth in full, and the provisions of
applicable law.

Common Stock

As of September 30, 1999, there were approximately 34,000,000 shares of common
stock outstanding held of record by approximately 200 shareholders. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of common stock. Subject to
preferences applicable to any then outstanding preferred stock, holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor. In the event
of a liquidation, dissolution, or winding up of EMusic, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
our liabilities and the liquidation preference of any preferred stock. Holders
of common stock have no preemptive or subscription rights, and there are no
redemption or conversion rights with respect to such shares. All outstanding
shares of common stock are fully paid and non-assessable.

Preferred Stock

Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by our stockholders. The issuance of
preferred stock by our board of directors could adversely affect the rights of
holders of common stock.

The potential issuance of preferred stock may have the effect of delaying or
preventing a change in control of EMusic, may discourage bids for our common
stock at a premium over the market price of the common stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
common stock. Immediately after this offering there will be no shares of
preferred stock outstanding, and we have no current plans to issue shares of
preferred stock.

Warrants

As of September 30, 1999, we had outstanding warrants to purchase an aggregate
of approximately 2,712,000 shares of our common stock. Warrants for 100,000
shares expire in October 2003 and have an exercise price equal to $7.10. The
exercise price of these warrants is subject to certain adjustments upon future
issuances of common stock or rights to acquire common stock at a price less
than the applicable exercise price. The warrants for the remaining shares have
an average exercise price of $14.12 and expire by September 2001. The exercise
price of all warrants is subject to customary adjustments on stock splits,
stock dividends, any merger or acquisition involving EMusic and similar
transactions, such as to permit the holders of warrants to receive upon
exercise of the warrants that which they would have received had they exercised
the warrants immediately prior to any such transaction.

Registration Rights of Certain Holders

In connection with the sale of shares of our Series B preferred stock, on March
23, 1999 we entered into an agreement with the holders of shares of our Series
B preferred stock and the holder of a warrant to purchase 100,000 shares of our
common stock to register the shares of our common stock into which these
securities are

                                       60
<PAGE>

convertible or exercisable. In accordance with this agreement, we have included
these shares as part of this registration statement. As of September 30, 1999,
we have not granted registration rights to any other holders of our securities.

Anti-Takeover, Limited Liability and Indemnification Provisions

Effect of Delaware Anti-takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law, as amended, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless:

  . prior to such date, the board of directors of the corporation approved
    either the business combination or the transaction that resulted in the
    stockholder becoming an interested stockholder;

  . upon consummation of the transaction that resulted in the stockholder
    becoming an interested stockholder, the interested stockholder owned at
    least 85% of the voting stock of the corporation outstanding at the time
    the transaction commenced, excluding for purposes of determining the
    number of shares outstanding those shares owned (1) by persons who are
    directors and also officers and (2) by employee stock plans in which
    employee participants do not have the right to determine confidentially
    whether shares held subject to the plan will be tendered in a tender or
    exchange offer; or

  . on or subsequent to such date, the business combination is approved by
    the board of directors and authorized at an annual or special meeting of
    stockholders, and not by written consent, by the affirmative vote of at
    least 66 2/3% of the outstanding voting stock that is not owned by the
    interested stockholder.

Section 203 defines business combinations to include:

  . any merger or consolidation involving the corporation and any interested
    stockholder;

  . any sale, transfer, pledge or other disposition of 10% or more of the
    assets of the corporation involving the interested stockholder;

  . any transaction that results in the issuance or transfer by the
    corporation of any stock of the corporation to the interested
    stockholder;

  . any transaction involving the corporation that has the effect of
    increasing the proportionate share of the stock of any class or series of
    the corporation beneficially owned by the interested stockholder; or

  . the receipt by the interested stockholder of the benefit of any loans,
    advances, guarantees, pledges or other financial benefits provided by or
    through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

Certificate of Incorporation and Bylaw Provisions. Our amended and restated
certificate of incorporation and amended and restated bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of EMusic or an unsolicited acquisition proposal that a stockholder
might consider favorable, including a proposal that might result in the payment
of a premium over the market price for the shares held by stockholders. These
provisions are summarized in the following paragraphs.

Classified Board of Directors. Our amended and restated certificate of
incorporation and amended and restated bylaws provide for our board to be
divided into three classes of directors serving staggered, three year terms.
The classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board of directors.


                                       61
<PAGE>

Supermajority Voting. Our amended and restated certificate of incorporation
requires the approval of the holders of at least 66 2/3% of our combined voting
power to effect certain amendments to the amended and restated certificate of
incorporation with respect to the bylaws, directors, stockholder meetings and
indemnification, or to effect any business combination (as defined in Section
203) relating to us. Our amended and restated bylaws may be amended by either a
majority of the board of directors, or the holders of a majority of our voting
stock, provided that certain amendments approved by stockholders require the
approval of at least 66 2/3% of our combined voting power.

Authorized but Unissued or Undesignated Capital Stock. Our authorized capital
stock consists of 200,000,000 shares of common stock and 20,000,000 shares of
preferred stock. As of September 30, 1999, no preferred stock has been
designated. As of September 30, 1999, we had outstanding approximately
34,000,000 shares of common stock. The authorized but unissued (and in the case
of preferred stock, undesignated) stock may be issued by the board of directors
in one or more transactions. In this regard, our amended and restated
certificate of incorporation grants the board of directors broad power to
establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to the board of
director's authority described above could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of
EMusic. The board of directors does not currently intend to seek stockholder
approval prior to any issuance of preferred stock, unless otherwise required by
law or the rules of any exchange on which our securities are then traded.

Special Meetings of Stockholders. Our amended and restated bylaws provide that
special meetings of stockholders of EMusic may be called only by the board of
directors, or by the chairman of our board of directors or our president.

No Stockholder Action by Written Consent. Our amended and restated certificate
of incorporation and amended and restated bylaws provide that an action
required or permitted to be taken at any annual or special meeting of the
stockholders of EMusic may only be taken at a duly called annual or special
meeting of stockholders. This provision prevents stockholders from initiating
or effecting any action by written consent.

Notice Procedures. Our amended and restated bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders of EMusic, including proposals relating to the
nomination of candidates for election as directors, the removal of directors
and amendments to our amended and restated certificate of incorporation or
amended and restated bylaws. These procedures provide that notice of such
stockholder proposals must be timely given in writing to the secretary of
EMusic prior to the meeting. Generally, to be timely, notice must be received
by our secretary not less than 120 days prior to the meeting. The notice must
contain certain information specified in the amended and restated bylaws.

Limitation of Director Liability. Our amended and restated certificate of
incorporation limits the liability of our directors (in their capacity as
directors but not in their capacity as officers) to us or our stockholders to
the fullest extent permitted by Delaware law. Specifically, directors will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability:

  .  for any breach of the director's duty of loyalty to us or our
     stockholders;

  .  for acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

  .  under Section 174 of the Delaware General Corporation Law, which relates
     to unlawful payments of dividends or unlawful stock repurchases or
     redemptions; or

  .  for any transaction from which the director derived an improper personal
     benefit.

Indemnification Arrangements. Our amended and restated bylaws provide that our
directors and officers shall be indemnified and provide for the advancement to
them of expenses in connection with actual or threatened proceedings and claims
arising out of their status as such to the fullest extent permitted by the
Delaware

                                       62
<PAGE>

General Corporation Law. We intend to enter into indemnification agreements
with each of our directors and executives officers that will provide them with
rights to indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.

Transfer Agent

The transfer agent and registrar for our common stock is Interwest Transfer
Company, Inc. Its address is 1981 East 4800 South, Suite 100, Salt Lake City,
Utah 84117, and its telephone number at this location is (801) 272-9294.

                                       63
<PAGE>

                        Shares Eligible for Future Sale

As of September 30, 1999, we had outstanding approximately 34,000,000 shares of
common stock. Of these shares, 5,750,000 shares sold in our underwritten public
offering are freely tradable without restrictions or further registration under
the Securities Act unless such shares are purchased by "affiliates" of EMusic,
as that term is defined under Rule 144 under the Securities Act. Shares
purchased by affiliates are subject to certain limitations and restrictions as
described below.

Sales of Restricted Shares

The remaining approximately 28,081,000 shares of common stock held by existing
stockholders were issued and sold by us in reliance upon exemptions from the
registration requirements of the Securities Act. 13,112,367 of such shares will
be freely tradable upon the effectiveness of the registration statement to which
this prospectus is a part except to the extent that such shares are held by
affiliates of EMusic. Of the remaining shares, approximately 4,045,000 are
freely tradeable, approximately 10,729,000 shares are eligible for resale
pursuant to, and subject to the requirements of Rule 144. Approximately 448,000
shares will not be eligible for resale pursuant to Rule 144 until June 2000. As
of September 30, 1999, approximately 20,993,000 of our outstanding shares were
subject to "lock-up" agreements described below.

In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period, a number of shares that does not exceed the greater of:

 . 1% of the number of shares of common stock then outstanding, which will
   equal approximately 330,000 shares immediately after this offering; or

 . the average weekly trading volume of the common stock on the Nasdaq
   National Market during the four calendar weeks preceding the filing of a
   notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain other requirements regarding
the manner of sale, notice filing and the availability of current public
information about us.

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "Rule 144(k) shares" may be sold without restriction.

Options

As of September 30, 1999, there were a total of approximately 6,623,000 shares
of common stock subject to outstanding options under our stock option plans,
approximately 2,439,000 of which were vested. All shares issuable upon exercise
of options granted under our stock option plans as well as shares issuable
under our 1999 employee stock purchase plan are generally available for resale
in the public market.

Warrants

As of September 30, 1999, approximately 2,712,000 shares of our common stock
were subject to outstanding warrants. Of such shares, 110,000 are subject to
the registration statement to which this prospectus is a part. We have no
contractual obligation to file a registration statement with respect to the
other shares issuable upon exercise of the warrants. If we do not file such a
registration statement, such shares will begin to be eligible for resale under
Rule 144 if such warrants are exercised on a "net exercise" basis beginning in
June 2001.

                                       64
<PAGE>

Lock-up Agreements

Our officers, directors and some other stockholders, holding in total
approximately 8,893,000 of our outstanding shares, have agreed with CIBC World
Markets Corp. not to sell or otherwise dispose of any of their shares for a
period of 90 days after September 24, 1999. Other stockholders holding in total
approximately 12,100,000 of our outstanding shares are subject to agreements
with us which require that they not, directly or indirectly, offer, sell,
pledge or otherwise dispose of any of their shares for the same 90-day period.
CIBC World Markets Corp., however, may in its sole discretion and at any time,
without notice, release all or any portion of the shares subject to these
agreements.

                          Price Range of Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol
"EMUS." Prices reported represent prices between dealers, do not include
markups, markdowns or commissions and do not necessarily represent actual
transactions. The market for our shares has been sporadic and at times very
limited.

The following table sets forth the high and low bid quotations for the common
stock for the fiscal years ending June 30, 1999 and 2000 and the portion of the
fiscal year ended June 30, 1998 for which our common stock was traded.

<TABLE>
<CAPTION>
                                                                   High   Low
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Fiscal Year Ended June 30, 1998
     Fourth Quarter (after May 12, 1998)......................... $ 6.50 $ 5.00
   Fiscal Year Ended June 30, 1999
     First Quarter............................................... $ 8.00 $ 5.88
     Second Quarter..............................................   7.50   5.00
     Third Quarter...............................................  23.88   7.00
     Fourth Quarter..............................................  29.13  13.63
   Fiscal Year Ending June 30, 2000
     First Quarter .............................................. $26.19 $11.56
     Second Quarter (through October 12, 1999)...................  17.13  15.00
</TABLE>

On October 12, 1999, the last sale price reported on the Nasdaq National Market
for our common stock was $15.81 per share.

                 Changes in and Disagreements with Accountants
                     on Accounting and Financial Disclosure

In June 1998, EMusic retained PricewaterhouseCoopers LLP as EMusic's
independent accountants and dismissed Barry L. Friedman P.C., Atlantis Ventures
Corporation's former accountants. The decision to change independent
accountants was ratified by our board of directors. During the two most recent
fiscal years audited by Barry Friedman through June 29, 1998, there were no
disagreements with Barry Friedman regarding any matters with respect to
accounting principles or practices, financial statement disclosure or audit
scope or procedure, which disagreements, if not resolved to the satisfaction of
the former accountants, would have caused Barry Friedman to make reference to
the subject matter of the disagreement in connection with this report. The
former accountants reports for the years and periods audited by them are not
part of our financial statements included in this prospectus. Such reports did
not contain an adverse opinion or disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles. Prior to
retaining PricewaterhouseCoopers LLP, we did not consult with
PricewaterhouseCoopers LLP regarding the application of accounting principles
or the type of audit opinion that might be rendered on our financial
statements.

                                       65
<PAGE>

                                 Legal Matters

The validity of the shares of common stock offered hereby will be passed upon
for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of the
date of this prospectus, an investment partnership of Gray Cary Ware &
Freidenrich owned an aggregate of 8,300 shares of common stock. This investment
partnership is also a selling stockholder.

                                    Experts

The financial statements of EMusic.com Inc. as of June 30, 1999 and for the
period January 8, 1998 (inception) to June 30, 1998, the year ended June 30,
1999 and the period January 8, 1998 (inception) to June 30, 1999, the financial
statements of Creative Fulfillment, Inc. as of December 31, 1998 and for each
of the two years in the period ended December 31, 1998 and the financial
statements of Internet Underground Music Archive Inc. as of June 30, 1998 and
for each of the two years in the period ended June 30, 1998 included in this
prospectus, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in auditing and accounting.

                  Where You Can Find More Information About Us

We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock registered hereby.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in our registration statement and
the exhibits filed therewith. For further information with respect to EMusic
and the common stock, reference is made to the registration statement and the
exhibits filed therewith. Statements contained in this prospectus regarding the
contents of any agreement or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of such agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.

You may read and copy any document we file at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
Our SEC filings are also available to the public from the SEC's website at
http://www.sec.gov.

Since September 20, 1998, we have been subject to the information and periodic
reporting requirements of the Securities Exchange Act of 1934, and, in
accordance therewith, file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the SEC's website, which is described above.

                                       66
<PAGE>

                         Index to Financial Statements

                  Index to Financial Statements- June 30, 1999

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  F-2
Consolidated Balance Sheets..............................................  F-3
Consolidated Statements of Operations....................................  F-4
Consolidated Statement of Stockholders' Equity...........................  F-5
Consolidated Statements of Cash Flows....................................  F-6
Notes To Consolidated Financial Statements...............................  F-7

                    Index to Pro Forma Financial Statements

<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Unaudited Pro Forma Condensed Combining Financial Information............ F-20
Unaudited Pro Forma Combining Condensed Statement of Operations Data..... F-21
Notes to the Unaudited Pro Forma Combining Condensed Statement of
 Operations Data......................................................... F-22

           Index to Financial Statements- Creative Fulfillment, Inc.

<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................ F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statement of Stockholders' Equity (Deficit).............................. F-26
Statements of Cash Flows................................................. F-27
Notes To Financial Statements............................................ F-28

                      Index to Financial Statements- IUMA

<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................ F-32
Balance Sheets........................................................... F-33
Statements of Operations................................................. F-34
Statement of Stockholders' Deficit....................................... F-35
Statements of Cash Flows................................................. F-36
Notes To Financial Statements............................................ F-37
</TABLE>

                                      F-1
<PAGE>

                       Report of Independent Accountants

To the Board of Directors and Stockholders
EMusic.com Inc. (formerly GoodNoise Corporation)

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
EMusic.com Inc. (formerly GoodNoise Corporation) (a development stage
enterprise) and its subsidiaries at June 30, 1998 and 1999, and the results of
their operations and cash flows for the period January 8, 1998 (Inception) to
June 30, 1998, the year ended June 30, 1999 and the period January 8, 1998
(Inception) to June 30, 1999 in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 26, 1999

                                      F-2
<PAGE>

                                EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a Development Stage Enterprise)

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     Proforma
                                       June 30, 1998 June 30, 1999 June 30, 1999
                                       ------------- ------------- -------------
                                                                    (unaudited)
                                       (in thousands, except share and per share
                                                         data)
<S>                                    <C>           <C>           <C>
ASSETS
Current Assets:
  Cash................................    $   510      $ 19,002      $ 18,433
                                                                     --------
  Accounts receivable.................         --            51
  Prepaid expenses and other assets...         21           224
                                          -------      --------
    Total current assets..............        531        19,277
Property and equipment, net...........         34         1,076
Music content, net....................         --         8,758
Trade names, net......................         --        24,680
Other assets..........................         17           430
                                          -------      --------
    Total assets......................    $   582      $ 54,221
                                          =======      ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current Liabilities:
  Accounts payable....................    $    67      $    637
  Accrued liabilities.................         51         1,679
  Accrued compensation and related
   benefits...........................         17           368
                                          -------      --------
    Total current liabilities.........        135         2,684
                                          -------      --------
Commitments Note 8
Redeemable Convertible Preferred
 Series B Stock.......................         --        32,550            --
                                          -------      --------      --------
Stockholders' Equity:
  Preferred Stock, $0.001 par value;
   380,000 shares authorized; no
   shares issued and outstanding......         --            --            --
  Common Stock, $0.001 par value;
   200,000,000 shares authorized;
   14,715,300,16,804,237 and
   28,561,237 (unaudited) pro-forma
   shares issued and outstanding,
   respectively.......................         15            17            29
  Additional paid-in capital..........      1,618        67,827        99,796
  Note receivable from employee.......         (6)           --            --
  Deficit accumulated during the
   development stage..................     (1,180)      (48,857)      (48,857)
                                          -------      --------      --------
    Total stockholders' equity........        447        18,987      $ 50,968
                                          -------      --------      --------
      Total liabilities, redeemable
       convertible preferred stock and
       stockholders' equity...........    $   582      $ 54,221
                                          =======      ========
</TABLE>

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

                                      F-3
<PAGE>

                                EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                   January 8, 1998 Year ended   January 8, 1998
                                   (Inception) to   June 30,    (Inception) to
                                    June 30, 1998     1999       June 30, 1999
                                   --------------- -----------  ---------------
<S>                                <C>             <C>          <C>
Revenues.........................    $        --   $        92    $        92
Costs of revenues................             --            27             27
                                     -----------   -----------    -----------
Gross profit.....................             --            65             65
                                     -----------   -----------    -----------
Operating expenses:
  Product development............            961        11,690         12,651
  Selling and marketing..........             --           556            556
  General and administrative.....            219         1,599          1,818
  Amortization of trade names....             --         1,682          1,682
                                     -----------   -----------    -----------
    Total operating expenses.....          1,180        15,527         16,707
                                     -----------   -----------    -----------
Operating loss...................         (1,180)      (15,462)       (16,642)
Interest income..................             --           359            359
Interest expense.................             --           (37)           (37)
                                     -----------   -----------    -----------
Net loss.........................    $    (1,180)  $   (15,140)   $   (16,320)
                                     -----------   -----------    -----------
Accretion of Series A Preferred
 Stock to redemption value.......             --           (25)           (25)
Beneficial conversion charge,
 Series A Preferred Stock........             --          (144)          (144)
Accretion of Series B Preferred
 Stock to redemption value.......             --          (222)          (222)
Beneficial conversion charge,
 Series B Preferred Stock .......             --       (31,577)       (31,577)
Dividend on Series B Preferred
 Stock...........................             --          (569)          (569)
                                     -----------   -----------    -----------
Net loss applicable to common
 shares..........................    $    (1,180)  $   (47,677)   $   (48,857)
                                     ===========   ===========    ===========
Net loss per common share--basic
 and diluted.....................    $     (0.12)  $     (3.52)   $     (4.87)
                                     ===========   ===========    ===========
Weighted average common shares
 outstanding--basic and diluted..     10,234,055    13,563,606     10,027,231
                                     ===========   ===========    ===========
Pro forma net loss per common
 share--basic and diluted........                  $     (0.95)   $     (1.39)
                                                   ===========    ===========
Shares used in pro forma net loss
 per common share................                   16,731,464     12,299,002
                                                   ===========    ===========
</TABLE>

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

                                      F-4
<PAGE>

                                Emusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                (in thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                      Deficit
                                                            Note    Accumulated
                                                         Receivable During the      Total
                          Number of  Common  Additional     From    Development Stockholders'
                            Shares   Stock  Paid Capital  Employee     Stage       Equity
                          ---------- ------ ------------ ---------- ----------- -------------
<S>                       <C>        <C>    <C>          <C>        <C>         <C>
Issuance of common stock
 at inception of the
 company................   8,378,000  $ 8     $    (8)      $--      $     --      $    --
Issuance of common stock
 on March 30, 1998......   1,191,800    1           9       (10)           --           --
Issuance of common stock
 in exchange for
 services on March 30,
 1998...................     672,600    1           5        --            --            6
Issuance of common stock
 in exchange for
 services on April 12,
 1998...................     271,400   --           7        --            --            7
Conversion of notes
 payable into common
 stock on May 1, 1998...     501,500    1         169        --            --          170
Payment on note
 receivable.............          --   --          --         4            --            4
Issuance of shares in
 connection with
 merger.................   3,700,000    4         684        --            --          688
Issuance of options to
 advisors...............          --   --         752        --            --          752
Net loss for the period
 from January 8, 1998
 (inception) through
 June 30, 1998..........          --   --          --        --        (1,180)      (1,180)
                          ----------  ---     -------       ---      --------      -------
BALANCE, June 30, 1998..  14,715,300   15       1,618        (6)       (1,180)         447
Issuance of common stock
 for acquisition of
 Creative Fulfillment,
 Inc....................     630,179    1       5,557        --            --        5,558
Issuance of common stock
 related to Nordic
 Entertainment
 transaction............     665,188    1      11,083        --            --       11,084
Issuance of common stock
 for acquisition of
 IUMA, Inc..............     448,000   --       7,771        --            --        7,771
Issuance of warrants in
 conjunction with the
 purchase of music
 content ...............          --   --       1,327        --            --        1,327
Issuance of warrants
 with Series A preferred
 stock..................          --   --         343        --            --          343
Accretion of Series A
 preferred stock to
 redemption value.......          --   --          --        --           (25)         (25)
Beneficial conversion
 charge, Series A
 preferred stock........          --   --         144        --          (144)          --
Accretion of Series B
 preferred stock to
 redemption value.......          --   --          --        --          (222)        (222)
Beneficial conversion
 charge, Series B
 preferred stock........          --   --      31,577        --       (31,577)          --
Dividends on Series B
 preferred stock........          --   --          --        --          (569)        (569)
Exercise of warrants to
 purchase common stock..     300,000   --         300        --            --          300
Exercise of options to
 purchase common stock..      45,400   --           1        --            --            1
Payment on note
 receivable from
 employee...............          --   --          --         6            --            6
Issuance of common stock
 for services...........         170   --          --        --            --
Issuance of options to
 advisors...............          --   --       2,379        --            --        2,379
Issuance of warrants for
 product development....          --   --       5,682        --            --        5,682
Issuance of common stock
 options in exchange for
 assets.................          --   --          45        --            --           45
Net loss for the year
 ended June 30, 1999....          --   --          --        --       (15,140)     (15,140)
                          ----------  ---     -------       ---      --------      -------
BALANCE, June 30, 1999..  16,804,237  $17     $67,827       $--      $(48,857)     $18,987
                          ==========  ===     =======       ===      ========      =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>

                                Emusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                  January 8, 1998               January 8, 1998
                                  (Inception) to   Year ended   (Inception) to
                                   June 30, 1998  June 30, 1999  June 30, 1999
                                  --------------- ------------- ---------------
<S>                               <C>             <C>           <C>
Cash flows from operating
 activities:
 Net loss........................     $(1,180)      $(15,140)      $(16,320)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities (net of
  the effects of acquisitions):
 Depreciation....................           3             93             96
 Amortization of trade names.....          --          1,682          1,682
 Loan interest converted into
  Series B preferred stock.......          --             34             34
 Amortization of music content...          --              2              2
 Issuance of common stock for
  services.......................          13             --             13
 Fair value of warrants issued
  for product development........          --          5,682          5,682
 Fair value of options issued to
  advisors.......................         752          2,379          3,131
 Changes in assets and
  liabilities:
  Accounts receivable............          --            (51)           (51)
  Prepaid expenses...............         (21)          (203)          (224)
  Other assets...................         (17)          (413)          (430)
  Accounts payable...............          67            149            216
  Accrued liabilities............          51            652            703
  Accrued payroll and related
   benefits......................          17            152            169
                                      -------       --------       --------
   Net cash used in operating
    activities...................        (315)        (4,982)        (5,297)
                                      -------       --------       --------
Cash flows from investing
 activities:
 Purchase of trade names.........          --           (468)          (468)
 Purchase of music content.......          --         (7,317)        (7,317)
 Purchase of property and
  equipment......................         (37)        (1,091)        (1,128)
                                      -------       --------       --------
   Net cash used in investing
    activities...................         (37)        (8,876)        (8,913)
Cash flows from financing
 activities:
 Proceeds from issuance of
  common stock...................          --            301            301
 Common stock issued in
  connection with merger.........         688             --            688
 Proceeds from issuance of
  Series A Preferred Stock and
  warrants.......................          --            500            500
 Proceeds from issuance of
  Series B Preferred Stock.......          --         29,800         29,800
 Proceeds from issuance of
  convertible notes..............         170          1,743          1,913
 Proceeds from repayment of
  employee notes receivable......           4              6             10
                                      -------       --------       --------
   Net cash provided by financing
    activities...................         862         32,350         33,212
                                      -------       --------       --------
Net increase in cash.............         510         18,492         19,002
Cash at beginning of period......          --            510             --
                                      -------       --------       --------
Cash at end of period............     $   510       $ 19,002       $ 19,002
                                      =======       ========       ========
Supplemental disclosure of non-
 cash financing activities:
 Conversion of notes payable into
  common stock...................     $   170       $     --       $    170
                                      =======       ========       ========
 Issuance of common stock for
  notes receivable...............          10             --             10
                                      =======       ========       ========
 Accretion of Series A preferred
  stock to redemption value......          --             25             25
                                      =======       ========       ========
 Beneficial conversion charge
  Series A preferred stock.......          --            144            144
                                      =======       ========       ========
 Conversion of notes payable and
  interest to Series B preferred
  stock..........................                      1,777          1,777
                                      =======       ========       ========
 Accretion of Series B preferred
  stock to redemption value......          --            222            222
                                      =======       ========       ========
 Beneficial conversion charge,
  Series B preferred stock.......          --         31,577         31,577
                                      =======       ========       ========
 Conversion of Series A preferred
  into series B preferred stock..          --            182            182
                                      =======       ========       ========
 Issuance of common stock options
  for assets.....................          --             44             44
                                      =======       ========       ========
 Issuance of warrants for music
  content........................          --          1,327          1,327
                                      =======       ========       ========
 Issuance of common stock in
  conjunction with acquisitions..          --         13,329         13,329
                                      =======       ========       ========
 Issuance of common stock to
  Nordic.........................          --         11,084         11,084
                                      =======       ========       ========
 Accrued dividend payable on
  Series B preferred stock.......          --            569            569
                                      =======       ========       ========
 Accrual for amount due on
  content licence................          --            116            116
                                      =======       ========       ========
</TABLE>

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

                                      F-6
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--The Company and Summary of Significant Accounting Policies

The Company, its Recapitalization and Liquidity

Emusic.com Inc (formerly GoodNoise Corporation), (the "Company"), a Delaware
corporation, was incorporated on January 8, 1998 to develop and market a
repertoire of musical recordings offered for sale to consumers by direct file
transfer, or "downloading," over the Internet. Since its inception, the Company
has been in the development stage devoting its efforts primarily to organizing
itself as a public reporting entity, recruiting management and technical staff,
developing its product, acquiring operating assets and raising capital. The
Company operates within one industry segment.

On May 11, 1998, Atlantis Ventures Corporation ("Atlantis"), a Florida
Corporation, acquired 9,335,000 shares of Common Stock of the Company
representing its then outstanding common stock in exchange for 11,015,300
shares of Atlantis. Prior to the merger, Atlantis had 3,700,000 shares issued
and outstanding. For accounting purposes, this transaction was presented as a
recapitalization of the Company. Atlantis was a publicly traded company that
was organized in August 1989 and had no revenues or operations prior to the
merger with the Company. As of May 11, 1998, Atlantis had cash balances of
$690,000, liabilities of $2,000 and an accumulated deficit of $2,000. Following
the recapitalization, Atlantis changed its name to GoodNoise Corporation.

On July 22, 1999, the Company changed its name to Emusic.com Inc. and
recapitalized as a Delaware corporation. The accompanying financial statements
reflect all share amounts after giving effect to these recapitalizations.

 Principles of Consolidation

These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries from the dates of acquisition. All significant
intercompany-balances and transactions have been eliminated.

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

 Risks and Uncertainties

The Company is in the development stage and is subject to various risks,
including the need for additional financing, dependence on key personnel and
the establishment of its operations as a viable business model. Furthermore,
the Company is subject to the risks and uncertainties associated with Internet
commerce. In addition the Company has made substantial investments in music
content for its website. To date the Company does not have sufficient operating
history to determine whether it can fully recover the cost of such investments.

 Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash,
accounts receivable and accounts payable, approximate their fair value due to
their relatively short maturities.

                                      F-7
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Music Content and Advance Royalty Payments

In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to acquire music content are recorded as an asset. 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
subjected to an impairment reserve and charged to expense during the period in
which the loss becomes evident.

Advances to artists are recorded as an asset if past performance and current
popularity of the artist to which the advance is made provide a sound basis for
estimating the probable future recoupment of such advances.

 Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
two to three years, or the lease term of the respective assets.

 Revenue Recognition

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided the Company has no significant remaining obligations
and collection of the resulting receivable is probable.

Revenue from music downloads and physical merchandise are recognized in the
period in which the download or shipment occurs. Revenues from music downloads
and physical merchandise have not been significant to date.

 Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25 "Accounting for Stock Issued to
Employees," and complies with disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS
123.

 Income Taxes

Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

                                      F-8
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Net Loss per Common Share

The weighted average shares used to compute basic net loss per share include
outstanding shares of common stock from the date of issuance, and exclude
shares of common stock subject to repurchase by the Company. The calculation of
diluted net loss per share for all periods presented excludes shares of common
stock issuable upon exercise of employee stock options and common stock
issuable upon the conversion of Series B preferred stock, as their effect would
be antidilutive. Therefore, the weighted average number of shares used in the
calculation of basic and dilutive net loss per common share is the same. The
following table summarizes the computation of basic and diluted net loss per
share (in thousands, except share and per share data):

<TABLE>
<CAPTION>
                                     January 8, 1998             January 8, 1998
                                     (Inception) to  Year ended   (Inception to
                                        June 30,      June, 30      June 30,
                                          1998          1999          1999
                                     --------------- ----------  ---------------
<S>                                  <C>             <C>         <C>
Net loss...........................    $   (1,180)   $  (15,140)   $  (16,320)
Accretion of Series A preferred
 stock to redemption value.........            --           (25)          (25)
Beneficial conversion charge Series
 A preferred stock.................            --          (144)         (144)
Accretion of Series B preferred
 stock to redemption value.........            --          (222)         (222)
Beneficial conversion charge,
 Series B preferred stock..........            --       (31,577)      (31,577)
Dividend on Series B preferred
 stock.............................            --          (569)         (569)
                                       ----------    ----------    ----------
Net loss applicable to common
 shares............................    $   (1,180)   $  (47,677)   $  (48,857)
                                       ----------    ----------    ----------
Net loss per common share - basic
 and diluted.......................    $    (0.12)   $    (3.52)   $    (4.87)
                                       ----------    ----------    ----------
Weighted average common shares
 outstanding - basic and diluted...    10,234,055    13,563,606    10,027,231
                                       ----------    ----------    ----------
Antidilutive securities:
 Options to purchase common stock..       908,297     2,183,091     1,710,861
 Common stock subject to
  repurchase.......................       508,056     1,596,492     1,257,344
 Series B Preferred Stock..........            --     3,167,858     2,271,771
 Warrants..........................            --        35,267        21,471
                                       ----------    ----------    ----------
                                        1,416,353     6,982,708     5,261,447
                                       ==========    ==========    ==========
</TABLE>

In addition, the effects of warrants for the purchase of 1,508,000 and 100,000
shares of common stock exercisable at $13.63 and $18.00 respectively have been
excluded from the above calculation as their effect would be antidilutive for
purposes of the calculation of diluted earnings per share.

 Comprehensive Net Loss

There are no differences between the Company's net loss as reported for any of
the periods reported herein and the Company's comprehensive loss, as defined by
Statement of Financial Accounting Standards No. 130, for each of these
respective periods.

 Segment information

Effective for the year ended June 30, 1999, the Company has adopted the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
During all periods presented, the Company operated in a single business
segment, marketing a repertoire of musical recordings offered for sale to
consumers by direct file transfer, or "downloading," over the Internet. Through
June 30, 1999, foreign operations have not been significant.

 Cash and Cash Equivalents

The Company considers all highly liquid investments with an original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are deposited with two major

                                      F-9
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

banks in the United States. Deposits in these banks may exceed the amount of
insurance provided on such deposits. The Company has not experienced any losses
on its deposits of its cash and cash equivalents.

 Reclassifications

Certain previously reported amounts have been reclassified to conform to the
current financial statement presentation format included herein.

 Recent Accounting Pronouncements

In March 1998 the Accounting Standards Executive Committee issued Statement of
Position No. 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. SOP
98-1 is effective for the fiscal years beginning after December 15, 1998. The
Company is currently evaluating the impact of SOP 98-1 on its financial
statements and related disclosures.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company
believes the adoption of SOP 98-5 will not have a material impact on its
results of operations.

In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years beginning
after June 15, 2000. The Company does currently hold derivative instruments or
engage in hedging activities.

Note 2--Acquisitions

On January 31, 1999, the Company completed the acquisition of Creative
Fulfillment, Inc. ("Creative Fulfillment") for a combination of cash and stock,
at which time Creative Fulfillment became a wholly owned subsidiary of the
Company. The results of Creative Fulfillment have been included in the
Consolidated Results of Operations since the date of acquisition. The total
purchase price of $6,030,000 consisted of 630,179 shares of the Company's
common stock valued at $5,557,000, cash consideration of $313,000 net
liabilities assumed of $11,000 and other acquisition related expenses of
approximately $150,000. Substantially all of the purchase price has been
allocated, based on an independent appraisal to the domain name and trademark
"EMusic" which the Company is amortizing over its estimated life of three years
using the straight-line method.

On June 18, 1999, the Company completed the acquisition of Internet Underground
Music Archive, Inc. ("IUMA") for a combination of cash and stock, at which time
IUMA became a wholly owned subsidiary of the Company. The results of IUMA have
been included in the Consolidated Statement of Operations since the date of
acquisition. The total purchase price of $8,990,000 consisted of 448,000 shares
of the Company's common stock valued at $7,771,000, net liabilities assumed of
$1,119,000 and professional fees of approximately $100,000. The acquisition has
been accounted for using the purchase method of accounting and, based on a
preliminary review, the Company has allocated substantially all of the purchase
price to the tradename "IUMA". The Company has engaged an independent
valuations consultant to perform a review of the Company's preliminary
allocation of the purchase price. Any adjustments arising as a result of their
review will be recorded upon its completion. The Company is amortizing this
intangible asset over its estimated life of three years using the straight-line
method.

                                      F-10
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Summarized below are the unaudited pro-forma results of the Company as though
Creative Fulfillment and IUMA had been acquired on January 8, 1998 (Inception).
Adjustments have been made for the estimated increases in amortization relating
to the intangible assets acquired and other immaterial pro forma adjustments
(in thousands except per share amounts).

<TABLE>
<CAPTION>
                                                      January 8, 1998   Year
                                                      (Inception) to   ended
                                                         June 30,     June, 30
                                                           1998         1999
                                                      --------------- --------
<S>                                                   <C>             <C>
Revenue..............................................     $   182     $    444
Net loss.............................................      (4,594)     (19,964)
Net loss per common share, basic and diluted.........     $ (0.41)    $  (3.66)
</TABLE>

The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma financial information presented
above is not necessarily indicative of either the results of operations that
would have occurred had the acquisition taken place on January 8, 1998
(Inception) or of future results of operations of the combined companies.

Note 3--Music Content, net

Music content and advanced royalty balances is comprised of payments for the
following as of June 30 (in thousands):

<TABLE>
<CAPTION>
                                                                    1998  1999
                                                                    ---- ------
<S>                                                                 <C>  <C>
Acquired sound recordings.......................................... $--  $2,343
Digital distribution rights........................................  --   6,417
                                                                    ---  ------
                                                                     --   8,760
Earned royalty.....................................................  --      (2)
                                                                    ---  ------
                                                                    $--  $8,758
                                                                    ===  ======
</TABLE>

On June 30, 1999 the Company purchased certain music master sound recordings,
copyrights and trademarks, including the full physical and electronic download
distribution rights and other intangible assets related to certain record
labels. The total purchase price of $2,343,000 consisted of the fair value of
warrants to purchase 35,000 shares of the Company's common stock at a price of
$13.63 per share, estimated as $143,000 using the Black-Scholes model, and cash
of $2,200,000.

The Company has acquired rights to distribute other musical recordings over the
Internet for periods generally ranging from three to five years for a total
consideration of $6,356,000, consisting of advances paid on future royalties of
$5,117,000 in cash and warrants to purchase up to 229,500 shares of common
stock exercisable at prices ranging from $13.63 to $18.00 with a fair value,
estimated using the Black-Scholes model, of $1,184,000. In addition an amount
of $116,000 due under the terms of one contract remains outstanding at June 30,
1999. This amount is included in accrued liabilities.


                                      F-11
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4--Property and Equipment

Property and equipment balances comprise the following as of June 30 (in
thousands):

<TABLE>
<CAPTION>
                                                                   1998   1999
                                                                   ----  ------
<S>                                                                <C>   <C>
Computer equipment................................................ $27   $  495
Software..........................................................   5       81
Furniture and fixtures............................................   5      584
                                                                   ---   ------
                                                                    37    1,160
Less: Accumulated depreciation....................................  (3)     (84)
                                                                   ---   ------
                                                                   $34   $1,076
                                                                   ===   ======
</TABLE>

Note 5--Trade Names

Trade names consist of the following as of June 30 (in thousands):

<TABLE>
<CAPTION>
                                                                  1998   1999
                                                                 ------ -------
<S>                                                              <C>    <C>
EMusic trade and domain name:
  From Creative Fullfillment acquisition (see note 2)........... $   -- $ 6,018
  Purchased from Nordic Entertainment...........................     --  11,354
                                                                 ------ -------
  Total.........................................................     --  17,372
IUMA trade and domain name (see note 2).........................     --   8,990
Less: Accumulated amortization..................................     --  (1,682)
                                                                 ------ -------
                                                                 $   -- $24,680
                                                                 ====== =======
</TABLE>

On April 27, 1999 the Company completed a purchase of the rights related to the
EMusic domain name and certain digital music distribution rights from Nordic
Entertainment Worldwide, Inc. and affiliated entities ("Nordic"). Nordic
continued as a stand-alone business following this transaction. The total
purchase price of $11,459,000 consisted of 665,188 shares of the Company's
common stock valued at $11,084,000, and cash consideration of $375,000. The
total purchase price was allocated to the EMusic domain name and music
distribution rights in the amounts of $11,354,000 and $205,000, respectively.
The trade name is being amortized over its estimated useful life of three years
on a straight-line basis.

Note 6--Notes Payable

During the period from December 1998 through March 1999, the Company obtained
loans in the form of convertible notes payable totaling $1,743,000. The notes,
which bore interest at 10% per annum and were due to mature on March 31, 1999,
represented bridge loans in advance of the Series B Preferred Stock financing.
All outstanding principal and accrued interest of $34,000 due under these notes
converted into 7,109 shares of Series B preferred stock upon the closing of the
sale of such stock on March 23, 1999 (See Note 7).

Note 7--Mandatorily Redeemable Convertible Preferred Stock

Mandatorily redeemable convertible preferred stock at June 30, 1999 was
comprised of the following:

<TABLE>
<CAPTION>
                                                  Shares
                                          ----------------------   Liquidation
                                          Authorized Outstanding     Amount
                                          ---------- ----------- ---------------
<S>                                       <C>        <C>         <C>         <C>
Series B.................................  120,000     117,570   $35,271,000
Undesignated.............................  380,000          --            --
                                           -------     -------   -----------
                                           500,000     117,570   $35,271,000
                                           =======     =======   ===========
</TABLE>

                                      F-12
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Series A

On October 28, 1998, the Company raised proceeds of $500,000 through the sale
of 500 shares of Series A mandatorily redeemable preferred stock ("Series A ")
and warrants to purchase 100,000 shares of the Company's common stock to an
accredited investor. The Series A shares were convertible into shares of the
Company's common stock based on a conversion formula and contained certain
redemption provisions. The Company recorded a charge to deficit accumulated
during the development stage in the amount of $144,000 arising from the "in-
the-money" conversion feature attached to the Series A shares. In conjunction
with the Company's Series B financing discussed below, all 500 shares of Series
A were converted into 2,048 shares of Series B redeemable convertible preferred
stock.

The warrants, which remain outstanding at June 30, 1999, have a term of four
years with an initial exercise price of $7.10 per share and have been recorded
at fair value, estimated using the Black Scholes Model, as additional paid in
capital of $343,000.

 Series B

On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of 117,570 shares of Series B Convertible Preferred Stock ("Series B"), which
includes the conversion of outstanding convertible notes and Series A shares
into Series B Shares. Total proceeds, including proceeds from the convertible
notes were $31,577,000 net of issuance costs of approximately $2,724,000.

Under the terms of the Series B Purchase Agreement, each share of Series B is
convertible into 100 shares of the Company's common stock. The conversion
factor of 100 is determined by dividing the redemption value of $300 per Series
B by the conversion price per common share of $3.00.

During the year ended June 30, 1999, the Company has recorded a charge to
accumulated deficit for the "in-the-money" conversion feature attached to the
Series B stock. The amount of this charge is limited to the aggregate amount of
the net proceeds received of $31.6 million. The remaining difference between
the Series B carrying value and its redemption value, resulting from issuance
costs associated with the transaction, will be accreted through March 2004, the
earliest redemption date, using the effective interest rate method, as a charge
to deficit accumulated during the development stage.

The key terms of the Series B Preferred Stock Purchase Agreement include:

Voting Rights. The holders of the Series B are entitled to a number of votes
equal to the number of shares of Common Stock issuable upon conversion of the
Series B. The holders of the Series B are also entitled to elect one member of
the Board of Directors.

Liquidation Preference. Upon any liquidation, dissolution or winding up of the
affairs of the Company, the holder of each Series B Share shall be entitled to
be paid $300 per share (the "Series B Preference Amount"). If the assets of the
Company upon such event are insufficient to make such payment in full, then the
holders of Series B shares shall be entitled to pro rata distribution of all
the assets of the Company. After payment in full of the liquidation preference
to the holders of Series B shares, such holders are entitled to no further
distributions.

Dividends. The Series B stockholders are entitled to cumulative dividends at an
annual rate of 6% of the Series B Preference Amount. The payment of such
amounts may be deferred until the Company completes an initial underwritten
public offering, is sold, or until March 31, 2004. During the year ended June
30, 1999, the Company recorded a charge of approximately $569,000 to deficit
accumulated during the development stage, representing the accrued dividends on
the Series B.

                                      F-13
<PAGE>

Conversion. Each Series B is initially convertible into 100 shares of Common
Stock at the election of the holder thereof. All Series B are subject to
conversion on the closing of an underwritten public offering with gross
proceeds of $25 million or more at a per share price of $6 or more or the
approval of the holders of 67% of the Series B.

Adjustments to Conversion Rate. The Conversion Rate is subject to proportional
adjustment upon any stock split, stock dividend or other similar change to the
capital stock of the Company and certain other adjustments upon future
issuances of common stock or rights to acquire Common Stock at a price less
than $3 per share.

Redemption. In the event of certain defaults by the Company or if the Series B
have not been converted after five years, the holders of the Series B have the
right to require the Company to redeem the Series B.

Registration Rights. The Company is obligated to promptly (and in any event
within 120 days of the first sale of the Series B) file a registration
statement with the Securities and Exchange Commission to cover the resale of
the Company's common stock issuable upon the conversion of the Series B shares.
The Company has received a waiver from the holders of Series B extending this
date until the earlier of 10 days after the closing of the Company's follow on
offering (see Note 10) or September 30, 1999.

Fundamental Changes. Certain corporate actions, as more fully defined in the
Company's restated articles of incorporation, require the approval of the
holders of 67% of the series B preferred shares.

Note 8--Commitments:

The Company leases office space under a non-cancelable operating lease that
expires in March 2004. The monthly rent amount includes certain maintenance
costs associated with the leased space, and is subject to annual increases
based on the Consumer Price Index. In addition, the Company has a lease for its
former offices under which it is committed to pay monthly rentals of $4,000
until March 31, 2001. The Company has entered into a subleasing agreement for
these premises for which it receives monthly payments of $4,000 until March 31,
2001. The Company is exposed to credit risk as the sublease does not relieve it
of it's obligation under the original lease.

Rent expense, net of sublease income, was $13,000, $231,000 and $244,000 for
the period from January 8, 1998 (Inception) to June 30, 1998, the year ended
June 30, 1999, and the period from January 8, 1998 (Inception) to June 30,
1999, respectively.

Future minimum lease payments under these leases, net of sublease income, are
as follows (in thousands):

<TABLE>
<CAPTION>
   Year Ending June 30,
   <S>                                                                    <C>
   2000.................................................................. $  804
   2001..................................................................    804
   2002..................................................................    804
   2003..................................................................    804
   2004..................................................................    603
                                                                          ------
                                                                          $3,819
                                                                          ======
</TABLE>

Note 9--Stockholders' Equity

Restricted Common Stock

A total of 8,378,000 shares of common stock were issued to the Company's
founders, of which 1,062,000 were issued subject to a restricted stock purchase
agreement with one of the founders. The agreement provides the

                                      F-14
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company with the right to repurchase 590,000 of these shares at $0.01 per share
subject to ratable vesting over three years. As of June 30, 1999, a total of
311,389 shares were subject to repurchase by the Company under this agreement.
In March 1999, pursuant to the stockholders' agreement entered into in
conjunction with the Series B preferred stock issuance (Note 6), an additional
4,897,650 shares of the common stock originally issued to the Company's two
other founders, were designated as newly restricted shares, subject to
repurchase by the Company at $0.01 per share. The shares vest ratably over
three years from the date of the Series B preferred stock issuance. As of June
30, 1999, 4,465,679 of these shares remained subject to repurchase by the
Company.

Stock Option Plans

On March 30, 1998, the Company adopted the 1998 Stock Option Plan and on
December 31, 1998 the Company adopted the 1998 Non-Statutory Stock Option Plan
(the "Plans") that provides for the granting of either incentive or
nonqualified stock options to purchase shares of the Company's common stock,
and for stock-based awards to officers, directors key employees of the Company
and to non-employee consultants. Options granted to employees generally vest
ratably over a period of three or four years, and expire ten years from the
date of grant. On June 30, 1999, there were 1,656,850 shares of common stock
available for grant under the Plans.

Option activity under the Plans is as follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                       Average
                                                                      Exercise
                                             Number of    Exercise    Price Per
                                              Shares        Price       Share
                                             ---------  ------------- ---------
<S>                                          <C>        <C>           <C>
  Granted................................... 2,437,550  $ 0.01--$5.00  $ 0.85
                                             ---------
Balance at June 30, 1998.................... 2,437,550                 $ 0.85
  Granted................................... 4,216,000  $5.75--$13.63  $10.76
  Exercised.................................   (45,400) $        0.03  $ 0.03
  Canceled..................................  (310,400) $       11.00  $11.00
                                             ---------
Balance at June 30, 1999.................... 6,297,750                 $ 7.12
                                             =========
</TABLE>

The following table summarizes information with respect to stock options
outstanding at June 30, 1999:

<TABLE>
<CAPTION>
                       Options Outstanding              Options Exercisable
               --------------------------------------  ------------------------
                              Weighted-
                 Number        Average     Weighted-     Number      Weighted-
 Range of      Outstanding    Remaining     Average    Exercisable    Average
 Exercise      at June 30,   Contractual   Exercise    at June 30,   Exercise
 Prices           1999       Life Years      Price        1999         Price
 --------      -----------   -----------   ---------   -----------   ---------
<S>            <C>           <C>           <C>         <C>           <C>
$0.01-$0.03     1,951,750       8.79        $ 0.03        906,184      $0.03
 5.00-6.75      1,145,000       9.28          5.04        569,613       5.42
 7.19-8.38        625,000       9.54          7.47         85,000       7.26
 11.00-13.63    2,576,000       9.89         13.11        191,000      13.55
                ---------                               ---------
                6,297,750       9.40          7.12      1,751,797       3.60
                =========                               =========
</TABLE>

                                      F-15
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Fair Value Disclosures

The aggregate fair value and weighted average fair value per share of options
granted to employees and advisors was $1,121,000 and $0.46, $21,786,000 and
$5.17, respectively, in the period January 8, 1998 (Inception) through June 30,
1998 and the year ended June 30, 1999 respectively. In the year ended June 30,
1999, $2,379,000 of the aggregate amount was recorded as Product Development
expense in the Consolidated Statement of Operations representing the estimated
fair value of 666,000 options issued to various Company advisors which vested
upon issuance. In the period January 8, 1998 (Inception) through June 30, 1998,
$752,000 of the aggregate amount, representing the estimated fair value 280,000
options issued to Company advisors, was recorded in the Consolidated Statement
of Operations.

The fair value of each option grant is estimated on the date of grant using the
Black Scholes Option Pricing Model with the following assumptions:

<TABLE>
<CAPTION>
                                                         January 8, 1998  Year
                                                           (Inception)    Ended
                                                             through      June
                                                            June 30,       30,
                                                              1998        1999
                                                         --------------- -------
   <S>                                                   <C>             <C>
   Expected volatility..................................         55%         46%
   Risk-free interest...................................       5.73%        6.0%
   Expected life........................................     5 years     5 years
   Expected dividend yield..............................          0%          0%
</TABLE>

Pro forma stock compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the fair value at the grant date for the awards in 1998 and 1999 consistent
with the provisions of SFAS No. 123, the Company's net loss for 1998 and 1999,
respectively, would have been as follows (in thousands except per share data):

<TABLE>
<CAPTION>
                                                      January 8, 1998
                                                        (Inception)     Year
                                                          through      Ended
                                                         June 30,     June 30,
                                                           1998         1999
                                                      --------------- --------
   <S>                                                <C>             <C>
   Net loss applicable to common shares - as report-
    ed..............................................      $(1,180)    $(47,677)
   Net loss applicable to common shares - pro
    forma...........................................      $(1,458)    $(49,009)
   Net loss per common share basic and diluted - as
    reported........................................      $ (0.12)    $  (3.52)
   Net loss per common share basic and diluted - pro
    forma...........................................      $ (0.14)    $  (3.61)
</TABLE>

Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.

Warrants

Warrants to purchase 300,000 shares of the Company's common stock were
exercised on August 10, 1998 for cash proceeds of $300,000. Warrants to
purchase 100,000 shares of the Company's common stock at $7.31 per share, which
expire on October 28, 2002, remain outstanding at June 30, 1999.

In conjunction with the acquisition of music content on June 30, 1999 (Note 2),
the Company issued warrants to purchase 35,000 shares of the Company's common
stock at a price of $13.63 per share. The warrants, which

                                      F-16
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


expire on June 10, 2001, were valued at $143,000 and were recorded as an
addition to paid in capital. These warrants remain outstanding at June 30,
1999.

During the year ended June 30, 1999, the Company issued warrants for the
purchase of 1,388,300 common shares in exchange for product development
activities by various individuals operating in the music industry. The warrants
were issued with exercise prices ranging from $7.10 to $13.625 and have two-
year terms. The fair value of these warrants, estimated using the Black-Scholes
Model, of $5,682,000 has been recorded as a charge to Product Development
expense in the Consolidated Statement of Operations. All these warrants remain
outstanding as of June 30, 1999.

In connection with agreements to license digitally downloadable rights from
various record labels the Company issued warrants to purchase up to 229,500
shares of common stock at exercise prices ranging between $13.63 and $18.00.
These warrants remain outstanding as of June 30, 1999.

Note 10--Income Taxes

At June 30, 1999, the Company had approximately $10 million of federal and $10
million state Net Operating Loss carryforwards available to offset future
taxable income which will expire in varying amounts beginning in 2018 and 2006,
respectively. Under the Tax Reform Act of 1986, the amounts of and benefits
from Net Operating Loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of Net Operating
Losses that the company may utilize in any one year include, but are not
limited to, a cumulative change in ownership.

Deferred Taxes are composed of the following (in thousands):

<TABLE>
<CAPTION>
                                                                     June 30
                                                                   ------------
                                                                   1998   1999
                                                                   ----  ------
     <S>                                                           <C>   <C>
     Deferred tax assets:
       Net Operating Losses....................................... $400  $4,120
       Accruals and reserves......................................   --      80
       Depreciation and amortization..............................   --     200
                                                                   ----  ------
                                                                    400   4,400
       Less Valuation Allowance:                                   (398)     --
                                                                   ----  ------
                                                                      2   4,400
     Deferred tax liabilities:
       Non-deductible intangible assets...........................   --  (4,400)
       Depreciation and amortization..............................   (2)     --
                                                                   ----  ------
       Total asset/(liability).................................... $ --  $   --
                                                                   ====  ======
</TABLE>

The acquisitions of IUMA and Creative Fulfillment were structured as tax-free
exchanges of stock, therefore, the differences between the recognized fair
values of acquired net assets and their historical tax bases are not deductible
for tax purposes. A deferred tax liability has been recognized for the
differences between assigned fair values of intangibles for book purposes and
the tax bases of such assets. The Company has recognized deferred tax assets to
the extent of deferred tax liabilities.


                                      F-17
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



Note 11--Subsequent Events

 Investment in Crunch Music Ltd

On July 6, 1999 the Company invested approximately $833,000 in Crunch Music
Ltd. ("Crunch"), in exchange for a 19.5% ownership interest and a seat on the
Crunch board of directors. Crunch is a company incorporated in England and
Wales which operates a website selling downloadable music in the mp3 format
from independent British dance labels. Under a separate distribution agreement,
the Company and Crunch agreed to distribute each others musical content in
their respective territories.

 Approval of Name Change

On July 16, 1999, the stockholders approved a proposal to amend the Company's
Restated Articles of Incorporation in order to change its name from GoodNoise
Corporation to EMusic.com Inc. and to recapitalize as a Delaware corporation.
In connection with these changes, the par value of the Company's common shares
changed from $0.01 per share to $0.001 per share. The accompanying financial
statements reflect all share amounts after giving effect to this
recapitalization.

 Approval of Increase in Number of Shares for Stock Option Plans.

On July 16, 1999, the stockholders approved an increase in the number of shares
available for issuance under the Plans from 8 million to 11 million shares.

 Approval of Employee Stock Purchase Plan

On July 16, 1999 the stockholders approved the 1999 Stock Purchase Plan Under
the terms of the plan, eligible employees may purchase shares of common stock
at a discount through payroll deductions. A total of 250,000 shares of common
stock were reserved for issuance under the plan.

 Increase in authorized capital

On July 16, 1999 the stockholders approved an increase in the authorized number
of preferred shares to 20,000,000.

 Intention to Sell Additional Shares

On July 23, 1999 the Company filed a registration statement with the Securities
and Exchange Commission relating to an offering of up to 5.5 million shares of
common stock. Of the shares offered, it is expected that 5.0 million shares
will be sold by the Company and that up to 500,000 shares will be sold by
certain selling stockholders.

                                      F-18
<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 12--Unaudited Pro Forma Net Loss Per Common Share And Pro Forma
Stockholders Deficit

Pro forma basic net loss per common share has been computed as described in
Note 1 and also gives effect to common equivalent shares from the conversion of
the Series B preferred stock, which will occur automatically on the completion
of the Company's follow-on offering (using the as-converted method) for the
year ended June 30, 1999.

A reconciliation of the numerator and denominator used in the calculation of
pro forma and diluted net loss per common share follows (in thousands except
share and per share data):

<TABLE>
<CAPTION>
                                                                    January 8,
                                                        Year Ended   1998 to
                                                         June 30,    June 30,
                                                           1999        1999
                                                        ----------  ----------
   <S>                                                  <C>         <C>
   Pro forma net loss per common share, basic and
    diluted:
     Net loss attributable to common stockholders.....  $  (47,677) $  (48,857)
   Accretion of Series B preferred stock to redemption
    value.............................................         222         222
   Beneficial conversion charge, Series B preferred
    Stock.............................................      31,577      31,577
                                                        ----------  ----------
   Net loss...........................................  $  (15,878) $  (17,058)
                                                        ----------  ----------
   Shares used in computing net loss per common share,
    basic and diluted.................................  13,563,606  10,027,231
   Adjustments to effect the assumed conversion of the
    preferred stock...................................   3,167,858   2,271,771
                                                        ----------  ----------
   Shares used in computing pro forma net loss per
    common share, basic and diluted...................  16,731,464  12,299,002
                                                        ==========  ==========
   Pro forma net loss per common share, basic and
    diluted...........................................  $    (0.95) $    (1.39)
                                                        ==========  ==========
</TABLE>

If the offering contemplated by the registration statement is consummated, all
of the Series B stock will be automatically converted into an aggregate of
11,757,000 shares of common stock and the accumulated dividend of $569,000 will
be paid in cash to the holders of Series B. Unaudited pro forma stockholders
equity as at June 30, 1999, as adjusted for the conversion of the Series B
stock, is disclosed on the Balance Sheet.

                                      F-19
<PAGE>

         Unaudited Pro Forma Condensed Combining Financial Information

The following unaudited Pro Forma Combined Condensed Statement of Operations
data assume a business combination between the Company, including its wholly
owned subsidiary Creative Fulfillment, Inc. ("Creative Fulfillment"), and
Internet Underground Music Archive ("IUMA"), which was accounted for as a
purchase acquisition. The Pro Forma Combined Condensed Statement of Operations
data are based on the audited financial statements and the notes thereto of the
Company the historical financial statements and notes thereto of Creative
Fulfillment and the historical financial statements and the notes thereto of
IUMA all of which we included in this prospectus.

The Pro Forma Combined Condensed Statement of Operations combine the Company's
historical condensed statement of operations for:

  . the twelve months ended June 30, 1999 (including the operations of
    Creative Fulfillment from the date of its acquisition), the condensed
    consolidated statement of operations of Creative Fulfillment for the six
    months ended January 31, 1999 (prior to its acquisition by the Company)
    and IUMA's condensed statement of operations for the nine months ended
    April 30, 1999;

The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have occurred if
the Merger had been consummated at the beginning of the periods presented, nor
is it necessarily indicative of future operating results or financial position.
The unaudited Pro Forma Combined Condensed Financial Statements do not
incorporate any benefits from cost savings or synergy of operations of the
combined company.

The Company incurred direct transaction costs of approximately $100,000
associated with the Merger that will be included in the purchase price
allocated to acquired net assets. There can be no assurance the Company will
not incur additional charges in subsequent quarters to reflect costs associated
with the Merger or that management will be successful in its efforts to
integrate the operations of the two companies.

These Pro Forma Combined Condensed Statement of Operations data should be read
in conjunction with the historical financial statements and the related notes
thereto of the Company, and the financial statements and the notes thereto of
the Company included herein.


                                      F-20
<PAGE>

UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENT OF OPERATIONS DATA
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                            Creative
                           EMusic.com     Fulfillment          Pro Forma                IUMA            Pro Forma
                          ------------- ---------------- ------------------------  -------------- ------------------------
                              Year         Six Months                               Nine Months
                              Ended          Ended                                     Ended
                          June 30, 1999 January 31, 1999 Adjustments    Combined   April 30, 1999 Adjustments    Combined
                          ------------- ---------------- -----------   ----------  -------------- -----------   ----------
<S>                       <C>           <C>              <C>           <C>         <C>            <C>           <C>
Revenues................   $       92         $103         $   (50)(B) $      145     $   299           --            $444
Cost of revenues........           27           32                             59         --            --              59
                           ----------         ----         -------     ----------     -------       -------     ----------
  Gross profit (loss)...           65           71             (50)            86         299           --             385
                           ----------         ----         -------     ----------     -------       -------     ----------
Operating expenses:
 Product development....       11,690           57             (38)(B)     11,709         255           --          11,964
 Selling and marketing..          556          --              --             556         --            --             556
 General and
  administrative........        1,599           13             --           1,612       1,120           --           2,732
 Amortization of trade
  names.................        1,682          --            1,502 (C)      3,184         --          2,235 (E)      5,419
                           ----------         ----         -------     ----------     -------       -------     ----------
  Total operating
   expenses.............       15,527           70           1,464         17,061       1,375         2,235         20,671
                           ----------         ----         -------     ----------     -------       -------     ----------
Income (loss) from
 operations.............      (15,462)           1          (1,514)       (16,975)     (1,076)       (2,235)       (20,286)
Interest and other
 (expense) income, net..          322          --              --             322         --            --             322
                           ----------         ----         -------     ----------     -------       -------     ----------
Net income (loss).......   $  (15,140)        $  1         $(1,514)    $  (16,653)    $(1,076)      $(2,235)    $  (19,964)
                                              ====         =======     ==========     =======       =======
Accretion of Series A
 and B Preferred to
 redemption value.......         (391)                                       (391)                                    (391)
Beneficial conversion
 charge, Series B
 Preferred..............      (31,577)                                    (31,577)                                 (31,577)
Dividend on Series B
 Preferred..............         (569)                                       (569)                                    (569)
                           ----------                                  ----------                               ----------
Net loss applicable to
 common stockholders....   $  (47,677)                                 $  (49,190)                              $  (52,501)
                           ==========                                  ==========                               ==========
Net loss per share,
 basic and diluted......   $    (3.52)                                 $    (3.53)                              $    (3.66)
                           ==========                                  ==========                               ==========
Weighted average common
 shares outstanding,
 basic and diluted......   13,563,606                      367,604 (A) 13,931,210                   410,667 (D) 14,341,877
                           ==========                      =======     ==========                   =======     ==========
</TABLE>

                            See accompanying notes

                                      F-21
<PAGE>

 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA

1. The preliminary allocation of the purchase price among the identifiable
   tangible and intangible assets was based on a preliminary assessment of the
   fair market value of those assets. Such preliminary purchase price
   allocation is subject to adjustment based upon the Company's further
   analysis, which adjustment could be material in amount. The amounts
   preliminarily identified as intangible assets arising from the transaction
   are expected to be amortized over an estimated useful life of three years.

2. The following pro forma adjustments are reflected in the unaudited pro forma
   condensed combining financial information and are required to allocate the
   preliminary purchase price and acquisition costs to the net assets acquired
   from Creative Fulfillment and IUMA based on their fair value:

  Adjustments reflecting the acquisition of Creative Fulfillment:

  (A) Reflects the weighted average effect of the issuance of 630,179 shares
      of Common Stock as if the issuance occurred at the beginning of the
      period.

  (B) Reflects the elimination of inter-company transactions including
      development consulting revenue paid by the Company to Creative
      Fulfillment and a short-term loan of $13,000 made by the Company to
      Creative Fulfillment in January 1999.

  (C) Reflects the amortization of intangible assets associated with the
      purchase of Creative Fulfillment as if the acquisition was completed as
      of the beginning of the period. Amortization is over the estimated
      useful lives of the assets acquired of three years.

  Adjustments reflecting the acquisition of IUMA:

  (D) Reflects the weighted average issuance of 448,000 shares of Common
      Stock as if its issuance occurred at the beginning of the period.

  (E) Reflects the amortization of intangible assets associated with the
      purchase of IUMA as if the acquisition was completed as of the
      beginning of the period. Amortization is over the estimated useful
      lives of the assets acquired of three years.

                                      F-22
<PAGE>

                       Report of Independent Accountants

The Boards of Directors and Shareholders
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Creative
Fulfillment, Inc. (d.b.a. "Emusic") (a development stage enterprise) at October
31, 1998, and the results of its operations and its cash flows for the years
ended October 31, 1997 and 1998 and for the period from March 14, 1995
(inception) through October 31, 1998 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
March 31, 1999

                                      F-23
<PAGE>

                  CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                         October 31, January 31,
                                                            1998        1999
                                                         ----------- -----------
                                                                     (Unaudited)
<S>                                                      <C>         <C>
ASSETS
Current assets:
 Cash and cash equivalents.............................   $   1,770   $  13,852
 Accounts receivable...................................          --       3,062
                                                          ---------   ---------
  Total current assets.................................       1,770      16,914
Property and equipment, net............................       9,664       6,774
                                                          ---------   ---------
   Total assets........................................   $  11,434   $  23,688
                                                          =========   =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Commitments (Note 4)
Current liabilities:
 Accounts payable and accrued liabilities..............   $  18,402   $   9,443
 Related party liabilities (Notes 3 & 7)...............       7,066      13,286
                                                          ---------   ---------
  Total current liabilities............................      25,468      22,729
                                                          ---------   ---------
Shareholders' equity:
 Common stock, no par value; 25,000,000 shares
  authorized, 17,079,965 shares issued and
  outstanding..........................................     186,133     186,133
 Deficit accumulated during the development stage......    (200,167)   (185,174)
                                                          ---------   ---------
  Total shareholders' equity (deficit).................     (14,034)        959
                                                          ---------   ---------
   Total liabilities and shareholders' equity..........   $  11,434   $  23,688
                                                          =========   =========
</TABLE>



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

                                      F-24
<PAGE>

                  CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                            Years Ended      March 14, 1995   Three Months Ended    March 14, 1995
                            October 31,      (Inception) to       January 31,       (Inception) to
                         ------------------   October 31,   -----------------------  January 31,
                           1997      1998         1998         1998        1999          1999
                         --------  --------  -------------- ----------- ----------- --------------
                                                            (Unaudited) (Unaudited)  (Unaudited)
<S>                      <C>       <C>       <C>            <C>         <C>         <C>
Revenues:
 Music revenues......... $272,253  $117,993     $685,481      $38,431     $10,092     $ 695,573
 Advertising revenues...      191    39,560       39,751           --      10,296        50,047
 Other revenues.........      118    37,083       37,201           --      50,000        87,201
                         --------  --------    ---------      -------     -------     ---------
  Total revenues........  272,562   194,636      762,433       38,431      70,388       832,821
Cost of revenues:
 Cost of music
  revenues..............  244,307   113,753      625,605       35,011      11,747       637,352
 Cost of other
  revenues..............       --    17,730       17,730           --          --        17,730
                         --------  --------    ---------      -------     -------     ---------
  Total cost of
   revenues.............  244,307   131,483      643,335       35,011      11,747       655,082
                         --------  --------    ---------      -------     -------     ---------
Gross profit............   28,255    63,153      119,098        3,420      58,641       177,739
                         --------  --------    ---------      -------     -------     ---------
Operating expenses:
 Product development....   48,371    76,859      158,851        4,089      40,349       199,200
 Sales, general and
  administrative........   21,052    68,333      156,132        2,323       3,299       159,431
                         --------  --------    ---------      -------     -------     ---------
  Total operating
   expenses.............   69,423   145,192      314,983        6,412      43,648       358,631
                         --------  --------    ---------      -------     -------     ---------
Income (loss) from
 operations.............  (41,168)  (82,039)    (195,885)      (2,992)     14,993      (180,892)
Interest and other
 expense, net...........   (1,731)     (951)      (4,282)      (1,057)         --        (4,282)
                         --------  --------    ---------      -------     -------     ---------
Net income (loss)....... $(42,899) $(82,990)   $(200,167)     $(4,049)    $14,993     $(185,174)
                         ========  ========    =========      =======     =======     =========
</TABLE>


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

                                      F-25
<PAGE>

                  CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                       Deficit
                                                     Accumulated     Total
                                    Common Stock     During the  Shareholders'
                                 ------------------- Development    Equity
                                   Shares    Amount     Stage      (Deficit)
                                 ---------- -------- ----------- -------------
<S>                              <C>        <C>      <C>         <C>
Issuance of Common Stock to
 Founders for services.......... 13,500,000 $ 15,000  $      --    $ 15,000
Net loss........................                        (29,104)    (29,104)
                                 ---------- --------  ---------    --------
Balance at October 31, 1995..... 13,500,000   15,000    (29,104)    (14,104)
Issuance of Common Stock to
 Founder in exchange for fixed
 assets.........................  2,000,000   20,000         --      20,000
Issuance of Common Stock in
 exchange for advertising
 services.......................     96,665    4,833         --       4,833
Issuance of Common Stock in
 exchange for cancellation of
 note payable...................  1,000,000   50,000         --      50,000
Net loss........................         --       --    (45,174)    (45,174)
                                 ---------- --------  ---------    --------
Balance at October 31, 1996..... 16,596,665   89,833    (74,278)     15,555
Sale of Common Stock for Cash...     47,500    9,500         --       9,500
Issuance of Common Stock for
 Services.......................    125,000   24,640         --      24,640
Net loss........................         --       --    (42,899)    (42,899)
                                 ---------- --------  ---------    --------
Balance at October 31, 1997..... 16,769,165  123,973   (117,177)      6,796
Issuance of Common Stock for
 Services.......................    310,800   62,160         --      62,160
Net loss........................         --       --    (82,990)    (82,990)
                                 ---------- --------  ---------    --------
Balance at October 31, 1998..... 17,079,965  186,133   (200,167)    (14,034)
Net income (unaudited)..........         --       --     14,993      14,993
                                 ---------- --------  ---------    --------
Balance at January 31, 1999
 (unaudited).................... 17,079,965 $186,133  $(185,174)   $    959
                                 ========== ========  =========    ========
</TABLE>


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

                                      F-26
<PAGE>

                  CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                             Years Ended      March 14, 1995   Three Months Ended    March 14, 1995
                             October 31,      (Inception) to       January 31,       (Inception) to
                          ------------------   October 31,   -----------------------  January 31,
                            1997      1998         1998         1998        1999          1999
                          --------  --------  -------------- ----------- ----------- --------------
                                                             (Unaudited) (Unaudited)  (Unaudited)

<S>                       <C>       <C>       <C>            <C>         <C>         <C>
Cash flows from
 operating activities:
Net income (loss).......  $(42,899) $(82,990)   $(200,167)     $(4,049)    $14,993     $(185,174)
Adjustments to reconcile
 net income (loss) to
 net cash used in
 operating activities:
 Depreciation...........    12,277    12,856       30,453        3,221       2,890        33,343
 Issuance of common
  stock in exchange for
  services..............    24,640    62,160      106,633           --          --       106,633
 Changes in operating
  assets and
  liabilities:
 Accounts receivable....        --        --           --           --      (3,062)       (3,062)
 Accounts payable and
  accrued liabilities...     5,180     1,617       25,468       (4,251)    (15,239)       10,229
                          --------  --------    ---------      -------     -------     ---------
Net cash used by
 operating activities...      (802)   (6,357)     (37,613)      (5,079)       (418)      (38,031)
                          --------  --------    ---------      -------     -------     ---------
Cash flows from
 investing activities:
Acquisition of property
 and equipment..........    (2,623)   (1,464)     (20,117)          --          --       (20,117)
                          --------  --------    ---------      -------     -------     ---------
Net cash provided by
 investing activities...    (2,623)   (1,464)     (20,117)          --          --       (20,117)
                          --------  --------    ---------      -------     -------     ---------
Cash flows from
 financing activities:
Proceeds from issuance
 of note................        --        --       50,000           --      12,500        62,500
Net proceeds from
 issuance of common
 stock..................     9,500        --        9,500           --          --         9,500
                          --------  --------    ---------      -------     -------     ---------
Net cash provided by
 financing activities...     9,500        --       59,500           --      12,500        72,000
                          --------  --------    ---------      -------     -------     ---------
Net increase/(decrease)
 in cash................     6,075    (7,821)       1,770       (5,079)     12,082        13,852
Cash at beginning of
 period.................     3,516     9,591           --        9,591       1,770            --
                          --------  --------    ---------      -------     -------     ---------
Cash at end of period...  $  9,591  $  1,770    $   1,770      $ 4,512     $13,852     $  13,852
                          --------  --------    ---------      -------     -------     ---------
Supplemental disclosures
 of cash flow
 information:
Issuance of Common Stock
 in exchange for fixed
 assets.................  $     --  $     --    $  20,000      $    --     $    --     $  20,000
Conversion of notes
 payable to Common
 Stock..................  $     --  $     --    $  50,000      $    --     $    --     $  50,000
</TABLE>

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

                                      F-27
<PAGE>

                  Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                         Notes to Financial Statements

1. Nature of Business and Significant Accounting Policies

Organization and Business

Creative Fulfillment, Inc. ("Creative" or the "Company"), a California
corporation, was incorporated on March 14, 1995 to develop an Internet web site
to sell musical recordings on CD's, the fulfillment and shipping of which is
performed by a third party. Since its inception, the Company has been in the
development stage devoting its efforts primarily to developing its web site,
acquiring operating assets and raising capital. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.

Significant Accounting Policies

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

 Unaudited Interim Results

The accompanying interim financial statements as of January 31, 1999 and for
the three months ended January 31, 1998 and 1999 are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of January 31, 1999 and for the three months ended January 31,
1998 and 1999. The financial data and other information disclosed in these
notes to financial statements related to these periods are unaudited. The
results for the three months ended January 31, 1999 are not necessarily
indicative of the results to be expected for the year ending October 31, 1999.

 Revenue Recognition

Music revenues are generally recognized in the period in which the shipment
occurs. A provision is made for returns based on historical return levels
experienced by the Company. All music sales are paid for by credit card.

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.

Other revenue consists primarily of consulting revenue, which is generally
recognized ratably over the term of the agreements, provided that the Company
has no significant remaining obligations and collection of the resulting
receivable is probable.

 Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. No individual customers represented
greater than 10% of sales in fiscal 1997 or 1998. In the three months ended
January 31, 1999 (unaudited), one customer accounted for 71% of total revenues.
See also Note 3 below.

                                      F-28
<PAGE>

                  Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)


 Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short maturities.

 Property and Equipment

Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.

 Comprehensive Income or Loss

There are no differences between the Company's net income or loss for the years
ended October 31, 1997 and 1998, for the period from March 14, 1995 (inception)
to October 31, 1998, the three months ended January 31, 1999 (unaudited) and
the period from March 14, 1995 (inception) to January 31, 1999 (unaudited) and
the Company's comprehensive income or loss for each of these periods.

 Product Development Costs

Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.

 Income Taxes

Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. It also provides guidance for accounting for changes
in the fair value of a derivative (i.e. gains and losses). SFAS 133 is
effective for all fiscal years beginning after June 15, 1999. The Company does
not expect that the adoption of SFAS 133 will have a material effect on its
financial statements.

                                      F-29
<PAGE>

                  Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)


2. Property and Equipment

<TABLE>
<CAPTION>
                                                         October 31, January 31,
                                                            1998        1999
                                                         ----------- -----------
                                                                     (Unaudited)
   <S>                                                   <C>         <C>
   Computer and office equipment........................  $ 40,117    $ 40,117
   Less accumulated depreciation........................   (30,453)    (33,343)
                                                          --------    --------
                                                          $  9,664    $  6,774
                                                          ========    ========
</TABLE>

3. Related Party Transactions

The Company has incurred $18,000 and $19,000 in development expenses during
fiscal 1998 and the period from March 14, 1995 (inception) to October 31, 1998,
and incurred $31,010 (unaudited) and $43,510 in development expenses in the
period from March 14, 1995 (inception) to January 31, 1999 with Mango
Enterprises. Mango Enterprises is owned by the Founder and holder of 79% of the
outstanding Common Stock of Emusic.

The Company has incurred $3,927 in expenses during the period from March 14,
1995 (inception) to October 31, 1998 with WebCentral. There have been no
transactions with WebCentral since October 1998. WebCentral is owned by the
Founder and holder of 79% of the outstanding Common Stock of Emusic.

At October 31, 1998 and January 31, 1999, the Company owed $7,066 and $786
(unaudited) to the Founder of the Company for short-term advances made. Such
advances are not evidenced by a note, and are generally repaid within three
months or less.

See Note 7 below for additional related party transactions subsequent to
October 31, 1998.

4. Commitments

The Company does not have any equipment or facilities lease commitments as of
October 31, 1998 or January 31, 1999 (unaudited). Rent paid during fiscal 1997,
1998 and the three months ended January 31, 1999 (unaudited) was insignificant.

5. Income Taxes

There is no provision for income taxes for the period from March 14, 1995
(inception) through January 31, 1999 as the Company incurred a net loss. The
Company's deferred tax assets at October 31, 1998 principally relate to its net
operating loss and approximate $175,000. Due to uncertainty surrounding
recoverability, a full valuation allowance has been established against this
amount.

Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before full
utilization.

6. Common Stock

The Company's is authorized to issue 25,000,000 shares of Common Stock, of
which 17,079,965 shares were issued and outstanding as of October 31, 1998 and
January 31, 1999 (unaudited). Of the total shares issued and outstanding,
17,032,465 shares were issued for other than cash proceeds. The value of such
shares was based on sales of similar instruments for cash, or the value of the
goods or services received, whichever was more readily determinable.

                                      F-30
<PAGE>

                  Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)


7. Subsequent Events

 Merger

On January 25, 1999, EMusic.com Inc. (formerly GoodNoise Corporation)
("EMusic") acquired all of the Company's outstanding shares of Common Stock, at
which time the Company became a wholly owned subsidiary of EMusic.

 Related Party Loan and Consulting Revenues

In January 1999, EMusic loaned Creative $12,500, which was repaid to EMusic in
February 1999. In addition, during the three months ended January 31, 1999,
EMusic paid consulting fees totaling $50,000, which were recorded as revenue by
Creative.

                                      F-31
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
Internet Underground Music Archive ("IUMA")

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Internet
Underground Music Archive ("IUMA") at July 31, 1998 and the results of its
operations and its cash flows for the years ended July 31, 1998 and 1997 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 21, 1999

                                      F-32
<PAGE>

                INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                         July 31,    April 30,
                                                           1998        1999
                                                         ---------  -----------
                                                                    (Unaudited)
<S>                                                      <C>        <C>
ASSETS

Current assets:
  Cash and cash equivalents............................. $   1,684  $    33,537
  Accounts receivable...................................    40,204       21,797
  Prepaid expenses......................................       592        2,293
                                                         ---------  -----------
    Total current assets................................    42,480       57,627
Property and equipment, net.............................    33,468       41,613
Intangible assets, net..................................    15,921       12,884
Other assets............................................     1,700       64,570
                                                         ---------  -----------
    Total assets........................................ $  93,569  $   176,694
                                                         =========  ===========

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
  Accounts payable...................................... $  87,356  $   391,471
  Accrued payroll and related benefits..................        --      203,027
  Current portion of notes payable......................    51,468      183,638
                                                         ---------  -----------
    Total current liabilities...........................   138,824      778,136
                                                         ---------  -----------
Notes payable, less current portion.....................   131,145      309,550
                                                         ---------  -----------
Total liabilities.......................................   269,969    1,087,686
                                                         ---------  -----------

Commitments (Note 4)

Shareholders' equity (deficit):
  Common stock, no par value; 30,000,000 shares
   authorized, 3,351,750 and 4,432,480 shares issued and
   outstanding..........................................   554,810    1,105,168
  Notes receivable from shareholders....................        --       (8,655)
  Deferred compensation.................................  (328,527)    (528,971)
  Accumulated deficit...................................  (402,683)  (1,478,534)
                                                         ---------  -----------
    Total shareholders' equity (deficit)................  (176,400)    (910,992)
                                                         ---------  -----------
     Total liabilities and shareholders' equity
      (deficit)......................................... $  93,569  $   176,694
                                                         =========  ===========
</TABLE>


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

                                      F-33
<PAGE>

                INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                  Years Ended July        Nine Months Ended
                                         31,                  April 30,
                                 --------------------  -----------------------
                                   1997       1998        1998        1999
                                 ---------  ---------  ----------- -----------
                                                       (unaudited) (unaudited)
<S>                              <C>        <C>        <C>         <C>
Revenues:
 Website hosting...............  $  55,799  $ 137,200   $  53,061  $   136,958
 Advertising...................    162,447     79,326      55,327       64,140
 Other.........................    213,814      7,821       6,872       97,572
                                 ---------  ---------   ---------  -----------
  Total revenues...............    432,060    224,347     115,260      298,670
Operating expenses:
 Product development...........     50,524     99,616      88,793      123,657
 Selling, general and
  administrative...............    345,346    340,493     221,576    1,119,994
 Amortization of deferred
  compensation.................      4,158     13,662      12,492      130,870
                                 ---------  ---------   ---------  -----------
  Total operating expenses.....    400,028    453,771     322,861    1,374,521
                                 ---------  ---------   ---------  -----------
Income (loss) from operations..     32,032   (229,424)   (207,601)  (1,075,851)
Interest and other expense,
 net...........................        --      (1,011)        --           --
                                 ---------  ---------   ---------  -----------
Income (loss) before income
 taxes.........................     32,032   (230,435)   (207,601)  (1,075,851)
Income tax benefit (expense)...    (10,542)    10,542      10,542          --
                                 ---------  ---------   ---------  -----------
Net income (loss)..............  $  21,490  $(219,893)  $(197,059) $(1,075,851)
                                 =========  =========   =========  ===========
Net income (loss) per common
 share-basic...................  $    0.01  $   (0.07)  $   (0.06) $     (0.28)
                                 =========  =========   =========  ===========
Net income (loss) per common
 share-diluted.................  $    0.01  $   (0.07)  $   (0.06) $     (0.28)
                                 =========  =========   =========  ===========
Weighted average common shares
 outstanding-basic ............  3,270,000  3,310,875   3,297,250    3,829,615
                                 =========  =========   =========  ===========
Weighted average common shares
 outstanding-diluted...........  3,636,601  3,310,875   3,297,250    3,829,615
                                 =========  =========   =========  ===========
</TABLE>




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

                                      F-34
<PAGE>

                INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                       STATEMENT OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                               Notes due                                 Total
                                                  from       Deferred   Accumulated  Shareholders'
                          Shares     Amount   Shareholders Compensation   Deficit       Deficit
                         --------- ---------- ------------ ------------ -----------  -------------
<S>                      <C>       <C>        <C>          <C>          <C>          <C>
Balance at July 31,
 1996................... 3,270,000 $  163,500   $   --      $     --    $  (204,280)  $   (40,780)
 Unearned stock-based
  compensation..........               17,333       --        (17,333)          --            --
 Amortization of stock-
  based compensation....       --         --        --          4,158           --          4,158
 Net income.............       --         --        --             --        21,490        21,490
                         --------- ----------   -------     ---------   -----------   -----------
Balance at July 31,
 1997................... 3,270,000    180,833       --        (13,175)     (182,790)      (15,132)
 Issuance of common
  stock for services....    81,750     44,963       --            --            --         44,963
 Unearned stock-based
  compensation..........              329,014       --       (329,014)          --            --
 Amortization of stock-
  based compensation....       --         --        --         13,662           --         13,662
 Net loss...............       --         --        --            --       (219,893)     (219,893)
                         --------- ----------   -------     ---------   -----------   -----------
Balance at July 31,
 1998................... 3,351,750    554,810       --       (328,527)     (402,683)     (176,400)
 Exercise of stock
  options...............   955,730      9,557    (8,655)                        --            902
 Issuance of common
  stock for services....   125,000    209,487       --            --            --        209,487
 Unearned stock-based
  compensation..........       --     331,314       --       (331,314)          --            --
 Amortization of stock-
  based compensation....       --         --        --        130,870           --        130,870
 Net income
  (unaudited)...........       --         --        --            --     (1,075,851)   (1,075,851)
                         --------- ----------   -------     ---------   -----------   -----------
Balance at April 30,
 1999 (unaudited)....... 4,432,480 $1,105,168   $(8,655)    $(528,971)  $(1,478,534)  $  (910,992)
                         ========= ==========   =======     =========   ===========   ===========
</TABLE>





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

                                      F-35
<PAGE>

                INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                   Years Ended July       Nine Months Ended
                                         31,                  April 30,
                                  -------------------  -----------------------
                                    1997      1998        1998        1999
                                  --------  ---------  ----------- -----------
                                                       (unaudited) (unaudited)
<S>                               <C>       <C>        <C>         <C>
Cash flows from operating
 activities:
Net income (loss)...............  $ 21,490  $(219,893)  $(197,059) $(1,075,851)
Adjustments to reconcile net
 income (loss) to net cash used
 in operating activities:
  Depreciation and
   amortization.................     6,341     14,481      13,128       14,892
  Amortization of deferred
   compensation.................     4,158     13,662      12,492      130,870
  Issuance of common stock for
   services.....................        --     44,963      44,963      209,487
  Changes in operating assets
   and liabilities:
    Accounts receivable.........   (52,372)    27,277      40,459       18,407
    Other assets................        --        (94)     (2,230)      (4,571)
    Prepaid expenses relating to
     acquisition................        --         --          --      (60,000)
    Accounts payable and accrued
     liabilities................    39,922     (3,834)    (15,702)     507,142
                                  --------  ---------   ---------  -----------
Net cash provided (used) by
 operating activities...........    19,539   (123,438)   (103,949)    (259,624)
                                  --------  ---------   ---------  -----------
Cash flows used in investing
 activities:
Acquisition of property and
 equipment......................   (19,349)   (18,077)    (12,955)     (20,000)
Cash paid for intangibles.......        --    (11,756)         --           --
                                  --------  ---------   ---------  -----------
Net cash used in investing
 activities.....................   (19,349)  (29,833)     (12,955)     (20,000)
                                  --------  ---------   ---------  -----------
Cash flows from financing
 activities:
Proceeds from issuance of
 notes..........................     4,100    149,342     131,145      315,100
Principal payments on notes.....        --         --          --       (4,525)
Proceeds from issuance of common
 stock..........................        --         --          --          902
                                  --------  ---------   ---------  -----------
Net cash provided by financing
 activities.....................     4,100    149,342     131,145      311,477
                                  --------  ---------   ---------  -----------
Net increase/(decrease) in
 cash...........................     4,290     (3,929)     14,241       31,853
Cash at beginning of period.....     1,323      5,613       5,613        1,684
                                  --------  ---------   ---------  -----------
Cash at end of period...........  $  5,613  $   1,684   $  19,854  $    33,537
                                  ========  =========   =========  ===========
Supplemental disclosures of cash
 flow information:
Cash paid during the year for:
  Interest......................  $     --  $   1,011   $      --  $       758
</TABLE>


                                      F-36
<PAGE>

               INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

1. Nature of Business and Significant Accounting Policies

Organization and Business

Internet Underground Music Archive Inc. ("IUMA" or the "Company"), a California
corporation, was incorporated on July 1, 1995 to promote, distribute and sell
music from unsigned and independent musicians. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.

Significant Accounting Policies

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

 Unaudited Interim Results

The accompanying interim financial statements as of April 30, 1999 and for the
nine months ended April 30, 1998 and 1999 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of April 30, 1999 and for the nine months ended April 30, 1998
and 1999. The results for the nine months ended April 30, 1999 are not
necessarily indicative of the results to be expected for the year ending July
31, 1999.

 Revenue Recognition

Website hosting and related service revenues are generally recognized ratably
over the term of the agreements, provided that the Company has no significant
remaining obligations and collection of the resulting receivable is probable.

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.

Other revenue consists primarily of consulting revenue and commissions on music
sales. Consulting revenue is recognized ratably over the term of the
agreements. Commissions on music sales are derived from fulfillment of compact
disc sales on behalf of artists listed on the IUMA websites, and are recognized
upon shipment of the related product.

 Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. For the fiscal years ending July 31,
1997 and 1998 there were two different sets of customers, which accounted for
76% and 72% of revenues, respectively. Three customers accounted for 91% of
revenues for the nine months ending 4/30/99.

                                      F-37
<PAGE>

               INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS


 Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short-term maturities.

 Property and Equipment

Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.

 Net Income or Loss per Common Share

Basic earnings per share is computed by dividing net income or loss available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per common share is computed
giving effect to all dilutive options in issuance.

 Comprehensive Income or Loss

There are no differences between the Company's net income or loss for the years
ended July 31, 1997 and 1998 and for the nine months ended April 30, 1999
(unaudited) and the Company's comprehensive income or loss for the same
periods.

 Product Development Costs

Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.

 Income Taxes

Income taxes are accounted for using the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

 Stock-based compensation

The Company accounts for stock-based awards/options to employees using the
intrinsic value method and has adopted the disclosure only provisions of
Financial Accounting Standard No. 123.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that entities recognize
all derivatives as either assets or liabilities and measure those instruments
at fair value. It also provides guidance for accounting for changes in the fair
value of a derivative (i.e. gains and losses). SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. The Company does not expect that
the adoption of SFAS 133 will have a material effect on its financial
statements.

                                      F-38
<PAGE>

               INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS


2. Property and Equipment

<TABLE>
<CAPTION>
                                                             July
                                                              31,     April 30,
                                                             1998       1999
                                                            -------  -----------
                                                                     (unaudited)
   <S>                                                      <C>      <C>
   Computer and office equipment........................... $48,601    $59,874
   Less accumulated depreciation........................... (15,133)   (18,261)
                                                            -------    -------
                                                            $33,468    $41,613
                                                            =======    =======
</TABLE>

Book value for assets under capital lease at July 31, 1998 and April 30, 1999
totaled approximately $5,000 and $4,000, respectively.

Depreciation expense for the periods ended July 31, 1997, July 31, 1998 and
April 30, 1999 totaled approximately $5,000, $12,000 and $12,000, respectively.

The Company incurred rental expense of $17,000, $18,000, and $14,000 for the
years ended July 31, 1997 and July 31, 1998 and for the nine months ended,
respectively.

3. Related Party Transactions

Shares of Common Stock were issued to several employees in exchange for
promissory notes. As of April 30, 1999, none of these promissory notes have
been paid in full.

The Company had the following related party transactions during the periods
presented.

  . On July 12, 1996 the Company entered into an agreement with two
    shareholders, under which it borrowed approximately $33,000. Under the
    terms of the agreement and in return for consulting services provided,
    the shareholders received stock equivalent to 18% of the outstanding
    capital of the Company. The note was interest free and is payable upon
    receipt by the Company of additional financing in excess of $250,000. As
    of July 31, 1998 and April 30, 1999 (unaudited), the total amount
    borrowed remained outstanding.

  . Pursuant to an agreement dated October 23, 1998 one shareholder loaned
    the Company $5,000 at 5% per annum. The loan was unsecured and payable
    when the Company received additional financing.

  . Two shareholders are due approximately $27,000, pursuant to a consulting
    agreement dated February 5, 1997.

  . During the year ended July 31, 1998 a shareholder advanced the Company
    approximately $12,000 repayable at $100 per month, interest at 5.73% per
    annum. As of July 31, 1998 and April 30, 1999 (unaudited), the total
    amount borrowed remained outstanding.

4. Commitments

IUMA entered into a capital lease for equipment during the year ended July 31,
1998 and will have payments due of approximately $2,000 for each of the years
ended July 31, 1999, 2000 and 2001.

As of July 31, 1998, the Company had operating leases for equipment with
commitments of approximately 13,000, $13,000, 8,000 and 1000 for the years
ended July 31, 1999, 2000, 2001 and 2002, respectively.

As of July 31, 1998 the Company had a rental lease with minimum monthly
payments of approximately $1,000 for a total commitment of approximately
$12,000 for the year ended July 31, 1999.


                                      F-39
<PAGE>

               INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS


5. Income Taxes

The Company's deferred tax assets of approximately $79,000 at July 31, 1998
principally relate to its net operating loss. A full valuation allowance has
been established because of the uncertainty of realization.

Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to ownership changes. The annual
limitation may result in the expiration of net operating losses and credits
before full utilization.

6. Preferred Stock

The Company was authorized to issue 20,000,000 shares of Preferred Stock, of
which none were issued or outstanding at July 31, 1998 and April 30, 1999

7. Common Stock

The Company was authorized to issue 30,000,000 shares of Common Stock, of which
3,351,750 and 4,307,480 shares were issued and outstanding at July 31, 1998 and
April 30, 1999 (unaudited), respectively. The value of such shares was
determined based upon the value of the shares issued, as determined by cash
proceeds to the company on sales of similar instruments, or the value of the
goods or services received, whichever was more readily determinable.

8. Stock Options

 Option activity

Option activity during the year ended July 31, 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                                       Average
                                                                       Weighted
                                                                       Exercise
                                                               Shares   Price
                                                               ------- --------
   <S>                                                         <C>     <C>
   Balance, July 31, 1996.....................................     --    $--
    Options granted........................................... 389,326    .01
                                                               -------
   Balance, July 31, 1997..................................... 389,326    .01
    Options granted........................................... 325,557    .01
                                                               -------
   Balance, July 31, 1998..................................... 714,883    .01
                                                               =======
</TABLE>

At July 31, 1998, all outstanding options were exercisable of which 506,486
shares, at a weighted average exercise price of $0.01, are subject to the
Company's right of repurchase upon exercise.

 Pro forma stock compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the minimum value at the grant date for the awards in 1997 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net loss for 1997 and 1998,
respectively, would have been as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                           1997      1998
                                                          -------  ---------
   <S>                                                    <C>      <C>
   Net income (loss) attributable to common stock
    holders--as reported................................. $21,490  $(219,893)
   Net income (loss) attributable to common
    stockholders--pro forma.............................. $17,214  $(233,892)
   Net income (loss) per common share--basic and diluted
    as reported.......................................... $ (0.01) $   (0.07)
   Net income (loss) per common share--basic and diluted
    pro forma............................................ $ (0.01) $   (0.06)
</TABLE>


                                      F-40
<PAGE>

               INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS


Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.

The minimum value of each option grant is estimated on the date of grant using
a type of Black-Scholes option-pricing model with the following assumptions
used for grants:

<TABLE>
<CAPTION>
                                                                     1997  1998
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Weighted average risk-free interest rate......................... 6.49% 5.47%
   Expected life (from vesting date)................................    5     5
   Expected dividends...............................................  --    --
</TABLE>

Based on the above assumptions, the aggregate fair value and weighted average
fair value per share of options granted in 1997 and 1998 were $18,501 and
$0.048 and $329,665 and $1.013, respectively. All options were granted with
exercise prices below the estimated market value at the date of grant.

The options outstanding (all of which are exercisable) by exercise price at
July 31, 1998 are as follows:

                              Options Outstanding

<TABLE>
<CAPTION>
                                                                                      Weighted
                                                                                       Average
                                                                                      Remaining
                                                                                     Contractual
     Exercise                        Number                                             Life
      Prices                       Outstanding                                         (years)
     --------                      -----------                                       -----------
     <S>                           <C>                                               <C>
      $0.01                          714,883                                            8.79
</TABLE>

 Deferred stock compensation

During the years ended July 31, 1997 and 1998, the Company issued options to
certain employees with exercise prices below the deemed fair market value of
the Company's common stock at the date of grant. In addition, the Company
allowed such options to be exercised in advance of full vesting, subject to
repurchase rights with respect to unvested shares. In accordance with the
requirements of APB 25, the Company has recorded deferred compensation for the
difference between the exercise price of the stock options and the fair market
value of the Company's stock at the date of grant. Deferred compensation is
being amortized over the vesting periods. At July 31, 1998, the Company
recorded deferred compensation of $328,527 (net of cancellations), of which
$4,158 and $13,662 had been amortized to expense during the years ended July
31, 1997 and 1998.

9. Subsequent Events

 Leases

During October 1999 the Company entered into a second rental lease with minimum
monthly payments of approximately $1,000. This lease was cancelled in May 1999.
In addition, during July 1999 the original rental lease was also cancelled.

 Merger

On June 30, 1999, EMusic.com Inc. (formerly GoodNoise Corporation) acquired all
of the Company's outstanding shares of Common Stock, at which time the Company
became a wholly owned subsidiary of EMusic.com Inc.


                                      F-41
<PAGE>



                         [LOGO OF eMUSIC APPEARS HERE]
<PAGE>

--------------------------------------------------------------------------------

                           [LOGO OF EMUSIC.COM INC.]

                               13,284,102 Shares

                                  Common Stock

                               -----------------
                                   PROSPECTUS
                               -----------------

                                October   , 1999



--------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
<PAGE>

                                    Part II

                     Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with this
offering. All amounts shown are estimates except for the SEC registration fee.

<TABLE>
<S>                                                                     <C>
SEC registration fee................................................... $58,165
Nasdaq National Market additional listing fee..........................   2,000
Printing expenses......................................................   5,000
Legal fees and expenses................................................  20,000
Accounting fees and expenses...........................................   5,000
Transfer Agent and Registrar fees......................................   1,000
Miscellaneous expenses.................................................     835
                                                                        -------
  Total................................................................ $92,000
                                                                        =======
</TABLE>

Item 14. Indemnification of Officers and Directors

Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. The Registrant's Amended and Restated
Certificate of Incorporation and Bylaws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the Registrant has entered into separate indemnification agreements
(Exhibit 10.1) with its directors and officers which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature). The Registrant also
intends to continue to maintain director and officer liability insurance, if
available on reasonable terms. These indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of the Registrant's officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

On May 6, 1998, we issued 2,500,000 shares of our common stock and warrants to
purchase a total of 500,000 shares of our common stock at an exercise price of
$1.00 per share to accredited investors in exchange for $500,000.00 in reliance
on Rule 504 of Regulation D promulgated under the Securities Act. Warrants to
purchase 200,000 shares of common stock were exercised at the time of their
issuance.

On May 11, 1998, we acquired all of the outstanding shares of GoodNoise
Corporation, a Delaware corporation, in exchange for 11,015,300 shares of our
common stock in reliance on Section 4(2) of the Securities Act. On the same
date, we assumed options to purchase 1,722,500 shares of the Delaware
corporation's common stock, which were automatically converted into options to
purchase 2,032,550 shares of our common stock at a weighted average exercise
price of approximately $0.03 per share.

On July 29, 1998, we issued 170 shares of our common stock to a consultant in
exchange for consulting services in reliance on Section 4(2) of the Securities
Act.

                                      II-1
<PAGE>

On August 10, 1998, investors exercised warrants to purchase 300,000 shares of
our common stock in exchange for $300,000. These warrants had been issued as a
part of the private placement which occurred on May 6, 1998.

On October 28, 1998, we issued 500 shares of our Series A Preferred Stock and a
warrant to purchase 100,000 shares of our common stock at an exercise price of
$7.91 to an investor in reliance on Regulation D.

On December 16, 1998, we issued 10,000 shares of our common stock to an
employee upon exercise of an employee stock option in reliance on Rule 701.

On February 24, 1999, we acquired all of the outstanding shares of Creative
Fulfillment, Inc. in exchange for 630,179 shares of our common stock in
reliance on Section 4(2) of the Securities Act.

On March 23, 1999, we issued 117,570 shares of our Series B Preferred Stock to
accredited investors in exchange for $32,523,900.00 in cash, cancellation of
debt of $1,777,250 and conversion of the outstanding shares of our Series A
Preferred Stock in reliance on Rule 506 of Regulation D promulgated under the
Securities Act.

On April 27, 1999, we issued 665,188 shares of our common stock in
consideration of the acquisition of certain music rights in reliance on Section
4(2) of the Securities Act.

On June 11, 1999, we issued 448,000 shares of our common stock in exchange for
all of the outstanding shares of Internet Underground Music Archive, Inc. in
reliance on Section 4(2) of the Securities Act.

On June 10, 1999 we granted warrants for the purchase of 1,607,800 shares
solely to accredited investors in reliance on Regulation D.

From May 11, 1998 through September 20, 1998, we granted options to purchase
435,000 shares of our common stock at a weighted average exercise price of
approximately $5.07 per share. These options were granted to our employees and
consultants in exchange for services rendered in transactions exempt from
registration under the Securities Act under Rule 701. From September 21, 1998
through July 15, 1999, we granted options to purchase 4,186,000 shares of our
common stock at a weighted average purchase price of approximately $7.078 per
share. These options were granted to our employees and consultants in exchange
for services rendered in transaction exempt from registration under the
Securities Act under Section 4(2) thereof.

There were no underwriters employed in connection with any of the above
transactions.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  2.1(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Atlantis Ventures Corp., GN Acquisition Corp and certain
         other parties dated as of May 11, 1998
  2.2(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
         certain other parties dated as of October 8, 1998
  2.3(c) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, GNA Corporation, Internet Underground Music Archive, Inc.
         and certain shareholders of Internet Underground Music Archive, Inc.
         dated as of May 16, 1999
  2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
         corporation, and EMusic.com Inc., a Delaware corporation, dated as of
         July 21, 1999
  3.1(c) Amended and Restated Certificate of Incorporation
  3.2(c) Amended and Restated Bylaws
  5.1    Opinion of Gray Cary Ware & Freidenrich LLP
 10.1(c) Form of Indemnity Agreement
 10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
         Culpepper
 10.3(a) 1998 Stock Option Plan
 10.4(c) 1998 Nonstatutory Stock Option Plan
 10.5(c) 1999 Employee Stock Purchase Plan
 10.6(c) Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21(c)   Subsidiaries
 23.1    Consent of PricewaterhouseCoopers LLP
 23.2    Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
 24.1    Power of Attorney (see page II-5 of the Registration Statement)
 27.1    Financial Data Schedule
</TABLE>
------------------
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
    December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
    1999.
(c) Previously filed as an exhibit to the Registrant's Form S-1 (Registration
    Statement No. 333-83685).

Item 17. Undertakings

The Registrant 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 of 1933 (the "Securities Act");

      (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 foregoing, 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 the "Calculation of
    Registration Fee" table in the effective registration statement;

                                      II-3
<PAGE>

      (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;
    provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
    apply if the information required to be included in a post-effective
    amendment by those paragraphs is contained in periodic reports filed by
    the Registrant pursuant to Section 13 or Section 15(d) of the
    Securities Exchange Act of 1934 that are incorporated by reference 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.

Insofar as indemnification by the Registrant 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 Securities and Exchange
Commission, 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.

The 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 EMusic 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 the time shall be
     deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   Signatures

In accordance with the requirements of the Securities Act of 1933, EMusic
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of Redwood
City, State of California, on the 13th day of October, 1999.

                                          EMUSIC.COM INC.

                                                   /s/ Gene Hoffman, Jr.
                                          By: _________________________________
                                                     Gene Hoffman, Jr.
                                                  Chief Executive Officer

                               Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert H. Kohn, Gene Hoffman, Jr, Joseph
 H. Howell, and Peter M. Astiz, each of them acting individually, as his true
and lawful attorneys-in-fact and agents, each with full power of substitution,
for him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule 462(b)
increasing the number of securities for which registration is sought), and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, 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 for 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 his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

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 H. Kohn            Chairman of the Board and   October 13, 1999
______________________________________  Assistant Secretary
            Robert H. Kohn

      /s/ Gene Hoffman, Jr.            President, Chief Executive  October 13, 1999
______________________________________  Officer and Director
          Gene Hoffman, Jr.             (Principal Executive
                                        Officer)

        /s/ Joseph H. Howell           Executive Vice President    October 13, 1999
______________________________________  and Chief Financial
           Joseph H. Howell             Officer (Principal
                                        Financial and Accounting
                                        Officer)

         /s/ Ralph Peer, II            Director                    October 13, 1999
______________________________________
            Ralph Peer, II

           /s/ Tor Braham              Director                    October 13, 1999
______________________________________
              Tor Braham

         /s/ Ed Rosenblatt             Director                    October 13, 1999
______________________________________
            Ed Rosenblatt
</TABLE>

                                      II-5
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  2.1(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Atlantis Ventures Corp., GN Acquisition Corp and certain
         other parties dated as of May 11, 1998
  2.2(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
         certain other parties dated as of October 8, 1998
  2.3(c) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, GNA Corporation, Internet Underground Music Archive, Inc.
         and certain shareholders of Internet Underground Music Archive, Inc.
         dated as of May 16, 1999
  2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
         corporation, and EMusic.com Inc., a Delaware corporation, dated as of
         July 21, 1999
  3.1(c) Amended and Restated Certificate of Incorporation
  3.2(c) Amended and Restated Bylaws
  5.1    Opinion of Gray Cary Ware & Freidenrich LLP
 10.1(c) Form of Indemnity Agreement
 10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
         Culpepper
 10.3(a) 1998 Stock Option Plan
 10.4(c) 1998 Nonstatutory Stock Option Plan
 10.5(c) 1999 Employee Stock Purchase Plan
 10.6(c) Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21(c)   Subsidiaries
 23.1    Consent of PricewaterhouseCoopers LLP
 23.2    Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
 24.1    Power of Attorney (see page II-5 of the Registration Statement)
 27.1    Financial Data Schedule
</TABLE>
------------------
 * Previously filed.
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
    December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
    1999.
(c) Previously filed as an exhibit to the Registrant's Form S-1 (Registration
    Statement No. 333-83685).
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 394185}]
{"company-data": {"conformed-name": "EMUSIC COM INC", "cik": "0001065013", "assigned-sic": "3652", "irs-number": "943290594", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-88969", "film-number": "99728059"}, "business-address": {"street1": "1919 BROADWAY", "street2": "SUITE 200", "city": "REDWOOD CITY", "state": "CA", "zip": "94063", "phone": "6502160200"}, "mail-address": {"street1": "719 COLORADO AVENUE", "city": "PALO ALTO", "state": "CA", "zip": "94303"}, "former-company": {"former-conformed-name": "GOODNOISE CORP", "date-changed": "19980626"}}
As filed with the Securities and Exchange Commission on October 14, 1999
                                                      Registration No. 333-

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                --------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                                --------------
                                EMUSIC.COM INC.
             (Exact name of registrant as specified in its charter)

        Delaware                    3652                    94-3290594
State(or jurisdiction of     (Primary Standard           (I.R.S. Employer
    incorporation or             Industrial            Identification No.)
     organization)

                            Classification Code
                                  Number)
                            1991 Broadway, 2nd Floor
                         Redwood City, California 94063
                                 (650) 216-0200
         (Address and telephone number of principal executive offices)
                                --------------
                               Gene Hoffman, Jr.
                     President and Chief Executive Officer
                                EMusic.com Inc.
                            1991 Broadway, 2nd Floor
                         Redwood City, California 94063
                                 (650) 216-0200
           (Name, address and telephone number of agent for service)

                                   Copies to:
                               Andrew Zeif, Esq.
                               Craig Malina, Esq.
                        Gray Cary Ware & Freidenrich LLP
                              400 Hamilton Avenue
                        Palo Alto, California 94301-1825
                                 (650) 833-2000

                                --------------
    Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
                                --------------

    If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

    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
                                                           Proposed           Maximum
                                                           Maximum           Aggregate
       Title of Each Class of         Amount to be      Offering Price       Offering          Amount of
    Securities to be Registered        Registered        Per Share(1)        Price(1)      Registration Fee
-----------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par              13,284,102
  value).........................       shares(2)           $15.75         $209,224,607         $58,165
-----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457(c) of the Securities Act and based on the average of the
    closing bid and asked prices reported on the Nasdaq National Market on
    October 6, 1999.
(2) Represents shares of common stock (i) issued in connection with the
    conversion of shares of our Series B Preferred Stock; (ii) issuable upon
    exercise of outstanding common stock purchase warrants; (iii) issued in
    connection with certain acquisitions, a share exchange transaction and
    other transactions.
                                --------------
  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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Subject to Completion, Dated October 14, 1999

The information contained in this prospectus is not complete and may be
changed. These securities may not be sold 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.

                                 The Resale of
                               13,284,102 Shares

                           [LOGO OF EMUSIC.COM INC.]

                                 Common Stock
  The selling price will be determined by market factors at the time of their
                                    resale

-------------------------------------------------------------------------------
This prospectus relates to the resale by the selling stockholders of up to
13,284,102 shares of common stock. The selling stockholders may sell the stock
from time to time at the prevailing market price or in negotiated
transactions. Of the shares offered:

  .  up to 11,737,000 shares are presently outstanding and were issued upon
     the conversion of the Company's Series B Preferred Stock,

  .  up to 1,255,367 shares are presently outstanding and were issued in
     connection with the acquisition of Creative Fulfillment, Inc. and the
     purchase of certain assets of Nordic Entertainment Worldwide, Inc. and
     certain related partnerships;

  .  up to 110,000 shares are issuable upon the exercise of common stock
     purchase warrants and

  .  up to 181,735 shares issued in connection with a share exchange
     transaction in connection with the acquisition by the Company of its
     predecessor corporation and various other transactions.

Of the shares covered by this prospectus, approximately 13,226,414 shares are
subject to lock-up agreements or other restrictions which precludes the resale
of such shares for 90 days following our September 24, 1999 underwritten
public offering. We will receive no proceeds from the sale of the shares by
the selling stockholders. However, we have received proceeds from the sale of
shares currently outstanding and, if exercised, will receive proceeds equal to
the exercise price of the common stock purchase warrants.

Our common stock is listed on the Nasdaq National Market under the symbol
"EMUS." On October 12, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $15.81 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.

-------------------------------------------------------------------------------

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.

               The date of this prospectus is October   , 1999.
Table Of Contents
Page
                                                                           ----
Prospectus Summary.......................................................    4
Risk Factors.............................................................    8
Selling Stockholders.....................................................   19
Plan of Distribution.....................................................   27
Use of Proceeds..........................................................   29
Dividend Policy..........................................................   29
Capitalization...........................................................   30
Selected Financial Data..................................................   31
Management Discussion and Analysis of Financial Condition and Results of
 Operations..............................................................   32
Business.................................................................   38
Management...............................................................   50
Certain Transactions and Relationships...................................   57
Principal Stockholders...................................................   58
Description of Capital Stock.............................................   60
Shares Eligible for Future Sale..........................................   64
Price Range of Common Stock..............................................   65
Changes in and Disagreements with Accountants on Accounting and Financial
 Disclosure..............................................................   65
Legal Matters............................................................   66
Experts..................................................................   66
Where You Can Find More Information About Us.............................   66
Index to Financial Statements............................................  F-1
-------------------------

Prior to June 1999, we operated under the name GoodNoise Corporation. Our
executive offices are located at 1991 Broadway, 2nd Floor, Redwood City,
California 94063, and our telephone number is (650) 216-0200. Our website can
be found at EMusic.com. Our website does not constitute part of this
prospectus.

"EMusic" is a registered trademark of EMusic.com Inc. and the EMusic logo is a
trademark of EMusic.com Inc. All other trademarks or tradenames referred to in
this prospectus are the property of their respective owners.

As used in this prospectus, the terms "we," "us," "our" and EMusic mean
EMusic.com Inc. and the term "common stock" means our common stock, par value
$0.001 per share.

                                       3
Prospectus Summary

This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our common stock. You should read
the entire prospectus carefully, including "Risk Factors" and the financial
statements and related notes, before making an investment decision.

                                  Our Company

EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer music consumers a compelling selection of
music from which they may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. We currently have exclusive, multi-
year, digital download licenses to over 300,000 titles, from over 85 record
labels and over 1,300 recording artists, including selected titles from such
well known artists as The Offspring, They Might Be Giants, Iggy Pop and Ella
Fitzgerald. We currently have over 20,000 titles available for download on our
EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 4,000 unsigned artists. We believe this represents one of the
largest digital music content archives currently licensed for distribution over
the Internet.

Our website enables artists and labels to easily access a global customer base
while providing them with an integrated means of distributing, promoting and
tracking the sales of their recorded music. Recordings are offered for sale on
EMusic.com in the "mp3" format, the most widely-recognized compression standard
for the download of musical recordings. We believe that our combination of
selection, convenience, varied content, improved distribution and tracking
capabilities creates a compelling music purchasing experience for consumers as
well as an attractive distribution alternative for artists and independent
record labels.

The emergence of the Internet as a global communications standard, the growth
of high-speed internet access, the development of audio compression techniques,
such as mp3, and the proliferation of hardware and software that enables the
management and playback of downloadable music is currently driving rapid growth
in the sector. Forrester Research estimates that total online music revenues in
the United States are expected to grow from $89.0 million in 1998 to $7.8
billion in 2003. Of this amount, Forrester further estimates that $1.1 billion
will represent sales of downloadable music in 2003.

We operate a website that allows consumers to quickly and conveniently purchase
music and download it immediately, at a lower price than traditional CDs. We
believe that the limitations associated with the traditional music industry
present us with an opportunity to redefine the music distribution hierarchy and
enable artists and independent labels to access consumer markets at a level
currently only available to the major labels, while protecting the artists'
financial interests and providing consumers with numerous advantages in price,
convenience and music information.

Our solution provides the following benefits:

  .  Benefits to the Consumer. Consumer benefits include convenience, lower
     prices, large selection and music information. Downloadable music can be
     purchased online and used immediately, and can be more easily managed,
     carried and customized than music on physical media. When using the
     Internet as the distribution channel, there are none of the costs
     associated with distributing physical media, and as a result, music can
     be purchased at a lower cost than traditional CDs.

  .  Benefits to Artists and Independent Labels. Benefits to artists and
     independent labels include powerful distribution capability, greater
     understanding of fan base, significant new media exposure and an
     infrastructure to support the payment of royalties. Our solution offers
     global distribution to artists and independent labels, with higher
     margins stemming from lower distribution costs. By tracking the behavior
     of fans on our web site, we are able to offer artists and labels insight
     into who is buying their music, allowing them to focus their creative
     and promotional efforts.

                                       4
Our goal is to become the leading provider of compelling, downloadable music
directly to consumers over the Internet. Key elements of our strategy include:

    .  Continue to acquire compelling content through agreements with
       independent record labels, owners and distributors of recording
       catalogs and artists;

    .  Create strong brand awareness through offline and online marketing,
       site development and referral fee arrangements;

    .  Leverage strategic relationships to build brand and acquire content;

    .  Improve website functionality with the addition of chat rooms, music
       hubs, more content, more advanced search capabilities and dynamic
       personalization;

    .  Leverage pricing and infrastructure to become a trusted distribution
       channel by designing our technology and structuring our pricing to
       dissuade piracy and track all appropriate royalty payments;

    .  Continue to promote development of the downloadable music market by
       supporting organizations dedicated to the proliferation of
       downloadable music and by providing consumers with a positive
       purchase experience; and

    .  Continue to develop and enhance Internet Underground Music Archive by
       making it easier to access and post songs and information which will
       allow us to establish early relationships with potential music
       content providers.

We are a development stage company and have experienced net losses since
inception in January 1998. We intend to aggressively invest to implement our
strategy, and expect to continue to incur net losses for the forseeable future.

                                       5
The Offering

Common stock offered by the selling     13,284,102 shares; Includes an
stockholders .........................  indeterminate number of shares of
                                        common stock that may become issuable
                                        to prevent dilution resulting from
                                        stock splits, stock dividends and
                                        conversion price or exercise price
                                        adjustments, which are included
                                        pursuant to Rule 416 promulgated under
                                        the Securities Act of 1933.

Common stock currently outstanding ...  As of the date of this prospectus, we
                                        have approximately 34,000,000 shares of
                                        common stock issued and outstanding.

Use of proceeds.......................  We will not receive any proceeds from
                                        the resale of the shares of common
                                        stock by the selling shareholders. We
                                        will receive proceeds from the payment
                                        of the exercise price of the common
                                        stock purchase warrants if any are
                                        exercised for cash.
Nasdaq National Market symbol.................. EMUS
------------------
These share numbers are based on shares outstanding as of September 30, 1999
and exclude:

  . 6,623,365 shares of common stock issuable upon exercise of outstanding
    options at an average exercise price of $7.93;

  . 2,711,976 shares of common stock issuable upon exercise of outstanding
    warrants at an average exercise price of $14.09; and

  . 4,160,650 shares of common stock issuable upon exercise of options that
    may be granted under our stock option plans.

                                       6
Summary Consolidated Financial Data
January 8, 1998               January 8, 1998
                                  (inception) to   Year ended   (inception) to
                                   June 30, 1998  June 30, 1999  June 30, 1999
                                  --------------- ------------- ---------------
                                    (in thousands, except share and per share
                                                      data)
Statement of Operations Data:
Revenues........................            --     $       92     $       92
                                    ----------     ----------     ----------
Gross profit....................            --             65             65
                                    ----------     ----------     ----------
Operating loss..................    $   (1,180)    $  (15,462)    $  (16,642)
                                    ----------     ----------     ----------
Net loss........................    $   (1,180)    $  (15,140)    $  (16,320)
                                    ==========     ==========     ==========
Net loss applicable to common
 shares.........................    $   (1,180)    $  (47,677)    $  (48,857)
                                    ==========     ==========     ==========
Net loss per common share-basic
 and diluted....................    $    (0.12)    $    (3.52)    $    (4.87)
                                    ==========     ==========     ==========
Weighted average common shares
 outstanding-basic and diluted..    10,234,055     13,563,606     10,027,231
Pro forma basic and diluted net
 loss per share.................                   $    (0.95)    $    (1.39)
                                                   ==========     ==========
Pro forma weighted average
 common shares outstanding-basic
 and diluted....................                   16,731,464     12,299,002
                                                   ==========     ==========
Quarter Ended
                                         -------------------------------------------------
                                         June 30,  Sept. 30, Dec. 31,  March 31,  June 30,
                                           1998      1998      1998      1999       1999
                                         --------  --------- --------  ---------  --------
                                          (in thousands, all quarterly data unaudited)
Quarterly Statement of Operations Data:
Net revenue............................       --     $  12   $     8   $      21  $     51
Gross profit...........................       --        12         4          12        37
Net loss...............................   (1,091)     (849)   (1,125)     (2,289)  (10,877)
Net loss applicable to common shares...  $(1,091)    $(849)  $(1,294)  $ (33,914) $(11,620)
As of
                                                                June 30, 1999
                                                             -------------------
                                                              Actual   Pro Forma
                                                             --------- ---------
                                                               (in thousands)
Balance Sheet Data:
Cash and cash equivalents................................... $  19,002  $97,265
Working capital.............................................    16,593   94,856
Total assets................................................    54,221  132,484
Redeemable convertible preferred stock......................    32,550       --
Total stockholders' equity..................................    18,987  129,801
------------------
The pro forma weighted average common shares outstanding include preferred
stock on an as converted basis as well as common stock. The pro forma balance
sheet data presented above reflect the receipt of the net proceeds from the
sale of the 5,270,000 shares of common stock sold by us in our underwritten
public offering at the offering price of $16.00 and after deducting
underwriting discounts, commissions and estimated offering expenses as well as
the conversion of our preferred stock.

                                       7
Risk Factors

Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors and other information contained in
this prospectus before deciding to invest in our stock.

Any of the following risks, if they actually occur, could materially and
adversely affect our business, financial condition or results of operations. In
such an event, the trading price of our common stock could decline, and you
could lose all or part of your investment.

We have a new and unproven business model and it may not generate sufficient
revenue for our business to survive or be successful.

Our model for conducting business and generating revenues is new and unproven
and if it fails to develop as we plan, our business may not succeed. Our
business model depends upon our ability to generate revenue streams from
multiple sources through our website, including:

  . online sales of downloadable music;

  . website advertising fees from third parties;

  . licensing of musical recordings for use by others; and

  . online sales of music-related merchandise.

It is uncertain whether a music-based website such as ours, that relies on
attracting people to purchase and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. This business model may
not succeed or it may not be sustainable as our business grows.

In order for our business to be successful, we must not only develop services
that directly generate revenue, but also provide content and services that
attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We may not
be able to provide consumers with an acceptable blend of products, services,
and informational and community offerings that will attract consumers to our
website frequently. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. Accordingly, we are not certain that our business model
will be successful or that we can sustain revenue growth or be profitable.

We are competing in a new market that may not develop sufficiently to support
our business.

The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services are subject to a high degree of uncertainty and risk. We are
attempting to capitalize on a talent pool of artists underserved by the
traditional recording industry. Consumers may not continue to be interested in
listening to, or purchasing music from, these artists. If this new market fails
to develop, develops more slowly than expected or becomes saturated with
competitors, or our products and services do not achieve or sustain market
acceptance, we may not generate sufficient revenues to become profitable.

The future popularity of downloadable music will depend on consumer acceptance
of downloading music generally. We believe that consumer acceptance is, in
part, dependent on the availability of portable devices to store and play this
music. To the extent that devices are not available at affordable prices, or
consumer acceptance or distribution of these portable devices is delayed, our
potential market, and thus our ability to increase our revenues, may be
reduced.

                                       8
We have a limited operating history that makes an evaluation of our business
difficult.

We were incorporated in January 1998. During 1998, our operating activities
consisted largely of developing the infrastructure necessary to download music
on the Internet. Our limited operating history makes it difficult to evaluate
our current business and prospects. As a result of our limited operating
history, we do not have meaningful historical financial data upon which to
forecast quarterly revenues and results of operations. Before investing in us,
you should evaluate the risks, expenses and problems frequently encountered by
companies such as ours that are in the early stages of development.

We have incurred substantial losses to date and we expect net losses in the
future.

From inception through June 30, 1999, we had a deficit accumulated during the
development stage of $48.8 million. We expect substantial net losses and
negative cash flow for the foreseeable future. We believe it is critical to our
long-term success that we continue to develop "EMusic" brand awareness and
loyalty through marketing and promotion, expand our artist and consumer
networks, develop our online content and expand our other services. We expect
that our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will need
to generate significant additional revenues to achieve profitability. As a
result, we may never achieve profitability and, if we do achieve profitability
in any period, we may not be able to sustain or increase profitability.

Our quarterly revenues and operating results are subject to fluctuation which
may result in volatility or a decline in the price of our stock.

We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicators of future performance.
Our quarterly operating results are likely to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of our
control, including:

  . the demand for downloadable music content and Internet advertising;

  . the addition or loss of advertisers;

  . the level of traffic on our Internet sites;

  . the amount and timing of capital expenditures and other costs relating to
    the expansion of our operations;

  . the introduction of new sites and services by us or our competitors;

  . seasonal trends in Internet use, purchases of downloadable music, and
    advertising placements;

  . price competition or pricing changes in the industry;

  . technical difficulties or system downtime; and

  . general economic conditions, and economic conditions specific to the
    Internet and Internet media.

In addition, while our revenues may vary significantly, a portion of our
expenses are fixed. As a result, any decrease in revenues will not be
accompanied by a decrease in our fixed operating expenses and our operating
results will suffer. Our quarterly results may also be significantly impacted
by the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at our early stage of development, such accounting
treatment can have a material impact on the results for any quarter. Because of
these and other factors it is likely that our operating results will fall below
expectations in some future quarter and the trading price of our stock may
drop.

Shares eligible for future sale in the open market may depress our stock price.

As of September 30, 1999, there were approximately 34,000,000 shares of common
stock outstanding, of which approximately 10,000,000 were tradable without
restriction under the Securities Act and approximately

                                       9
11,000,000 were tradable under Rule 144. Upon the effectiveness of this
registration statement, substantially all of our remaining outstanding stock
will be tradable, including shares tradable under Rule 144.

Our stock price has been and may continue to be volatile.

Our common stock is currently traded on the Nasdaq National Market under the
ticker symbol "EMUS." There can be no assurance that an active trading market
will be sustained in the future. In addition to fluctuations in our operating
results, the following factors could cause the price of our securities to be
volatile:

  . development of the downloadable music market;

  . technological innovations;

  . new products;

  . acquisitions or strategic alliances entered into by us or our
    competitors;

  . failure to meet securities analysts' expectations;

  . government regulatory action;

  . patent or proprietary rights developments; and

  . market conditions for internet and technology stocks in general.

If our brand name is not accepted, our ability to attract content and customers
to our website will be harmed.

During the quarter ended June 30, 1999, we began to operate under the name
EMusic.com Inc. and launched a marketing campaign to establish the brand name
"EMusic." We believe that establishing and maintaining the EMusic brand is a
critical aspect of our efforts to attract and expand our Internet audience and
acquire new content and that the importance of brand recognition will increase
due to the growing number of Internet sites and the relatively low barriers to
entry in providing Internet content. We intend to incur significant expenses in
our brand building efforts. If these efforts do not generate increased revenues
our operating results will suffer. If we are unable to provide high quality
content or otherwise fail to promote and maintain our brand, our business will
be harmed.

If we are unable to maintain or expand our contracts for music content, or if
the content we license does not sell, our popularity and business may suffer.

We believe that a primary draw to our website is the ability to access music
from known artists and independent record labels. Currently, we have exclusive
multi-year contracts for much of our music library. However, if we are unable
to sign contracts for new content, or if we are unable to extend the terms of
existing contracts as they expire, our website may fail to attract new, or
retain existing, customers which would harm our business.

For much of the content we license, we pay advances against future royalties
which will be owed on sale of the content. If the content we license does not
sell in sufficient quantities, we may not be able to recover all or part of the
advances we have paid and our business could be harmed.

We rely on a third party for the hosting of our website and if this hosting
service becomes unavailable, our customers will not be able to access our
website.

We currently rely on a third party which hosts our website at a single location
in San Jose, California. We currently do not maintain a redundant website. If
for any reason our current website hosting services become unavailable or if
our hosting service experiences technical problems, customers will not be able
to access our website until these services are restored or until we are able to
make arrangements with an alternate provider.

                                       10
If we fail to adequately manage our growth, we may not be successful as we may
miss market opportunities.

We expect the scope of our operations and the number of our employees to grow
rapidly. In particular, we intend to hire additional engineering, sales,
marketing, content acquisition and administrative personnel. Additionally,
acquisitions could increase our employee headcount and business activity. We
expect our rapid growth to continue to place significant stress on our
technology, operations, management and employee base. Any failure to
successfully address the needs of our growing enterprise would harm our
business.

Our technology systems must be expanded and enhanced for our business to grow.

In order to support a growing business, we will need to continue to enhance and
expand the technology infrastructure which supports our business. We have
recently begun a conversion of our central database to a new database based
upon technology licensed from Oracle Corporation and we expect to implement a
new accounting system in the first half of calendar year 2000. As our business
continues to grow, we will need to add additional servers and other hardware
and software systems as well as additional sites for website hosting. If we
fail to successfully implement these new and enhanced systems, our operations
could be disrupted, we may become less competitive, our revenues could be
reduced and we may need to incur additional costs to address these issues.

We may have difficulty executing acquisitions and integrating the acquired
companies into our business.

Our business strategy includes entering into strategic alliances and acquiring
complementary businesses, technologies, content or products. In January 1999,
we completed the acquisition of Creative Fulfillment, Inc. and in June 1999, we
completed the acquisition of Internet Underground Music Archive. These and any
other future acquisitions involve risks commonly encountered in acquisitions of
companies, including:

  . exposure to unknown liabilities of acquired companies;

  . incurring acquisition costs and expenses in excess of what we
    anticipated;

  . the occurrence of fluctuations in our quarterly and annual operating
    results due to the costs and expenses of acquiring and integrating new
    businesses or technologies;

  . experiencing difficulties and expenses in assimilating the operations and
    personnel of the acquired businesses;

  . disruption of our ongoing business and diversion of our management's time
    and attention;

  . a possible inability to integrate successfully or to complete the
    development and application of acquired technology and a possible failure
    to achieve the anticipated financial, operating, and strategic benefits
    from these acquisitions;

  . experiencing difficulties in establishing and maintaining uniform
    standards, controls, procedures, and policies;

  . impairment of our relationships with key employees and customers of
    acquired businesses or the loss of these key employees and customers as a
    result of changes in management and ownership of the acquired businesses;
    and

  . acquisitions using the purchase method of accounting, which may result in
    goodwill, creating amortization charges in future periods.

In addition, our shareholders may be diluted if the consideration for future
acquisitions consists of equity securities. We may not overcome these risks or
any other problems encountered in connection with acquisitions. If we are
unsuccessful in doing so, our business could be harmed.

                                       11
We expect competition to increase significantly in the future and we may not be
able to compete successfully.

The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers, users and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors.

Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.

Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages relative to us, including:

  . longer operating histories;

  . significantly greater financial, technical and marketing resources;

  . greater brand name recognition;

  . larger existing customer bases; and

  . more popular content or artists.

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion, and sale of their products or services than we
can. Websites maintained by our existing and potential competitors may be
perceived by consumers, artists, talent management companies and other music-
related vendors or advertisers as being superior to ours. In addition, we may
not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisement. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.

We may need to obtain additional funds to execute our business plan and if we
are unable to obtain such funds, we will not be able to expand our business as
planned.

We believe that our existing capital resources will be sufficient to fund our
planned level of operating activities, capital expenditures and other
obligations through the next 12 months. Further, we may need to raise
additional funds in order to:

  . finance unanticipated working capital requirements;

  . develop or enhance existing services or products;

  . fund distribution relationships;

  . advertise to build global brand recognition;

  . respond to competitive pressures; or

  . acquire complementary businesses, technologies, content or products.

                                       12
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited. If we raise additional
funds by issuing equity or convertible debt securities, the percentage
ownership of our then existing stockholders will be reduced, and these
securities may have rights, preferences or privileges senior to those of our
stockholders.

Our business is dependent on the continued development and maintenance of the
Internet and the availability of increased bandwidth to consumers.

The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Internet access and services. Because global commerce on the
Internet and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace
in the long term.

The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to continue to upload
and download mp3 and other music file formats, as well as to conduct commercial
transactions with us, without significant delays or aggravation that may be
associated with decreased availability of Internet bandwidth and slower access
to our website. Our penetration of a broader consumer market will depend, in
part, on continued proliferation of high speed Internet access. Even compressed
in mp3 format, a typical three minute song file can occupy more than three
megabytes of storage space. This file could take approximately seven minutes to
download over a conventional 56 kbps modem compared to less than one minute
over an xDSL or cable modem.

The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased
frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increases in users or bandwidth requirements may harm the performance of the
Internet. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. This might include outages and delays resulting from
the "year 2000" problem. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of music and music-
related products and services. The infrastructure and complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if
these products or services are developed, the Internet may not become a viable
commercial marketplace for the products or services that we offer.

We must maintain and establish strategic alliances to increase our customer
base and enhance our business.

In an attempt to increase our customer base and traffic on our website, build
brand recognition, attract paid advertising and enhance content, distribution
and commerce opportunities, we have entered into strategic alliances with
various media, hardware device and Internet-related companies such as: Creative
Labs, RealNetworks and Centraal. Our failure to maintain or renew our existing
strategic alliances or to establish and capitalize on new strategic alliances
could harm our business. Our future success depends to a significant extent
upon the success of such alliances. Moreover, we are substantially dependent on
our ability to advertise on other Internet sites and the willingness of the
owners of other sites to direct users to our Internet sites through hypertext
links. We may not achieve the strategic objectives of these alliances, and
parties to strategic alliance agreements with us may not perform their
obligations as agreed upon. Such agreements also may not be

                                       13
specifically enforceable by us. In addition, some of our strategic alliances
are short term in nature and may be terminated by either party on short notice.
The termination or impairment of these strategic alliances could reduce our
ability to attract new customers.

Our success depends on our retention of key personnel.

Our performance is substantially dependent on the services of Robert H. Kohn,
our chairman, and Gene Hoffman, Jr., our chief executive officer, as well as on
our ability to recruit, retain and motivate other officers and key employees.
Competition for qualified personnel is intense and there are a limited number
of persons with knowledge of and experience in the Internet and music
entertainment industries. The loss of the services of any of our officers or
senior managers could harm our business.

We may not be able to hire and retain a sufficient number of qualified
employees to grow our business as planned.

Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. A large percentage of
our employees have joined us in 1999 and we expect that our rate of hiring will
continue at a very rapid pace. To manage the expected growth of our operations,
we will need to integrate these employees into our business. Our inability to
hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our programs, products and services, and could harm our
business. In addition, companies in the Internet and music industries whose
employees accept positions with competitive companies frequently claim that
their competitors have engaged in unfair hiring practices. We may be subject to
claims in the future as we seek to hire qualified personnel and those claims
may result in material litigation involving EMusic. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to
incur legal costs and diverting management's attention away from our business.

Security concerns regarding credit card or other confidential information
transmitted over the web could limit our growth and subject us to liability.

A significant barrier to e-commerce and communications over the Internet has
been the need for secure transmission of confidential information over public
networks. Internet usage may not increase at the rate we expect unless some of
these concerns are adequately addressed and found acceptable by the market.
Internet usage could also decline if any well publicized compromise of security
occurred. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. Protections
against security breaches may not be available at a reasonable price or at all.
If a third party were able to circumvent our security measures and
misappropriate our users' personal information, it may cause interruptions to
our retail website operation, damage our reputation or subject us to claims by
users. Any compromise of confidential data during transmission over the
Internet may harm our business.

Any failure of our internal security measures could cause us to lose customers
and subject us to liability.

Our business is dependent on maintaining a database of confidential user
information, including credit card numbers. If the security measures that we
use to protect personal information are ineffective, we may lose customers and
our business would be harmed. We rely on security and authentication technology
licensed from third parties. With this technology, we perform real-time credit
card authorization and verification. We cannot predict whether new
technological developments could allow these security measures to be
circumvented. In addition, our software, databases and servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We may need to spend significant resources to protect against
security breaches or to alleviate problems caused by any breaches and we may
not be able to prevent all security breaches.

                                       14
Our intellectual property protection may be inadequate, and any loss or
reduction in intellectual property protection may harm our business.

Our intellectual property includes our trademarks and copyrights, proprietary
software, and other proprietary rights. We believe that our intellectual
property is important to our success and our competitive position, and we try
to protect it. However, our efforts to protect our intellectual property could
be inadequate. Use of the "EMusic" name by others could dilute our brand
identity and confuse the market. In addition, our ability to conduct our
business may be harmed if others claim we violate their intellectual property
rights. For example, Sightsound.com, Inc. has asserted that many online music
providers, including EMusic, violate patent rights that it allegedly owns
covering the sale of music over the Internet through digital downloads. If
successful, these claims, or similar claims by others, could seriously harm our
business by forcing us to cease using intellectual property that we depend on
to operate our business. Even if unsuccessful, these claims could harm our
business by damaging our reputation, requiring us to incur legal costs and
diverting management's attention away from our business.

Government regulation may require us to change the way we do business.

Laws and regulations directly applicable to Internet communications, commerce
and advertising are becoming more prevalent. The United States Congress has
enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information. The laws
governing the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising. In addition,
the growth and development of the market for Internet commerce may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
over the Internet. Furthermore, the Federal Trade Commission has recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax. For example, changes in copyright law could require us
to change the manner in which we conduct business or increase our costs of
doing business. Because of this rapidly evolving and uncertain regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or forcing us to change
how we do business. In the event the Federal Trade Commission or other
governmental authorities adopt or modify laws or regulations applicable to our
business, including those relating to the Internet and copyright matters, our
business could be harmed.

We may have liability for content on our website and liability for other
materials which we distribute.

We may be liable to third parties for content on our website and any other
materials we distribute if:

  . the music, text, graphics or other content on our website violates their
    copyright, trademark, or other intellectual property rights;

  . our artists or labels violate their contractual obligations to others by
    providing content on our website; or

  . content we distribute is deemed obscene, defamatory or excessively
    violent.

                                       15
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.

Liability or alleged liability for content or other materials could harm our
business by damaging our reputation, requiring us to incur legal costs in
defense, exposing us to significant awards of damages, fines and costs and
could divert management's attention away from our business. In particular, in
addition to civil damages, liability for violations of copyright law currently
can result in penalties of up to $10,000 per occurrence.

Imposition of sales and other taxes on e-commerce transactions may impair our
ability to derive financial benefits from e-commerce.

Except for sales of tangible merchandise into certain states, we do not collect
sales or other taxes on sales of our products through our websites. Although
the Internet Tax Freedom Act precludes, for a period of three years ending
January 2002, the imposition of state and local taxes that discriminate against
or single out the Internet, it does not currently impact existing taxes.
However, one or more states may seek to impose sales tax collection obligations
on out-of-state companies such as us, which engage in or facilitate online
commerce. A number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the growth
of electronic commerce and could adversely affect our opportunity to derive
financial benefit from electronic commerce. Moreover, if any state or foreign
country were to successfully assert that we should collect sales or other taxes
on the exchange of merchandise on its system, it could affect our cost of doing
business.

Legislation limiting the ability of states to impose taxes on Internet based
transactions has been proposed in the U.S. Congress. We cannot assure you that
this legislation will ultimately become law or that the tax moratorium in the
final version of this legislation will be ongoing. Failure to enact or renew
this legislation, if enacted, could allow various states to impose taxes on
Internet-based commerce, which could harm our business.

We may have difficulty expanding into international markets which could limit
the growth of our business.

Our future growth and success will depend in part on our ability to generate
international sales. There can be no assurance, however, that we will be
successful in generating international sales of our products. Sales to
customers in certain international countries may be subject to a number of
risks, including: currency exchange rate risk; the risks that agreements may be
difficult or impossible to enforce and receivables difficult to collect through
an international country's legal system; foreign customers may have longer
payment cycles; or foreign countries could impose withholding taxes or
otherwise tax our foreign income, impose tariffs, embargoes, or exchange
controls, or adopt other restrictions on foreign trade. In addition, the laws
of certain countries do not protect our offerings and intellectual property
rights to the same extent as the laws of the United States. If we fail to
compete successfully or to expand the distribution of our offerings in
international markets the growth of our business could be limited.

Development of new standards for the electronic delivery of music may threaten
our business.

We currently rely on mp3 technology as a delivery method for the digital
distribution of music. Mp3 is an open standard adopted by the Moving Picture
Experts Group for the compression of audio files. We do not own or control mp3
technology and are dependent upon a license to obtain rights to certain patents
relating to the technology. The onset of competing industry standards for the
electronic delivery of music could significantly affect the way we operate our
business as well as the public's perception of EMusic as a company. For
example, some of the major recording studios have recently announced a plan to
develop a universal standard for the electronic delivery of music, called the
Secured Digital Music Initiative and have announced their intention to make
this delivery method available by the end of 1999. If new standards are
developed and adopted by consumers, we may not be able to obtain a license to
such technology on favorable terms or at all and our business could be harmed.

                                       16
Mp3 technology is controversial within certain segments of the traditional
music industry and we may face continued opposition to our use of mp3 which may
slow market development and harm our business.

Certain segments of the traditional music industry have not embraced the
development of the mp3 format to deliver music, in part because users of mp3
technology can download and distribute unauthorized or "pirated" copies of
copyrighted recorded music over the Internet. We believe that our success is
largely dependent upon the ease with which customers can download and play
music. We may face opposition from a number of different music industry sources
including record companies and studios, the Recording Industry Association of
America and certain artists. The adoption of competing standards may slow the
development of the market for downloadable music or result in increased costs
of doing business which could harm our business.

If we, or third parties on which we rely, fail to achieve year 2000 compliance,
our business could be harmed.

We may discover year 2000 compliance problems in our systems that will require
substantial revision. We have not conducted a year 2000 audit and have relied
only on our internal assessments of our year 2000 needs. Furthermore, we have
not developed contingency plans to respond to potential year 2000 issues. If we
unexpectedly experience failures related to the year 2000 problem or if we fail
to fix or replace any affected systems on a timely basis, our business could be
harmed. In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control, as
well as the general infrastructure of the Internet, may not be year 2000
compliant. Failure of third parties or of the general Internet infrastructure
to be year 2000 compliant could prevent us from publishing our content,
generating sales or collecting revenue, decrease the use of the Internet or
prevent users from accessing our websites for a substantial period of time
which could harm our business. For more information on our state of readiness,
costs and rights associated with year 2000 issues, see "Management Discussion
and Analysis of Financial Condition and Results of Operation--Year 2000
Readiness."

Our executive officers and directors control approximately 20% of our common
stock and have power to influence significant corporate matters, which may
delay, deter or prevent transactions that could benefit our stockholders.

Executive officers and directors, in the aggregate, beneficially own
approximately 20% of our outstanding common stock. These stockholders are able
to significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of EMusic and may make
some transactions more difficult or impossible without the support of these
stockholders.

Anti-takeover provisions in our charter documents could negatively impact our
stockholders.

Our Board of Directors has the authority to issue up to 20,000,000 shares of
preferred stock without need for stockholder approval. The board may also
determine the economic and voting rights, of this preferred stock. The holders
of our common stock could be adversely affected by the issuance of preferred
stock. Issuance of preferred stock could impede or prevent transactions that
would cause a change in control of our company. This might discourage bids for
our common stock as a premium over the market price of our common stock and
adversely affect the trading price of our common stock. We have no current
plans to issue shares of preferred stock. In addition, other provisions in our
charter documents could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.

Our data warehousing and web server systems are vulnerable to natural
disasters, failure of third-party services and other unexpected problems.

Since our data warehousing, web server and network facilities are all located
in California, an earthquake or other natural disaster could affect all of our
facilities simultaneously. An unexpected event such as a power or

                                       17
telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at our Internet service providers' facilities could
cause the loss of critical data and prevent us from offering our services to
artists and consumers. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, we rely on third parties
to securely store our archived data, house our web server and network systems,
and connect us to the Internet. A failure by any of these third parties to
provide these services satisfactorily could harm our business.

You should not rely on forward-looking statements in this prospectus.

This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including, "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue;" the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks described above and in other parts of this prospectus. These factors
may cause our actual results to differ materially from any forward-looking
statement. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
them to actual results or to changes in our expectations.

                                       18
Selling Stockholders

The following table sets forth certain information with respect to the selling
stockholders as of September 30, 1999. Except as set forth below, none of the
selling shareholders currently is an affiliate of ours, and none of them has
had a material relationship with us during the past three years.
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Citiventure 96
 Partnership, L.P.              1,627,100(/2/)    1,627,100        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners II, L.P.                624,000(/2/)      624,000        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners I, C.V.                  58,300(/2/)       58,300        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Chancellor Private
 Capital Offshore
 Partners III, L.P.               379,000(/2/)      379,000        0       --
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
VantagePoint
 Communication Partners,
 L.P.                           1,111,100(/2/)    1,111,100        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
VantagePoint Venture
 Partners 1996                    555,500(/2/)      555,500        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
VantagePoint Venture
 Advisors, LLC                     16,600(/2/)       16,600        0       --
c/o VantagePoint Venture
 Partners
Attn: James D. Marver
1002 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
Seligman Communications
 and Information
 Fund, Inc.                     1,000,000(/2/)    1,000,000        0       --
c/o J. & W. Seligman &
 Co., Inc.
Attn: Storm Boswiek
100 Park Avenue, 7th
 Floor
New York, NY 10017
19
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
CTI Limited                   999,900(/2/)         999,900         0       --
c/o Creative Technology
 Ltd.
31 International
 Business Park, Creative
 Resource
Singapore 609921
Phillips-Smith
 Speciality Retail Group
 III, L.P.                    833,300(/2/)         833,300         0       --
c/o Phillips-Smith
 Speciality Retail Group
Attn: G. Michael Machens
5080 Spectrum Drive,
 Suite 805 West
Addison, TX 75001
idealab! Capital
 Partners I-B, L.P.           697,500(/2/)         697,500         0       --
c/o idealab! Capital
 Management I, LLC
Attn: William S. Elkus
130 W. Union Street
Pasadena, CA 91103
idealab! Capital
 Partners I-A, L.P.           136,500(/2/)         136,500         0       --
c/o idealab! Capital
 Management I, LLC
Attn: William S. Elkus
130 W. Union Street
Pasadena, CA 91103
Drake & Co. for the
 account of                   645,000(/2/)         645,000         0       --
Citiventure Private
 Participations III
c/o Invesco Private
 Capital
Attn: Mark Radovanovich,
 CFO
1166 Avenue of the
 Americas, 27th Floor
New York, NY 10036
Weiss, Peck & Greer
 Venture Associates IV,
 L.L.C.                       490,300(/2/)         490,300         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Enterprise Fund III,
 L.L.C.                       428,800(/2/)         428,800         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Information Sciences
 Entrepreneur Fund, L.P.       19,000(/2/)          19,000         0       --
c/o Weiss, Peck & Greer
 LLC
Attn: Melissa Alves
555 California Street,
 Suite 3130
San Francisco, CA 94104
WPG Venture Associates
 IV Cayman, L.P.               61,900(/2/)          61,900         0       --
c/o BankAmerica Trust &
 Banking Corporation
(Cayman) Limited
Attn: Sarah Holbrook
P.O. Box 1092,
 BankAmerica House, Fort
 Street
George Town, Grand
 Cayman, Cayman Islands,
British West Indies
20
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Abacus L.P.                    10,000(/2/)          10,000           0     --
c/o TriNet Real Estate
 Trust
Attn: Robert W. Holman
 Jr.
Four Embarcadero Center,
 Suite 3150
San Francisco, CA 94111
Amcito Partners, L.P.          16,600(/2/)          16,600           0     --
Attn: William Brian
 Little
630 Fifth Ave., Suite
 2620
New York, NY 10111
Bank Sal Oppenheim jr &
 cie (Schweiz) AG             250,000(/2/)         250,000           0     --
Attn: Marko Bianchi
Uraniastrasse 28, CH -
 8022
Zurich, Switzerland
Tor Braham                     46,600(/2/)          11,600      35,000      *
10 Cordova Court
Portola Valley, CA 94028
Jorge A. del Calvo and
 Gerine Ongkeko                 8,300(/2/)           8,300           0     --
329 Walsh Road
Atherton, CA 94027
James Chapman                  96,607(/2/)          46,600      50,007      *
3435 Clay Street, #3
San Francisco, CA 94118
Catherine Filippini             3,300(/2/)           3,300           0     --
63 Indian Hill Road
Winnetka, IL 60093
Fisher Capital Ltd.           162,100(/2/)         162,100           0     --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
Craig Foley                    33,300(/2/)          33,300           0     --
7 Locust Lane
Bronxville, NY 10708
GCWF Investment Partners        8,300(/2/)           8,300           0     --
Attn: Greg Gallo
400 Hamilton Avenue
Palo Alto, CA 94301-1825
Roger B. Hackett                8,300(/2/)           8,300           0     --
c/o Go Video, Inc.
7835 East McClaine Drive
Scottsdale, AZ 85260-
 6949
John E. Kelley                  3,300(/2/)           3,300           0     --
c/o Edgewood Management
 Company
675 Third Avenue
New York, NY 10017
21
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Richard Lawson                  3,300(/2/)           3,300         0       --
1770 Broadway Street -
 Apt. 202
San Francisco, CA 94109
Greg Little                    16,600(/2/)          16,600         0       --
163 Carl Street
San Francisco, CA 94117
Reid Payne                      8,300(/2/)           8,300         0       --
c/o ABN AMRO
199 Bishopsgate
London EC2 M3TY
United Kingdom
PM&S Venture Fund II,
 LLC                           16,600(/2/)          16,600         0       --
c/o Pillsbury Madison &
 Sutro LLP
Attn: Michael J.
 Halloran
235 Montgomery Street
San Francisco, CA 94104
Promethean Service
 Company, LLC                  84,000(/2/)          84,000         0       --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
Bryan Rutberg                   3,300(/2/)           3,300         0       --
1625 Pacific Avenue -
 Apt. 401
San Francisco, CA 94115
Baird Ryan                      8,300(/2/)           8,300         0       --
c/o Gerald Peters
 Gallery Inc.
24 East 78th Street
New York, NY 10021
Sofinnova Venture
 Partners IV, L.P.            333,300(/2/)         333,300         0       --
Attn: Natalie Auber, CFO
140 Geary Street, 10th
 Floor
San Francisco, CA 94108
Edward Straube                  6,600(/2/)           6,600         0       --
67 Murray Avenue
Larkspur, CA 94939
Jason Strober                   3,300(/2/)           3,300         0       --
c/o VantagePoint Venture
 Partners
1001 Bayhill Drive,
 Suite 140
San Bruno, CA 94066
Wingate Capital Ltd.           87,200(/2/)          87,200         0       --
c/o Promethean
Attn: James F. O'Brien,
 Jr.
750 Lexington Avenue,
 22nd Floor
New York, NY 10022
22
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Stanton D. Wong                 5,000(/2/)           5,000         0       --
c/o Pillsbury Madison &
 Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Carm Adimando                  20,300(/2/)          20,300         0       --
47 Cherry Gate Lane
Trumbull, CT 06611
Jose J. Cofino                 20,400(/2/)          20,400         0       --
2735 Nicols Canyon Rd.
Los Angeles, CA 90046
Deborah A. Coleman             40,600(/2/)          40,600         0       --
c/o Merix Corporation
1521 Poplar Lane
Forest Grove, OR 97116
Sheldon Derezin                20,400(/2/)          20,400         0       --
6409 Ridge Manor Ave.
San Diego, CA 92120
Elrod Lawing &
 Sharpless, P.A.,
 Employees Profit              40,800(/2/)          40,800         0       --
Sharing Plan & Trust
Joseph Elrod, Trustee
2900 St. Regis Road
P.O. Box 13566
Greensboro, NC 27415-
 3566
Lawrence Gerbrandt              5,500(/2/)           5,500         0       --
3880 Via Mar Monte
Carmel, CA 93923
Laura Greenstein                5,100(/2/)           5,100         0       --
c/o Martin Greenstein
55 South Market Street,
 Ste. 1630
San Jose, CA 95113
James H. Gregg                 40,800(/2/)          40,800         0       --
580 Viejo Road
Carmel, CA 93932
Kenneth Hess                   20,400(/2/)          20,400         0       --
P.O. Box 5038
Carmel, CA 93921
Chase Bank Custodian,
 IRA fbo Jay C. Huffard        20,400(/2/)          20,400         0       --
Attn: Brenda Jackson AVP
One Chase Manhattan
 Plaza
New York, NY 10081
Brian Kahn                     10,200(/2/)          10,200         0       --
1071 N. Hillcrest Dr.
Beverly Hills, CA 90210
Dennis Levett                   8,100(/2/)           8,100         0       --
c/o Strutz-Levett
 Investment & Holding
 Co.
502 Waverley Street
Palo Alto, CA 94302
23
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Spencer Leyton                 65,118(/2/)           4,000      61,118       *
1689 Calypso Drive
Aptos, CA 95003
Richard Lipson                 10,200(/2/)          10,200           0      --
c/o Rainbow Leather,
 Inc.
14-15 112th St.
College Point, NY 11256
Raymond L. Ocampo Jr. or
 Sandra O. Ocampo              20,400(/2/)          20,400           0      --
Trustees of the Ocampo
 Family Trust UTA Dated
May 30, 1996
Attn: Raymond L. Ocampo,
 Jr.
500 Roehampton Rd.
Hillsborough, CA 94010
peermusic III, Ltd.            61,400(/2/)          61,400           0      --
3220 Blume Drive, Suite
 290
Richmond, CA 94806
Rand International
 Corporation                  102,300(/2/)         102,300           0      --
770 Lexington Ave., 16th
 Floor
New York, NY
Sensory Sciences              102,000(/2/)         102,000           0      --
c/o Go Video
Attn: Douglas Klein, CFO
7835 East McLain Drive
Scottsdale, AZ 85260-
 1732
Judith Stevens                  5,100(/2/)           5,100           0      --
c/o Martin Greenstein
55 South Market Street,
 Ste. 1630
San Jose, CA 95113
Seymour Svirsky                20,300(/2/)          20,300           0      --
44 Penn Blvd.
Scarsdale, NY 10583
Carl Tiedemann                 40,700(/2/)          40,700           0      --
c/o Tiedemann Investment
 Group
535 Madison Ave., 37th
 Floor
New York, NY 10022
Tiedemann Investment
 Group                         20,300(/2/)          20,300           0      --
Attn: Carl Tiedemann
535 Madison Ave., 37th
 Floor
New York, NY 10022
Samuel S. Trust                20,400(/2/)          20,400           0      --
P.O. Box 22274
Carmel, CA 92921
Neil & Lydia Weiss             10,200(/2/)          10,200           0      --
511 San Felicia Way
Los Altos, CA 94022
Norbert R. Wirsching           20,300(/2/)          20,300           0      --
303 E. 57th St. Apt. 22L
New York, NY 10022-2947
24
Maximum Number
                               Beneficial        of Shares of   Shares  Percentage
                              Ownership of       Common Stock   Owned     Owned
                             Common Stock as     Offered for    after     after
Name and Addresses        of September 30, 1999      Sale      Offering  Offering
------------------        --------------------- -------------- -------- ----------
Chambers Wong (Hong
 Kong)                            20,300(/2/)       20,300           0      --
c/o Jasper Ace Limited
Flat A, 9-F Tower 1,
 Regent on the Park
9 Kennedy Rd, Hong Kong
HFTP Investment LLC              304,800(/3/)      304,800           0      --
c/o Promethean
 Investment Group,
 L.L.C.
Attn: James F. O'Brien,
 Jr.
40 West 57th Street,
 Suite 1520
New York, NY 10019
Mark S. Chasan                   658,058(/1/)      538,058      120,000     --
21414 Arcos Dr.
Woodland Hills, CA 91364
Dan Barrett                          645(/1/)          645           0      --
c/o Nordic Entertainment
2512 Jefferson St.
Napa, CA 94558
Scott Bergevin                       461(/1/)          461           0      --
c/o Nordic Entertainment
2512 Jefferson St.
Napa, CA 94558
Fred and Rosalyn Chasan           36,896(/1/)       36,896           0      --
13633 Pasco De La Huerta
Poway, CA 92064
Griffith Emery                       153(/1/)          153           0      --
c/o Get Travel
 Corporation
3355 Vincent Road
Pleasant Hill, CA 94523
Trent George                      13,836(/1/)       13,836           0      --
6398 Flamingo Drive
Buena Park, CA 90620
Get Travel Corporation             2,950(/1/)        2,950           0      --
3355 Vincent Road
Pleasant Hill, CA 94523
Goff Johnson LLP                   6,301(/1/)        6,301           0      --
c/o Wayne Johnson
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Lochelle Harrison                    368(/1/)          368           0      --
1012 Charlson Way
Napa, CA 94558
Marilyn Jarrells                   1,752(/1/)        1,752           0      --
1716 Caton Avenue, #35
Brooklyn, NY 11226
Phil Jones                           461(/1/)          461           0      --
1452 Loma Drive
Hermosa Beach, CA 90254
25
Maximum Number
                               Beneficial           of Shares of   Shares  Percentage
                              Ownership of          Common Stock   Owned     Owned
                             Common Stock as        Offered for    after     after
Name and Addresses        of September 30, 1999         Sale      Offering  Offering
------------------        ---------------------    -------------- -------- ----------
Jamie Riggs                          276(/1/)             276         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Skunk New Media                    2,767(/1/)           2,767         0        --
1437 Seventh Street,
 Suite 300
Santa Monica, CA 90401
David Walton                         922(/1/)             922         0        --
499 Albacete Drive
Vacaville, CA 95688
Ralph Whitmore                     1,844(/1/)           1,844         0        --
222 N. Sepulveda Blvd.,
 Suite 150
El Segundo, CA 90245
Curt Zirzow                          645(/1/)             645         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Roger B. Goff                      2,661                2,661         0        --
c/o Wayne R. Johnson,
 Esq.
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Wayne R. Johnson                   3,991                3,991         0        --
1800 Avenue of the
 Stars, Suite 1000
Los Angeles, CA 90067
Kent Kiefer                      645,188(/1/)(/4/)    645,188         0        --
c/o Nordic Entertainment
2512 Jefferson Street
Napa, CA 94558
Gene Hoffman, Sr.                118,000(/5/)         118,000         0        --
13232 Idlewild Road
Matthews, NC 28105
Concord Records                   63,735(/6/)          63,735         0        --
2450-A Stanwell Drive
Concord, CA 94520

Silicon Valley Bank               10,000(/7/)          10,000         0        --
3003 Tarman Drive
Santa Clara, CA 95054
------------------
 *  Represents less than 1%
(1) Represents shares issued in connection with an acquisition or purchase of
    assets.
(2) Represents shares issued upon the conversion of our Series B preferred
    stock.
(3) Represents 100,000 shares to be issued upon exercise of outstanding common
    stock purchase warrants and 204,800 shares issued upon the conversion of
    our Series B preferred stock.
(4) Approximately 526,829 of such shares are beneficially owned by partners of
    various partnerships for which Mr. Kiefer is the general partner. Mr.
    Kiefer disclaims beneficial ownership except to the extent of his pecuniary
    interest.
(5) Represents shares issued in connection with the acquisition by the Company
    of its predecessor corporation.
(6) Represents shares issued in connection with a share exchange transaction.
(7) Represents shares issuable upon the exercise of common stock purchase
    warrants.

Tor Braham, a selling stockholder, is also a member of our Board of Directors.

Ralph Peer, II, a member of our Board of Directors and a selling stockholder,
is affiliated with peermusic III, Ltd., also a selling stockholder.

Spencer Leyton and Jim Chapman, both selling stockholders, are currently
officers of EMusic.

                                       26
Plan of Distribution

We will not receive any proceeds from the sale of the common stock through this
prospectus. We will receive proceeds from the payment of the exercise price of
the common stock purchase warrants if any are exercised for cash. We have
agreed to pay the expenses of registration of the common stock offered hereby,
including legal and accounting fees, but excluding underwriter's discounts and
commissions, if any.

The offered shares may be sold from time to time at

  . negotiated prices,

  . fixed prices which may be changed,

  . market prices prevailing at the time of sale or

  . prices related to prevailing market prices.

The selling stockholders may effect such transactions

  . in privately negotiated sales in the over-the-counter market or any
    exchange on which the securities are listed,

  . by selling the shares to or through broker-dealers, including block
    trades in which brokers or dealers will attempt to sell the shares as
    agent but may position and resell the block as principal, and

  . in one or more underwritten offerings on a firm commitment or best effort
    basis.

Sales of selling stockholders' shares may also be made pursuant to Rule 144
under the Securities Act, where applicable.

To the extent required under the Securities Act, the following information will
be set forth in an accompanying prospectus supplement

  . the aggregate amount of selling shareholders' shares being offered and
    the terms of the offering,

  . the names of any such agents, brokers, dealers, transferees or
    underwriters and

  . any applicable fee or commission with respect to a particular offer.

Each selling stockholder will be responsible for paying compensation owed by it
to any underwriters, dealers, brokers or agents participating in the
distribution of its shares, regardless of whether such compensation is in the
form of underwriting discounts, concessions, commission or fees. This
compensation might be in excess of customary commissions. The aggregate
proceeds to a selling stockholder from the sale of its shares offered by this
prospectus will be the purchase price of such shares less any discounts or
commissions.

If selling stockholders pledge, hypothecate or grant a security interest in
some or all of the shares, then the pledgees, secured parties or persons to
whom such securities have been hypothecated shall, upon foreclosure in the
event of default, be deemed to be selling stockholders under this prospectus.
Similarly, if the selling stockholders transfer, pledge, donate or assign
shares to lenders or others, then each of such persons will be deemed to be a
selling stockholder for purposes of this prospectus. The number of shares
beneficially owned by the selling stockholders will decrease if and when a
selling stockholder transfers, pledges, donates or assigns shares. The plan of
distribution for selling stockholders' shares sold by this prospectus will
otherwise remain

                                       27
unchanged, except that the transferees, pledgees, donees or other successors
will be selling shareholders under this prospectus. There is, however, no
assurance that any selling stockholder will sell any or all of the shares
described in this prospectus, and any selling stockholder may transfer, devise
or gift such securities by other means not described in this prospectus.

A selling stockholder may also use this prospectus in the following ways:

  . to sell short, from time to time, shares of our common stock and, in such
    instances, this prospectus may be delivered in connection with such short
    sales and the shares offered hereby may be used to cover such short
    sales,

  . to enter into hedging transactions with broker-dealers, and the broker-
    dealers may engage in short sales of the shares in the course of holding
    the positions they assume with such selling stockholder, including,
    without limitation, in connection with distribution of the shares by such
    broker-dealers,

  . to enter into option or other transactions with broker-dealers that
    involve the delivery of the shares to the broker-dealers, who may then
    resell or otherwise transfer such shares, and

  . to loan or pledge the shares to a broker-dealer and the broker-dealer may
    sell the shares as loaned or upon a default may sell or otherwise
    transfer the pledge shares.

The selling stockholders, any underwriter, any broker-dealer or any agent that
participates with the selling stockholders in the distribution of the shares
may be deemed to be "underwriter" within the meaning of the Securities Act. As
a result thereof, any discounts, commissions or concessions received by them
and any profit on the resales of the shares purchased by them may be deemed to
be underwriting commissions under the Securities Act.

To comply with securities laws of certain states, if applicable, the shares
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, in certain states the shares may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available.

Pursuant to a registration rights agreement entered into in connection with our
Series B preferred stock financing, we have agreed to keep the registration
statement of which this prospectus is a part continuously effective until the
earlier of the date that all of the shares issued upon the conversion of the
Series B preferred stock or exercise of the warrants have been resold or until
three years from the effectiveness of the registration statement of which this
prospectus is a part. In this regard, we are required to supplement and/or
amend the registration statement of which this prospectus is a part if more
shares than are registered for resale hereby are issued upon exercise of the
warrants or to supplement or change the list of selling stockholders hereunder.

                                       28
Use Of Proceeds

We will not receive any of the proceeds from the sale of shares of common stock
by the selling stockholders. If any warrants are exercised by selling
stockholders for cash, we will receive proceeds equal to the exercise price of
the warrants. We will use the net proceeds received upon the exercise of any
warrants for general corporate purposes, including working capital.

                                Dividend Policy

We have never declared or paid any cash dividends on our common stock. We
anticipate that we will retain earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our common stock in the foreseeable future.

                                       29
Capitalization

The following table shows:

  . the capitalization of EMusic on June 30, 1999; and

  . the capitalization of EMusic on June 30, 1999, pro forma giving effect to
    our underwritten public offering and the use of net proceeds from such
    offering, the conversion of Series B preferred stock and the payment of
    the accrued dividends on Series B preferred stock of $569,000.
June 30, 1999
                                                            ------------------
                                                                        Pro
                                                             Actual    Forma
                                                            --------  --------
                                                             (in thousands,
                                                            except share and
                                                             per share data)
Redeemable convertible preferred stock:
  Series B, $0.001 par value; 120,000 shares authorized;
   117,570 shares issued and outstanding actual; no shares
   issued and outstanding, pro forma....................... $ 32,550  $    --
  Undesignated, $0.001 par value; 380,000 shares
   authorized; no shares issued and outstanding actual, pro
   forma...................................................      --
Stockholders' equity:
  Common stock, $0.001 par value; 200,000,000 shares
   authorized; 16,804,237 shares issued and outstanding,
   actual; and 33,831,237 shares issued and outstanding,
   pro forma...............................................       17        34
  Additional paid-in capital...............................   67,827   178,624
  Note receivable from employee............................      --
  Accumulated deficit......................................  (48,857)  (48,857)
                                                            --------  --------
   Total stockholders' equity..............................   18,987   129,801
                                                            --------  --------
    Total capitalization................................... $ 51,538  $129,801
                                                            ========  ========
------------------
The number of outstanding shares in the preceeding table excludes 1,752,800
shares of common stock issuable upon the exercise of outstanding warrants with
a weighted average exercise price of $13.37 per share, 6,297,750 shares of
common stock issuable upon the exercise of outstanding stock options with a
weighted average exercise price of $7.12 per share and 4,656,850 shares of
common stock reserved for future issuance under our stock option plans.

                                       30
Selected Financial Data

This section presents our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.

The statement of operations data for the year ended June 30, 1999 and periods
from our inception on January 8, 1998 to June 30, 1998 and 1999, and the
balance sheet data at June 30, 1998 and 1999, are derived from our audited
financial statements, which are included elsewhere in this prospectus.
Historical results are not necessarily indicative of future results. The pro
forma balance sheet data as of June 30, 1999 gives effect to our underwritten
public offering and the use of the net proceeds from such offering, the
conversion of our Series B preferred stock and the payment of accrued dividends
amounting to $569,000. We have paid no cash dividends on our common stock.
January 8, 1998               January 8, 1998
                                   (inception) to   Year ended   (inception) to
                                    June 30, 1998  June 30, 1999  June 30, 1999
                                   --------------- ------------- ---------------
                                     (in thousands, except share and per share
                                                       data)
Statement of Operation Data:
Revenues.........................    $       --     $        92    $        92
Cost of revenues.................            --              27             27
                                     -----------    -----------    -----------
Gross loss.......................            --              65             65
Operating expenses:
  Product development............            961         11,690         12,651
  Selling and marketing..........            --             556            556
  General and administrative.....            219          1,599          1,818
  Amortization of trade names....            --           1,682          1,682
                                     -----------    -----------    -----------
   Total operating expenses......          1,180         15,527         16,707
                                     -----------    -----------    -----------
Operating loss...................         (1,180)       (15,462)       (16,642)
Interest income..................            --             359            359
Interest expense.................            --             (37)           (37)
                                     -----------    -----------    -----------
Net loss.........................    $    (1,180)   $   (15,140)   $   (16,320)
                                     -----------    -----------    -----------
Accretion of Series A and B
 preferred to redemption value...            --            (247)          (247)
Beneficial conversion charge,
 Series A and B preferred stock..            --         (31,721)       (31,721)
Dividend on Series B preferred
 stock...........................            --            (569)          (569)
                                     -----------    -----------    -----------
Net loss applicable to common
 shares..........................    $    (1,180)   $   (47,677)   $   (48,857)
                                     ===========    ===========    ===========
Net loss per common share--basic
 and diluted.....................    $     (0.12)   $     (3.52)   $     (4.87)
                                     ===========    ===========    ===========
Weighted average common shares
 outstanding--basic and diluted..     10,234,055     13,563,606     10,027,231
                                     ===========    ===========    ===========
Pro forma net loss per common
 share...........................                   $     (0.95)   $     (1.39)
                                                    ===========    ===========
Weighted average common shares
 outstanding used in computing
 pro forma basic and diluted net
 loss per share..................                    16,731,464     12,299,002
                                                    ===========    ===========
June 30, 1999
                                     June 30, 1998 June 30, 1999   Pro Forma
                                     ------------- ------------- -------------
Balance Sheet Data:
Cash and cash equivalents...........     $510         $19,002      $ 97,265
Working capital.....................      396          16,593        94,856
Total assets........................      582          54,221       132,484
Redeemable convertible preferred
 stock..............................       --          32,550           --
Total stockholders' equity..........      447          18,987       129,801
31
Management Discussion and Analysis of
                 Financial Condition and Results of Operations

You should read this discussion together with the financial statements and
other financial information included in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in these forward-
looking statements.

Results of Operations

We were incorporated on January 8, 1998 and are a development stage company.
Through June 30, 1999, we incurred costs to organize and develop an Internet
website to conduct our business. We began selling musical recordings over the
Internet in July 1998 and began our first significant selling and marketing
initiatives in the quarter ended June 30, 1999. We may experience significant
fluctuations in operating results in future periods due to a variety of
factors, including:

  . the demand for downloadable music content and Internet advertising;

  . the addition or loss of advertisers;

  . the level of traffic on our Internet sites;

  . the amount and timing of capital expenditures and other costs relating to
    the expansion of our operations;

  . the introduction of new sites and services by us or our competitors;

  . seasonal trends in Internet use, purchases of downloadable music and
    advertising placements;

  . price competition or pricing changes in the industry;

  . technical difficulties or system downtime; and

  . general economic conditions and economic conditions specific to the
    Internet.

Because of our limited history, we believe that period-to-period comparisons of
our operations are not meaningful. Accordingly, we have not included
comparisons in the discussions set forth below.

                                       32
The following table shows for the periods presented the dollar amounts of
selected line items from our unaudited statements of operations. Because the
revenues are limited, expenses stated as a percentage of revenue are not
meaningful.
Quarter Ended
                          ----------------------------------------------------------
                           June 30,   Sept. 30,    Dec. 31,   March 31,    June 30,
                             1998        1998        1998        1999        1999
                          ----------  ----------  ----------  ----------  ----------
                             (in thousands, except share and per share data)
Revenues................  $      --   $       12  $        8  $       21  $       51
Cost of revenues........         --          --            4           9          14
                          ----------  ----------  ----------  ----------  ----------
Gross profit............         --           12           4          12          37
Operating expenses:
 Product development....         919         667         925       1,654       8,444
 Selling and marketing..         --          --          --          --          556
 General and
  administrative........         172         197         205         314         883
 Amortization of trade
  names.................         --          --          --          334       1,348
                          ----------  ----------  ----------  ----------  ----------
  Total operating
   expenses.............       1,091         864       1,130       2,302      11,231
                          ----------  ----------  ----------  ----------  ----------
Loss from operations....      (1,091)       (852)     (1,126)     (2,290)    (11,194)
Interest income, net....         --            3           1           1         317
                          ----------  ----------  ----------  ----------  ----------
Net loss................  $   (1,091) $     (849) $   (1,125) $   (2,289) $  (10,877)
Accretion of Series A
 preferred stock to
 redemption value.......         --          --          (25)        --          --
Beneficial conversion
 charge, Series A
 preferred stock........         --          --         (144)        --          --
Accretion of B preferred
 stock to redemption
 value..................         --          --          --           (8)       (214)
Beneficial conversion
 charge, Series B
 preferred stock........         --          --          --      (31,577)        --
Dividend on Series B
 preferred stock........         --          --          --          (40)       (529)
                          ----------  ----------  ----------  ----------  ----------
Net loss applicable to
 common stockholders....  $   (1,091) $     (849) $   (1,294) $  (33,914) $  (11,620)
                          ==========  ==========  ==========  ==========  ==========
Net loss per common
 share, basic and
 diluted................  $    (0.08) $    (0.06) $    (0.09) $    (2.31) $    (1.02)
                          ==========  ==========  ==========  ==========  ==========
Weighted average common
 shares outstanding,
 basic and diluted......  12,847,724  14,591,336  14,581,212  14,674,372  11,437,948
                          ==========  ==========  ==========  ==========  ==========
Net Revenues

We are a development stage company. We earned no revenue from inception through
June 30, 1998. For the year ended June 30, 1999, our revenues totaled $92,000.
Our revenues to date have been comprised of advertising and sales of physical
merchandise and downloadable music recordings. In the future, we expect sales
of merchandise to be limited.

Cost of Revenues

Cost of revenues for the year ended June 30, 1999 include the cost of
merchandise sold, credit card processing fees, royalties and other costs
related to downloadable music revenues. Costs related to physical merchandise
exceeded related revenues during this period. We believe that the sale of
physical merchandise will become an increasingly smaller portion of our future
sales. As sales of physical merchandise become a lower portion of our revenues,
we expect that our gross margins will improve.

                                       33
Product Development Expenses

We began our development efforts in February 1998. Product development expenses
principally consist of:

  . website development, including software engineering, audio production and
    graphic design;

  . telecommunications charges;

  . salaries, rent, depreciation and other expenses related to building our
    music distribution business; and

  . amortization of music content.

Product development expenses were $11,690,000 for the year ended June 30, 1999,
compared to $961,000 for the year ended June 30, 1998. They were $12,651,000
from inception through June 30, 1999. These changes reflect the increase in our
product development efforts, particularly in software engineering, graphic
design and development of the infrastructure required to deliver downloadable
music to customers.

Included in the amount above is an expense relating to the fair value of fully-
vested options to advisors to purchase up to 666,000 shares of common stock at
exercise prices ranging from $5.75 to $13.625 per share. We also issued
warrants to individuals operating in the music industry to purchase up to
1,338,300 common shares at exercise prices ranging from $7.10 to $13.625 per
share. All of these options and warrants were issued at the closing market
price on the date of issue. Using the Black Scholes model, we estimated the
total fair value of these options to be $2,379,000 and the warrants to be
$5,682,000. We charged the combined total of $8,061,000 to product development
expense in 1999. During the period January 8, 1998 (inception) to June 30, 1999
we recorded $752,000 in respect of the fair value of 280,000 options granted to
advisors.

Although we can not predict the timing or amounts, we expect to continue to
issue options and warrants to advisors in the future and to record significant
charges as a result.

Selling and Marketing Expenses

We incurred no significant selling and marketing costs from inception through
March 31, 1999. Commencing with the launch of our EMusic brand in the quarter
ended June 30, 1999, we began an extensive selling and marketing campaign. As a
result, selling and marketing expenses for the quarter and year ended June 30,
1999 were $556,000. We also expect to enter into various strategic alliances,
begin other targeted advertising and direct promotion campaigns, attend trade
shows and begin other activities to attract new customers. As a result, we
expect to incur significant sales and marketing expenses in future periods.

General and Administrative Expenses

General and administrative expenses consist primarily of executive management,
finance, legal, administrative and related overhead costs, such as rent,
insurance, and depreciation. We have incurred costs of $1,818,000 from
inception through June 30, 1999, related to general and administrative
expenses. Of these costs, $1,599,000 was incurred in the year ended June 30,
1999. In April 1999, we moved our headquarters to new facilities located in
Redwood City, California, resulting in an increase in rent and facilities
related expenses of approximately $200,000 per quarter. We expect general and
administrative expenses to continue to increase as we expand our staff and
incur additional costs related to the growth of our business.

Amortization of Trade Names

During 1999, we purchased the "EMusic" and "IUMA" trade names for a combined
total of $26,362,000 in cash and stock. We began amortizing these costs over
three-year lives, resulting in an amortization expense of $1,682,000 in the
year ended June 1999. Future amortization related to these trade names will be:
Year ending                                           Amortization
             June 30,                                               Expense
            -----------                                           ------------
2000                                                  $9,132,000
             2001                                                   9,132,000
             2002                                                   6,416,000
34
Liquidity and Capital Resources

We had a cash balance of $19,002,000 at June 30, 1999. For the period from
inception through June 30, 1999, net cash of $5,297,000 was used for operating
activities consisting of net losses of $16,320,000, substantially offset by:

  . non-cash expense of $3,131,000 associated with stock and stock options
    granted to advisors;

  . non-cash expense of $5,682,000 associated with warrants granted to
    advisors; and

  . non-cash expense of $1,682,000 associated with amortization of trade
    names.

Additionally, we purchased approximately $1,128,000 in capital equipment from
inception through June 30, 1999. We expect to incur negative cash flow from
operations for the foreseeable future, as we continue to develop our business.

In October 1998, we raised proceeds of approximately $500,000 through the sale
of 500 shares of Series A preferred stock and warrants to purchase 100,000
shares of the our common stock. The Series A shares were subsequently converted
into shares of Series B preferred stock.

During the period from December 1998 through March 1999, we received loans in
the form of convertible notes payable totaling $1,743,000. The notes, which
bore interest at 10% per annum and were to mature on March 31, 1999,
represented bridge loans in advance of the Series B preferred stock financing.
All outstanding principal and accrued interest due under these notes converted
into an aggregate of 7,109 shares of Series B preferred stock upon the closing
of the Series B financing.

On March 23, 1999, we completed a private placement of approximately 117,570
shares of Series B convertible preferred stock, which includes the conversion
of outstanding convertible notes and Series A shares into Series B shares.
Total proceeds, including proceeds from the convertible notes, were
$31,577,000, net of issuance costs of approximately $2,724,000, of which
approximately $100,000 remained in accrued liabilities at June 30, 1999. The
Series B preferred stock was convertible at anytime at the option of the
holders into 11,757,000 shares of our common stock. As a result of the
beneficial conversion feature given to the holders of the Series B preferred
stock, we recorded a charge, limited to the net proceeds received, in the
quarter ended March 31, 1999.

In April 1999, we entered into a five-year lease agreement for new office
space. Under the terms of the agreement, we will make minimum monthly lease
payments of approximately $67,000 for a period of 60 months beginning in April
1999. This monthly amount includes certain maintenance costs associated with
the leased space, and is subject to annual increases based on the Consumer
Price Index.

On September 24, 1999 we completed a public offering of 5,270,000 shares of
common stock resulting in proceeds of $79,682,000, net of issuance costs of
approximately $1,109,000, of which $1,069,000 remained in accrued liabilities
at September 30, 1999.

We believe that our existing capital resources will be sufficient to fund our
current level of operating activities, capital expenditures and other
obligations through the next 12 months. However, if during that period or
thereafter we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations liquidity and financial condition.

Year 2000 Readiness

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in 99, the common two-digit reference for 1999. As a result, as we
transition from the 20th century to the 21st century, computer systems and
software

                                       35
used by many companies and organizations in a wide variety of industries will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the year 2000 issue.

State of Readiness. Although we have not conducted a formal audit internally or
by any third party, based on our current assessment, we believe our internal
systems are year 2000 compliant. We are currently conducting additional reviews
of our internal management information and other computer systems to identify
any year 2000 problems, and have begun to communicate with the external vendors
that supply us with material software and information systems and with our
significant suppliers to determine their year 2000 readiness. We have not
completed our year 2000 investigation and overall compliance initiative.

Costs. To date, we have not incurred any material costs directly associated
with our year 2000 compliance efforts, except for compensation expenses
associated with our salaried employees who have devoted some of their time to
our year 2000 assessment. We do not expect the total cost of year 2000 problems
to be material to our business. However, during the months prior to the century
change, we will continue to evaluate new software and information systems
provided to us by third parties and any new infrastructure systems that we
acquire to determine whether they are year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could substantially harm our business. We
currently have no contingency plans to address the risks associated with
unremediated year 2000 problems.

Risks. We are not currently aware of any year 2000 readiness problems relating
to our internally-developed proprietary systems that would substantially harm
our business. We may discover year 2000 readiness problems in these systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into our material systems may need to be
revised or replaced, all of which could be time-consuming and expensive. Our
failure to fix or replace our internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could substantially harm our business.
Moreover, our failure to adequately address year 2000 readiness issues in our
internally developed proprietary software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, governmental
agencies, utility companies, Internet access companies, third-party service
providers and others outside of our control may not be year 2000 ready. The
failure by these entities to be year 2000 ready could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our customers, decrease the use of the Internet or prevent users from accessing
websites.

In particular, we rely on Card Service International for credit card processing
and AboveNet Communications for website hosting. We have not yet received any
written assurance from Card Service or AboveNet as to their readiness for year
2000 issues. Because we have not received written assurance, we have assumed
that Card Service and AboveNet may not be ready for the year 2000 before
January 1, 2000, and that their credit card processing and website hosting
capabilities could fail at that time. Based on this assumption, we believe such
failures would be the most reasonably likely worst case year 2000 scenarios. If
the Card Service services fail, we would seek to complete credit card
transaction manually using temporary staff. If Card Service were unable to
restore service promptly, we believe switching to another financial institution
for automated credit card processing would require approximately 15 days. If
the AboveNet services fail, we would not be able to operate our business until
AboveNet restored its service or until we were able to obtain another web
hosting arrangement. We believe that it would require approximately three days
to establish a new web hosting arrangement.

Contingency Plan. As discussed above, we are engaged in an ongoing year 2000
assessment and have not yet developed any contingency plans. The responses
received from third-party vendors and service providers will be taken into
account in determining the nature and extent of any contingency plans we adopt.

                                       36
Quantitative and Qualitative Disclosures About Market Risk

We have considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
We had no holdings of derivative financial or commodity instruments at June 30,
1999. However, we are exposed to financial market risks, including changes in
interest rates. All of our revenue and capital spending is transacted in U.S.
dollars. Our investments portfolio comprises amounts invested in short term
cash deposits and therefore we believe that the fair value of our investment
portfolio or related income would not be significantly impacted by increases or
decreases in interest rates due mainly to the short-term nature of our
investment portfolio. However, a sharp increase in interest rates could have a
material adverse effect on the fair value of our investment portfolio.
Conversely, sharp declines in interest rates could seriously harm interest
earnings of our investment portfolio.

The table below presents principal amounts by expected maturity (in U.S.
dollars) and related weighted average interest rates by year of maturity for
our investment portfolio.
1999      Thereafter    Total
                                            -----------  ---------- -----------
Cash.................................... $19,002,000     $ --    $19,002,000
     Weighted Average Interest Rate........        5.18%      --
   Total Portfolio......................... $19,002,000     $ --    $19,002,000
                                            ===========     ====    ===========
Recent Accounting Pronouncements

In March 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-1 or SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our
financial statements and related disclosures.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities."
This standard requires companies to expense the costs of start-up activities
and organization costs as incurred. In general, SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. We believe the adoption of SOP
98-5 will not have a material impact on our results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities.

                                       37
Business

Overview

EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer a compelling selection of music from which
our customers may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. The recordings available for download
at EMusic.com are provided through our relationships with a growing roster of
recording artists and independent record labels. We currently have exclusive,
multi-year, digital download licenses to over 300,000 titles, from over 85
record labels and over 1,300 recording artists, including selected titles from
such well known artists as The Offspring, They Might Be Giants, Iggy Pop, and
Ella Fitzgerald. We currently have over 20,000 titles available for download on
our EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 4,000 unsigned artists. We believe this represents one of the
largest digital music content archives currently licensed for distribution over
the Internet.

Our website enables these artists and labels to easily access a global customer
base, while providing them with an integrated means of distributing, promoting
and tracking the sales of their recorded music. Recordings are offered for sale
on EMusic.com in the "mp3" format, the most widely-recognized compression
standard for the download of musical recordings. We believe that our
combination of selection, convenience, varied content, improved distribution
and tracking capabilities creates a compelling music purchasing experience for
consumers as well as an attractive distribution alternative for artists and
independent record labels.

Industry Background

 Recorded Music Industry

According to a report by Market Tracking International, worldwide retail sales
in the music industry were $39.7 billion in 1997 and are expected to grow to
$46.9 billion by 2004. The music industry can be divided into two kinds of
record companies or "labels"-- the "major" record labels and the "independent"
record labels. According to Billboard, the five major record labels and their
affiliates currently account for approximately 79% of all recorded music sales
worldwide. These companies are BMG Entertainment, EMI Music, Sony Music
Entertainment, Universal Music Group and Warner Music Group. These companies
have substantial investments in the distribution infrastructure which supports
the manufacturing, distribution and retailing of records and compact discs and
through which the substantial majority of current recorded music sales take
place. Historically, the major record labels have been reluctant to participate
in any alternative distribution model which would restructure the current music
distribution hierarchy due to their investment in the current physical
distribution infrastructure and their relationship with the retail channel.

Thousands of independent record labels account for most of the remaining
recorded music sales. In contrast to the major record labels, independent
record labels generally do not have substantial existing CD and record
distribution investments and, as a result, physical distribution can be more
difficult and costly to arrange. Independent record labels also typically have
less capital available. Without the established distribution networks,
independent record labels often pay higher royalties to artists to secure
publishing and distribution rights.

 Development of the Downloadable Music Industry

The Internet has emerged as a global platform that allows millions of people to
share information, communicate and conduct business. International Data
Corporation estimates that the number of Internet users worldwide who make
purchases over the Internet will grow from approximately 31 million users in
1998 to more than 183 million in 2003, representing 36% of all Internet users.
The Internet presents a significant opportunity for the rapid and cost-
effective distribution, promotion and sale of recorded music. Downloading music
files is also facilitated by the increased use of high-speed connections to the
Internet, such as digital cable modems, ISDN and digital subscriber lines.
According to Forrester Research, the number of subscribers using cable, xDSL or
ISDN modems is projected to reach 22 million by 2003.

                                       38
Forrester estimates that total online music revenues in the United States are
expected to grow from $89.0 million in 1998 to $7.8 billion in 2003. Of this
amount, Forrester further estimates that $1.1 billion will represent sales of
downloadable music in 2003. According to Market Tracking International, music
sold through the Internet will account for 8% or approximately $4.0 billion of
the $46.9 billion worth of music expected to be sold worldwide in 2004.

In addition to the development of the Internet, we believe that other
technological advances will drive rapid growth of the market for downloadable
music, including the adoption of open standards-based Internet audio, the
introduction of new hardware and improved digital compression technology. Prior
to the introduction of new digital compression technologies, it was impractical
to transmit high quality audio using the Internet because recordings in digital
format can be very large. Advances in compression techniques, however, have
greatly reduced the size of digitally stored recordings. For example, if not
compressed, a three minute song can occupy more than thirty megabytes of
storage. In contrast, the mp3 open standard can compress music files to one-
tenth their original size while maintaining their audio integrity at near-CD
quality levels. Mp3 playback software is currently available on most operating
environments such as Microsoft Windows 95/98, Windows NT and MacOS, most major
versions of UNIX and other operating environments for Internet enabled devices.
In addition, free copies of mp3 playback software like RealNetworks'
RealJukebox and America Online's WinAmp are widely available on the Internet.
Forrester estimates that there are already over 50 million mp3-capable users
today.

In recent years, consumers have increasingly used their computers to play and
store music. Dataquest estimates that in 1998, 50% of U.S. households had
multimedia PCs with a sound card, speakers and either a CD-ROM or DVD-ROM
drive. Consumers can now play CDs on their computers with the ease and fidelity
formerly associated only with high-end stereo systems. Consumer electronics
companies and technology companies have capitalized on the growing popularity
of digital music by introducing portable music devices. The Rio, introduced in
November 1998 by Diamond Multimedia Systems has already sold over 300,000
units. Other manufacturers, including Creative Labs, Sensory Sciences,
RCA/Thomson, Samsung, Toshiba and LG Electronics have released, or have
announced plans to release, portable mp3 players. In addition, other
manufacturers have produced, or have announced plans to produce, other devices
for playing and storing mp3 recordings, including the Empeg Car (a removable
audio system capable of holding over 5,000 titles), Clarion's AutoPC (an auto
mp3 audio player) and Lydstrom's Songbank (a home stereo component that stores
and supports mp3 files).

 Our Opportunity

We believe that a number of inefficiencies in the current structure of the
music industry leave three underserved constituencies: consumers, independent
record labels and artists.

Consumers pay higher prices than necessary for music in order for record labels
to recoup the high costs associated with distribution of music on a physical
media through traditional channels. In addition, the current dependence on
physical media limits consumer convenience by forcing them to purchase music at
retail outlets or through catalogs or Internet sites that use mail-order.
Further, physical media is less portable and harder to customize than
downloadable music. Increasingly, we believe that these shortcomings will drive
consumers to the solution of purchasing downloadable music direct from the
Internet.

We believe consumer adoption of downloadable music creates an excellent
opportunity for independent record labels to supplement or replace their
physical distribution networks with electronic channels. Currently, most
independent record labels rely on the distribution infrastructure of major
record labels to distribute their offerings. They are subject to constraints of
these physical channels, such as higher distribution costs driving lower
margins, limited shelf space and subordination to the offerings of the major
record labels, as well as more limited promotional capabilities. While the
promise of an electronic distribution infrastructure is compelling, most
independent record labels lack the resources and expertise to create a viable
proprietary

                                       39
electronic distribution channel. We believe that these independent record
labels will seek to partner with established providers of downloadable music to
leverage their branding, site traffic and technology.

By supporting independent record labels, we believe downloadable music creates
a compelling solution for artists. In return for access to the powerful
distribution and promotion capabilities of the major record labels, major label
artists are generally required to lock themselves into long-term contracts that
can reduce their royalty rates, limit their creative control and limit their
ability to promote and sell their music online. Artists who work with an
independent record label tend to enjoy less restrictive contracts, but must
face risks associated with an independent record label's less effective
distribution and promotion capabilities. Additionally, physical channels
require costly promotional efforts, making it difficult for some artists to
promote their offerings to a large audience. We believe that the cost and
contractual constraints of the major record labels and the limitations of
independent record labels using traditional distribution channels will
encourage many artists, including some major artists, to offer their music in
downloadable format, either on their own or through an independent record label
with electronic distribution capability.

Creating an infrastructure to handle royalty payments for downloadable music is
difficult, and the lack of this infrastructure has slowed acceptance of the
downloadable music distribution channel by artists, labels and songwriters.
Rights in the music industry focus on two levels; the underlying song and the
sound recording. The purchase of one song usually requires at least two
separate royalty payments, one to the songwriter and one to the performer. We
believe that the ability to accurately track and make royalty payments to the
correct parties is crucial to the proliferation of the downloadable music
distribution channel as a viable alternative to their physical counterparts.

The EMusic Solution

We are a leading provider of downloadable music. Our website allows consumers
to quickly and conveniently purchase music online at a lower price than most
traditional music CDs. Our website also allows consumers to download and listen
to music immediately. We believe that the limitations associated with the
traditional music industry present us with an opportunity to redefine the music
distribution hierarchy and enable artists and independent labels to access
consumer markets at a level currently only available to the major labels, while
protecting the artists' financial interests and providing consumers with
numerous advantages in price, convenience and music information.

We believe that our solution provides the following benefits:

 Benefits to Consumers

Convenience. Through our website, consumers can download music at any time, 24
hours a day, seven days a week. Consumers can register to make purchases from
our site in a few easy steps, and can purchase titles on multiple visits to our
site without having to re-enter personal and credit card information. Consumers
can search our site using various easy to use indices and generally have the
flexibility to make purchases song by song or by album. When they make their
purchase, consumers can download and listen to their music immediately, or they
can wait until a more convenient time to download their purchased titles. Once
downloaded, digital technology allows the consumer to organize their purchased
titles into play lists. Play lists allow users to organize and play their
titles in any order they desire. Consumers can easily copy music to their
laptops or mp3 devices for greater portability, without having to carry
physical media with them. In addition, mp3 devices have no moving parts and, as
a result, do not skip and can be used in situations where traditional music CDs
are not optimal, such as running or mountain biking.

Lower Prices. Our ability to deliver music electronically eliminates the
extensive infrastructure required by the traditional music industry to
distribute physical media. This greatly reduces our costs and allows us to
offer our music at a significantly lower price to consumers.

                                       40
Compelling Music Selection. We currently have exclusive, multi-year, digital
download licenses to over 300,000 titles, from over 85 record labels and over
1,300 recording artists, including selected titles from such well known artists
as The Offspring, They Might Be Giants, Iggy Pop and Ella Fitzgerald. We
currently have over 20,000 titles available for download on our EMusic.com
website. In addition, IUMA offers our customers access to over 4,000 unsigned
artists. We believe this represents one of the largest digital music content
archives currently licensed for distribution over the Internet. Furthermore,
our downloadable music format allows us to carry hard-to-find, out-of-
production or international titles that are not commercially viable to produce
or stock in a physical format.

Varied Information and Content. Visitors to our website can access music news,
as well as links to concert information, sites for free mp3 software downloads
and other information on downloadable music. We provide our consumers with the
opportunity to sample titles before purchasing them. This enables them to
explore new music without cost and may result in them purchasing additional or
lesser-known titles. In addition, we are beginning to offer other services to
our customer base, including online concerts, organizing online chat sessions
with their favorite artists and "undiscovered" talent, and other initiatives
that we believe will offer a more direct connection between artists and
consumers.

 Benefits to Artists and Independent Labels

Powerful Distribution Capabilities. Our website provides a powerful
distribution solution to artists and independent labels by allowing them access
to a broad range of music listeners. Because we are not dependent on physical
media, we can provide artists and independent record labels with much lower
distribution costs, creating higher margins for labels and allowing independent
record labels to pay artists higher royalties and publishing rates. In
addition, our distribution capabilities can allow artists to directly
distribute their offerings to the public, such as the new They Might Be Giants
mp3-only album which was recently released exclusively on our website.

Greater Understanding of Fan Base. By tracking the behavior and purchasing
patterns of users on our website, we are able to provide artists and
independent labels a level of feedback that was previously unavailable through
traditional music distribution channels. Artists and independent labels may use
our data to evaluate which songs receive the most interest, the location on the
Internet where they receive the best reception and how their music compares to
other music in the same genre or in other genres. Artists and labels may use
this information to target specific regions, increase the focus of promotional
efforts and provide a means to better connect with their fan base.

Significant New Media Exposure. The Internet is emerging as an important
promotional tool for artists and independent labels. In addition to the global
distribution of their music, we are currently beginning initiatives that will
enable us to offer artists significant exposure to their fan bases. This
includes concerts broadcast online, chat rooms featuring artists and fans, and
other exposure on our website. This relatively inexpensive promotion on a
global basis is a significant benefit to artists and independent labels.

Protection of Financial Interests. We believe that by closely tracking royalty
payments, and pricing our music low enough to discourage piracy, we provide a
valuable, trusted solution to artists and labels that will enable us to become
the preferred distribution channel for downloadable music. We have established
a proprietary database of artists, songwriters and labels that allows us to
seamlessly track and generate royalty payments to the appropriate parties. We
are currently licensed by the Harry Fox Agency, ASCAP, BMI and SESAC;
organizations dedicated to protecting the rights of, and collecting royalties
due to, artists and songwriters.

EMusic Business Strategy

Our objective is to become the leading provider of compelling, downloadable
music directly to consumers over the Internet. Our strategy is to leverage our
first-to-market advantage together with our established music

                                       41
industry relationships as we take advantage of the growing market for the
digital distribution of music. The following are key elements of our strategy:

Continue to Acquire Compelling and Varied Content. We will continue to increase
the number of musical selections available on our website in order to build our
global consumer base and increase the number of online music purchases. We are
pursuing a "best of breed" content acquisition strategy, focused on acquiring
exclusive rights to title libraries from leading independent record labels in
each well known music genre. We intend to continue to aggressively pursue the
acquisition of music content from, among others, independent record labels,
owners and distributors of recording catalogs, and established recording
artists.

Create Strong Brand Awareness. Building brand awareness of EMusic is
fundamental to expanding our global Internet user base and our ability to
attract providers of music content. We promote our brand through traditional
media, event sponsorships, online media and other marketing activities as well
as leveraging strategic relationships within the industry. We intend to enhance
brand awareness of our website by providing original and proprietary content,
aggressively expanding our online and offline marketing activities, enabling
consumers to purchase music and related merchandise, and establishing strategic
and referral fee relationships whereby other websites engage us as an online
music retail source and content provider.

Leverage Strategic Partnerships and Industry Relationships. We believe that our
strategic relationships with distribution and technology companies and our
strong relationships with media and music companies will help attract users,
significantly increase brand awareness of our website and help us to add new
content. We will seek to develop additional relationships with online music
retailers, Internet portal site companies and content providers. In addition,
we plan to establish retail relationships with other online distributors to
share commissions for sales generated from such websites.

Continue to Enhance Our Website. We intend to devote substantial resources to
improving the quality of our consumer users' experience on our website.
Features we intend to incorporate into future versions of our website include:
chat-rooms, music hubs, additional music-related content, more advanced search
capabilities and dynamic site personalization. We believe that a user-friendly
website with compelling and varied content will be a key differentiator of the
EMusic brand.

Become a Trusted Distribution Channel to the Music Industry. We intend to
further develop our technology infrastructure to be readily scaleable to
support our rapidly growing sales of online music, including the calculation of
royalty payments, while maintaining the speed and reliability of our site.
Furthermore, we intend to maintain low pricing to provide an attractive legal
alternative to piracy among the general public. We believe that providing a
reliable, trusted technology and payment infrastructure will position us more
favorably with record labels and artists as the premiere provider of
downloadable music.

Continue to Promote Development of Downloadable Music Market. We believe that
the development of the downloadable music market will be enhanced by educating
consumers about the benefits of downloadable music and by improving the
processes through which consumers purchase music online and use downloadable
music. We currently are active members of the Digital Media Association and
Electronic Frontier Foundation, organizations dedicated to, among other
matters, improving the ease of consumer acquisition and use of downloadable
music. We intend to continue to participate in programs which promote customer
and market awareness about downloadable music as well as industry groups which
are setting open standards for delivery. We intend to refine and simplify the
downloadable music purchasing experience through the continued development of
our website, which is designed to encourage purchases and repeat visits,
demonstrating to record labels and artists the value of the downloadable music
market.

Continue to Develop and Enhance IUMA. We believe that Internet Underground
Music Archive which allows unsigned artists to post music and related
information for access by the general public online, represents a competitive
advantage. IUMA promotes the development of the online music community and
allows us to establish early relationships with potential future music content
providers. We intend to continue to expand and

                                       42
improve IUMA so as to make it easier for artists to participate and for
consumers to access, search and preview the content on the site.

Content Acquisition

We have acquired, and intend to continue to aggressively seek, download rights
to master recordings owned by independent record labels and other owners and
distributors of significant recording catalogs. These exclusive, multi-year
license agreements typically include all existing and future recordings created
during the term of the agreement. Initially, we have focused on partnering with
independent record labels and established recording artists. We are actively
identifying and targeting independent record labels spanning every well known
music genre, including, hip hop, rap, jazz, classical, country, blues, heavy
metal and alternative rock.

We have adopted a "best of breed" approach with respect to acquiring
downloadable music licenses. In many distinctly defined genres of music, we
have successfully acquired the exclusive multi-year, digital download rights to
the market sales leaders, and are aggressively continuing those efforts in each
new genre of music we add to our expanding online catalog. The following is a
sampling of labels with which we have signed exclusive content deals with genre
market leaders:

  . Epitaph Records, one of the largest selling and most distinct brand names
    in punk rock and alternative music, represents top Billboard artists such
    as The Offspring, Tom Waits and Pennywise.

  . King Biscuit Flower Hour, which is currently aired on 180 radio stations,
    is the longest running syndicated live concert radio show. Their catalog
    features live recordings from such artists as The Who, David Crosby, Iggy
    Pop, Elton John and Rod Stewart.

  . Crunch Music Ltd., one of the United Kingdom's premier sources for
    independent UK music in the mp3 format, whose content focuses on dance,
    techno and hip-hop.

  . Jetset Records and spinART Records, which are recognized in numerous
    college magazines as the dominant music providers in the college music
    niche.

  . DRG Records, which owns the largest Broadway show recording library,
    including numerous Grammy and Tony Award winners.

  . Rykodisc, one of the largest independent recording catalogs, which
    represents artists such as Elvis Costello, Frank Zappa and Robert Cray.

  . Quicksilver Records, which features live recordings from The Monterey
    Jazz Festival and the Palo Alto Jazz catalog.

  . Fiction Music, which features new and never before released tracks from
    The Cure.

We have also entered into contracts giving us the exclusive right to allow our
customers to download music from a variety of recognizable, brand name artists.
Included in the content catalog are recordings from Frank Zappa, Louis
Armstrong, Ella Fitzgerald, Judy Garland, Shirley Bassey, Kool Keith, Kansas,
Foghat and thousands of others.

In June 1999, we purchased the Jewel-Paula-Ronn catalog of master recordings
with such Blues and R&B artists as B.B. King, John Lee Hooker, Aretha Franklin
and Lightnin' Hopkins. When we acquire masters, we will seek to work with label
partners to exploit the physical distribution rights while also selling the
music in downloadable form on our website.

Strategic Partnerships

 Distribution and Marketing Partnerships

We are aggressively pursuing a variety of partnerships aimed at building a
channel of distribution for our downloadable music and music-related products
and services across the Internet. To accomplish this, we are

                                       43
developing strategic relationships and alliances with high-traffic Internet
sites to feature our brand and exclusive content and in some cases offer our
content for sale.

  . Examples of existing marketing and advertising relationships include
    Comedy Central, CNET, Centraal, E!Online, Listen.com, ZDNet and CMJ
    Online.

  . In May 1999, RealNetworks and EMusic announced that mp3 tracks would be
    featured in RealJukebox Music Showcase and that there would be links to
    our website highlighted in the RealGuide music download section.

  . In July 1999, we announced a new strategic partnership and equity
    investment with Crunch Music Ltd., one of the United Kingdom's premier
    sources for independent UK music in the mp3 format. Under the new
    relationship, the two companies will work together on marketing,
    promoting and co-branding their websites, label partners and artists on
    both sides of the Atlantic. Launched in March 1999, Crunch has quickly
    established itself as one of the leading sites in the UK for downloading
    music and plans to expand to the rest of Western Europe. The Crunch site
    hosts music from leading UK independent record labels including Dorado,
    Filter, Pussyfoot, Platipus, The End, Tummy Touch, Marine Parade, TCR and
    Ochre. Notable artists include Echo and The Bunnymen's Will Sargant, pka
    as Glide, U2 producer DJ Howie B, Jacknife Lee, Art of Trance and Union
    Jack.

In addition, we are also working with our label partners to offer them a
solution for selling our catalog directly from their websites. These label
partners can choose to sell only their own music, or the entire EMusic catalog
on EMusic created co-branded websites. Beginning in the fall of 1999, we plan
to launch a grass roots affiliate program designed to make it easy for any
website to become an affiliate and sell the EMusic catalog from their websites.

 Hardware/Software/OEM Partnerships

We are building relationships with various manufacturers of computers and
consumer electronics devices, as well as software and book publishers to create
additional visibility as a source for downloadable music. As part of our
overall customer acquisition strategy, we are typically providing sample
titles, promotional coupons and other content to improve our partners' offering
to the music consumer and to continue to promote the downloadable music market.

  . We have established relationships with digital audio device manufacturers
    such as Creative Labs (Nomad), Diamond Multimedia (Rio) and Sensory
    Sciences (Rave). In each partnership, we are featured on the outside of
    the box as the premier source for downloadable music and provide sample
    titles with the installation software. Beginning in mid-1999, we will
    begin a marketing program with Creative Labs whereby a discount coupon
    for our content will be supplied or shipped with each product supplied by
    Creative Labs, including the Nomad portable mp3 player, Soundblaster
    sound cards and Cambridge Soundworks speaker systems.

  . In January 1999, we announced a technology and marketing alliance with
    Adaptec aimed at promoting the growth of downloadable music sales in the
    popular mp3 format. Adaptec is the developer of the market-leading CD-
    recording software products, Easy CD Creator, DirectCD and Toast. Under
    the terms of the agreement, EMusic and Adaptec will jointly sell and
    promote each other's products and services. EMusic and Adaptec will focus
    on technology solutions that allow consumers to easily purchase and
    download mp3 music from the Internet and make their own music CDs.

  . As an additional way to attract customers, promote downloadable music and
    distribute our label partners' music effectively, we plan to introduce
    certain marketing initiatives and alliances with OEM computer suppliers,
    sound card, high fidelity speaker and computer peripheral suppliers and
    wireless product manufacturers. Some of these programs will target the
    "back to school" and holiday seasons.

                                       44
Industry Relationships

The reporting of information relating to the sales and performance of music is
a legally required and complex aspect of the worldwide music industry. To
facilitate our compliance with these requirements, we have focused on building
strong relationships and alliances with the following organizations:

  . In February 1999, we announced a licensing agreement with the Harry Fox
    Agency, or HFA, a wholly-owned licensing subsidiary of the National Music
    Publishers' Association. Under this agreement, HFA will grant us the
    first Digital Phonorecord Delivery License for delivering songs in the
    mp3 format. Accordingly, we will submit regular reports to HFA, account
    for each song purchased and pay the appropriate statutory payments to HFA
    for distribution to copyright owners. This agreement helps ensure that
    songwriters and music publishers will receive royalty payments for music
    distributed electronically.

  . We have entered into agreements with ASCAP, BMI and SESAC, the major
    rights reporting organizations in the United States. Under each of these
    agreements, we pay music performance royalties to the copyright holders
    or performers.

  . We have an agreement with peermusic, one of the world's largest private
    music publishing companies. Pursuant to this agreement, peermusic
    provides music publishing administration services to us. We will share
    peermusic income derived from music publishing rights acquired by us. We
    have also licensed certain recordings from the peermusic catalog.

IUMA--Internet Underground Music Archive

In June 1999, we completed the acquisition of IUMA. IUMA was founded in 1993
and pioneered the delivery of music on the Internet. The IUMA website
(iuma.com) features more than 4,000 artists on individual websites with unique
URLs (bandname.iuma.com). IUMA artist websites enable audio sampling in mp3 and
RealAudio formats, and offer options for the sales of physical products and
downloadable music. IUMA artist websites also feature other content, including
artist biographies, cover art, lyrics, photos and tour dates. IUMA has received
worldwide media attention, including articles in Rolling Stone, Newsweek, USA
Today and the Financial Times, as well as spots on MTV and CNN.

The following are key elements of our strategy with respect to IUMA:

Enhance Content and Build Traffic. We believe that by increasing IUMA's brand
recognition in the unsigned artist community through aggressive marketing
efforts, IUMA can become a premier Internet destination for unsigned artists
and fans of those artists.

Leverage the IUMA Platform to Develop New Artists. We believe that by creating
an efficient environment for unsigned artists and fans to interact, the IUMA
website will allow promising artists to surface more quickly. These artists
will then be exposed to our label partners. We believe that by facilitating the
process of signing unsigned artists, we will be promoting a new generation of
artists with a greater appreciation of the value of digital downloading of
music. Consequently, this will encourage the growth of the market as well as
position EMusic to obtain additional downloadable music rights.

Sales and Marketing

Our sales and marketing objective is to sell downloadable music and music-
related products and services through EMusic.com and other websites, build
brand awareness, attract new visitors and convert them to loyal customers. To
accomplish this objective, our marketing strategy includes an aggressive
advertising campaign, high visibility promotions and sponsorships, strategic
public relations, a focused interactive marketing campaign, distribution
partnerships and broad loyalty programs.

                                       45
The following are key elements to our sales and marketing strategy:

Enhance the EMusic.com Website. The focus of the website is to make the
consumer's experience finding, purchasing and downloading music as simple as
possible. We are regularly adding new elements designed to improve content,
navigability and the overall buying process.

Corporate Branding Campaign. We have recently launched an aggressive corporate
branding campaign. The campaign is initially targeted at early adopters, music
enthusiasts, record labels and the Internet business community. We have
designed a comprehensive media campaign, including network and cable TV ads,
billboards and print media. The campaign is also designed to attract new users
to the EMusic.com website and encourage trial download and purchases. Using the
tag line, "The Way To Download," the campaign features a mix of media vehicles
designed to reach our target audience.

Sponsorships and Promotions. We intend to sponsor highly-visible events
including concert tours, conferences and trade shows. We also plan to offer
creative promotions on EMusic.com and other websites designed to encourage
consumers to establish an account and purchase tracks.

Other elements of our sales and marketing initiatives include the introduction
of loyalty programs, such as rebates and incentives, online advertising to our
target demographic, genre specific marketing initiatives and the introduction
of co-marketing agreements with labels.

We also sell advertising on our website. This advertising is generally related
to our music offerings either by the product or music oriented nature of their
promotion. We currently use the Doubleclick Dart program to manage, track and
report our advertising sales to our advertising customers.

Operations

Our integrated systems, services and tools provide functionality in the
following areas:

Digital Asset Management. The continued development of a database management
system that indexes, retrieves and manipulates our growing multimedia content
is central to our digital asset management system. This scalable system allows
us to, among other things, track user preferences to enable effective marketing
programs and maintain an efficient royalty accounting program. We are in the
process of converting our system to Oracle database technology running on Sun
Microsystems' Enterprise equipment and Linux webservers.

Ordering and Fulfillment. Our website includes an ordering system that is
designed to be easy-to-use and that facilitates convenient purchasing of
downloadable music. In order to maintain high customer satisfaction, we place
an emphasis on website and download reliability. At any time during a visit to
our website, a customer is able to click a "buy now" button to immediately
place a song or album in their personal "shopping cart." The customer can then
continue to shop on our website and add additional items if desired. New
customers are prompted to register with us at the time of purchase and to enter
their email addresses and passwords. Customers then securely submit their
credit card information online to purchase the music. The customers' email
addresses and passwords are used to identify them in the future, eliminating
the need to resubmit credit card and billing information for subsequent orders.

Audio Encoding and Delivery. We use a variety of audio compression technologies
for our audio samples and downloads, tailoring them to specific applications.
We currently use the mp3 format for digital distribution of our downloadable
music. In light of current user patterns, we use RealNetworks' popular
RealAudio format for delivering real-time streaming 30-second audio previews
and feature-length web broadcasts. Mp3 is also used for real-time preview
samples. We are exploring other download formats and plan to adjust the format
of our content to stay current with industry trends and customer preferences.
We may need to obtain a third party license to use a newly adopted format.

Infrastructure. Our hardware and software are built upon a distributed
transaction processing model which allows software to be distributed among
multiple parallel servers. Web servers are deployed in large numbers on
inexpensive Intel platforms, managed by Cisco load-balancing technology, and
served by Solaris database

                                       46
servers. Our servers are currently based in an AboveNet Communications co-
location facility in San Jose, California. Our architecture allows us to scale
by either adding new servers or increasing the capacity of existing servers
while maintaining both user performance and cost per transaction. The system's
template technology and modular database design allows the addition or
replacement of server-based applications such as multimedia formats and
delivery systems, and search and retrieval engines. This architecture also
enables low-cost, rapid deployment of additional websites that integrate with
our existing sites.

Competition

The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors, including:

  . providers of online music content such as MP3.com, MusicMaker.com and
    various private companies;

  . providers of music news and community such as Launch Media, Inc.,
    Tunes.com and various private companies;

  . companies offering mp3 or other audio compression formats, such as those
    of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation
    and RealNetworks, Inc. Certain of these companies also offer customers
    the ability to download music from their websites;

  . online destination sites with greater resources than us such as online
    music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
    like America Online, Excite and Yahoo!; and

  . traditional music industry companies, including BMG Entertainment, a unit
    of Bertelsmann AG, EMI Music, a unit of EMI Group plc, Sony Music
    Entertainment, a unit of Sony Corporation, Warner Music Group, a unit of
    Time Warner Inc., and Universal Music Group, a unit of the Seagram
    Company Ltd. Certain of these companies have recently entered the online
    commercial community and are currently backing the SDMI security format.

Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.

We believe that we compete primarily on the bases of:

  . the quality and variety of our digital content, including access to known
    artists;

  . the price of the downloaded content;

  . the ease of use and consumer acceptance of the compression system;

  . the ability to effectively promote brand equity; and

  . the ease of use and speed of our website.

Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages to us, including:

  . longer operating histories;

                                       47
. significantly greater financial, technical and marketing resources;

  . greater brand name recognition;

  . larger existing customer bases; and

  . more popular content or artists.

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion, and sale of their products or services
than we can. Websites maintained by our existing and potential competitors may
be perceived by consumers, artists, talent management companies and other
music-related vendors or advertisers as being superior to ours. In addition, we
may not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisements. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.

Intellectual Property

Our success and ability to compete are substantially dependent on our
internally developed technology. We pursue the registration of our trademarks
in the United States and internationally. We currently hold a registered
trademark from the United States Patent & Trademark Office for "EMusic." While
we rely on trademark, service mark, copyright and trade secrets laws and
restrictions in the United States and other jurisdictions, together with
contractual restrictions, to protect our proprietary rights, such trademark,
service mark, copyright and trade secret protection may not be available in
every jurisdiction in which we distribute or make available our musical content
and technology through the Internet. Although we believe that the use of
material on our websites is protected under current provisions of copyright
law, legal rights to certain aspects of Internet content and commerce are not
clearly settled. We may not be able to maintain rights to information,
including webcasting of popular sound recordings, downloadable music samples,
and artist, entertainment and other information. The failure to be able to
offer such information would harm our business.

While we have generally entered into confidentiality or license agreements with
our employees, consultants, and corporate partners in order to limit access to
and distribution and disclosure of our proprietary information, we cannot
assure you that the steps we have taken will adequately protect or prevent
misappropriation of our proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States. Despite our efforts, unauthorized parties may
attempt to copy or otherwise obtain and use our products and technology.
Policing unauthorized use is difficult.

There are no pending lawsuits against us regarding infringement of any existing
patents or other intellectual property rights or any material notices that we
are infringing the intellectual property rights of others. However, there can
be no assurance that such infringement claims will not be asserted by third
parties in the future. Any such claims could result in litigation subjecting us
to significant liability for damages, or in invalidation of our proprietary
rights. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management attention and resources,
or require us to enter into royalty or licensing agreements.

Employees

As of September 30, 1999, we had 70 full-time employees, including 30 in
content acquisition and marketing, 23 in engineering and product development,
14 in finance and operations and 3 in other administrative functions. Our
future success depends, in significant part, upon the continued service of our
key technical, editorial, product development, and senior management personnel
and on our ability to attract and retain highly qualified technical and
management personnel, for whom competition is intense. None of our employees
are represented by a collective bargaining unit, and we have never experienced
a work stoppage. Our relations with our employees are good.

                                       48
Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising
out of our operations. We are not currently engaged in any legal proceedings
that, individually or in the aggregate, we expect would have a material adverse
effect on our business.

Facilities

Our corporate headquarters are located in approximately 20,000 square feet in
Redwood City, California occupied under a lease expiring in April 2004. We
believe that our existing facilities will be adequate for the foreseeable
future, and that suitable additional facilities will be available in the future
as needed on commercially reasonable terms.

                                       49
Management

Executive Officers, Directors and Key Employees

Our current executive officers and directors as well as certain members of our
senior management, and their ages and positions as of September 30, 1999 are as
follows:
Name                   Age                     Position(s)
----                   ---                     -----------
Robert H. Kohn *......  42 Chairman and Secretary
Gene Hoffman, Jr. *...  24 President, Chief Executive Officer, and Director
Joseph H. Howell *....  47 Executive Vice President and Chief Financial Officer
Peter M. Astiz *......  41 Executive Vice President and General Counsel
James R. Chapman *....  32 Executive Vice President, Corporate Strategy
Gary Culpepper........  50 Executive Vice President, Business Affairs
Spencer Leyton........  51 Senior Vice President, Sales
Brian Brinkerhoff.....  36 Vice President, Content Acquisition
Steve Grady...........  33 Vice President, Marketing
Peter Harter..........  31 Vice President, Global Public Policy and Standards
Marv Su...............  36 Vice President, Interactive Marketing
Brett A. Thomas.......  29 Vice President, Technology
Tor Braham............  42 Director
Ralph Peer, II........  55 Director
Ed Rosenblatt.........  64 Director
------------------
*Executive Officer

Robert H. Kohn, a co-founder of EMusic, has been Chairman of the Board and
Secretary since January 1998. From October 1996 to December 1997, Mr. Kohn was
Vice President, Business Development and General Counsel of Pretty Good
Privacy, Inc., a developer and marketer of Internet encryption and security
software. From March 1987 to September 1996, he was Senior Vice President of
Corporate Affairs, Secretary, and General Counsel of Borland International,
Inc., a software company. Mr. Kohn also served as chief legal counsel for
Ashton-Tate Corporation. Prior to Ashton-Tate, he was an attorney at the
Beverly Hills law offices of Rudin & Richman, an entertainment law firm whose
clients included Frank Sinatra, Liza Minelli, Cher and Warner Brothers Music.
He was also Associate Editor of the Entertainment Law Reporter, for which he
continues to serve as a member of the Advisory Board. A member of the
California Bar Association, Mr. Kohn co-authored Kohn On Music Licensing, a
treatise on music industry law for lawyers, music publishers, and songwriters.
He graduated from Loyola Law School, Los Angeles and received a Bachelor of
Arts degree in Business Administration from California State University at
Northridge. Mr. Kohn is also an adjunct professor of law at Monterey College of
Law, where he teaches Corporate Law.

Gene Hoffman, Jr., a co-founder of EMusic, has been President, Chief Executive
Officer, and a Director since January 1998. From November 1996 to December
1997, Mr. Hoffman was Director of Business Development and Director of
Interactive Marketing of Pretty Good Privacy. From October 1995 to November
1996, he was founder, director and Executive Vice President of PrivNet, Inc.,
an Internet privacy software company. From August 1993 to October 1995, Mr.
Hoffman was a student at the University of North Carolina, Chapel Hill.

Joseph H. Howell joined EMusic in April 1998 as Executive Vice President and
Chief Financial Officer. From January 1995 to April 1998, Mr. Howell was Senior
Vice President and Chief Financial Officer of Merix Corporation, a manufacturer
of multilayer printed circuit boards. From May 1988 to January 1995, Mr. Howell
served as Vice President and Controller of Borland. He also served as Borland's
acting Chief Financial Officer in 1994. Mr. Howell received a Bachelor of Arts
degree in Political Science from the University of Michigan and a Masters of
Science in Accounting from Eastern Michigan University.

                                       50
Peter M. Astiz joined EMusic in July 1999 as Executive Vice President and
General Counsel. From October 1996 to July 1999, Mr. Astiz was a partner of
Gray Cary Ware & Freidenrich LLP, a law firm. From July 1989 until October
1996, Mr. Astiz was a partner of the law firm of Baker & McKenzie. Mr. Astiz
received a Bachelor of Science degree in Business Administration from the
University of California in 1979 and a J.D. from the University of San
Francisco.

James R. Chapman joined EMusic in April 1999 as Executive Vice President,
Corporate Strategy. From April 1997 to April 1999, Mr. Chapman was Director of
the Global Private Capital Group at Warburg Dillon Read LLC (formerly UBS
Securities LLC), a major investment bank. Prior to joining UBS Securities, from
July 1995 to April 1997 Mr. Chapman was President and Founder of Ashley Capital
Management, a private equity and advisory firm focused on principal investments
in emerging growth companies located in the Pacific Northwest and Rocky
Mountain States. From September 1994 to July 1995, Mr. Chapman was a partner of
Jacobson Partners, a boutique merchant bank focused on middle market buyouts
and direct equity investments. From May 1990 to September 1994, Mr. Chapman
also worked as an associate in the technology and healthcare investment banking
groups of Oppenheimer & Co. and PaineWebber Incorporated. Mr. Chapman received
a Bachelor of Arts degree in Economics from Middlebury College.

Gary Culpepper joined EMusic in April 1998 as Executive Vice President,
Business Affairs. From May 1995 to March 1998, Mr. Culpepper was in private law
practice, specializing in music and entertainment transactions for recording
artists, producers, and songwriters. From April 1994 to April 1995, Mr.
Culpepper was Senior Counsel for Sony Pictures/Columbia/TriStar Home Video. Mr.
Culpepper previously served as Vice President, Business Affairs/Music for
Paramount Pictures Corporation, where he was responsible for the negotiation,
structuring, and administration of all music-related rights for all film and
soundtrack licensing agreements, budget planning, and financial analysis for
all music-related deal-making activities. Prior to that, Mr. Culpepper was
Director, Business Affairs for Capitol Records, Inc. He was also Senior Counsel
for Casablanca Records & Filmworks, Assistant General Counsel for ABC Records,
Inc., and Manager, A&R Administration for A&M Records. He is a member of the
California Bar Association, graduated cum laude from University of California,
Los Angeles, and received his law degree from Southwestern University.

Spencer Leyton joined EMusic in April 1999 as Vice President, Corporate
Development, M&A and was appointed Senior Vice President, Sales, in August
1999. From 1997 until April 1999, Mr. Leyton worked as an independent business
consultant. From 1995 through 1996, Mr. Leyton served as Vice President,
Mergers & Acquisitions for Sybase, Inc., a software company. From 1989 through
1994, Mr. Leyton served as Senior Vice President, Business Development for
Borland. Mr. Leyton received a Bachelors of Arts degree in geography from
California State University, Hayward.

Brian Brinkerhoff joined EMusic in November 1998 as Vice President, Content
Acquisition. From January 1995 to November 1998, Mr. Brinkerhoff was Head of
Creative Music Publishing at the Walt Disney Company, a multinational
entertainment company. From January 1992 to December 1994, he was a principal
of Vis-a-Vis Entertainment Company, a music publishing company. From May 1989
to December 1991, Mr. Brinkerhoff was Product Manager, Kodak Interactive
Systems, a developer and marketer of personal computer software. Mr.
Brinkerhoff received a Bachelors of Arts degree in Economics from the
University of California at Davis.

Steve Grady joined EMusic in June 1998 as Vice President, Corporate
Communications and was promoted to Vice President, Marketing in January 1999.
From July 1997 to May 1998, Mr. Grady was Director, Corporate Communications
for Borland, where he was responsible for public relations and investor
relations. From July 1996 to July 1997, he was Director, Marketing
Communications for Infoseek Corporation. From 1992 to June 1995, he served as
Director, Corporate Communications for Borland. Prior to Borland, Mr. Grady
served in a variety of corporate communications and marketing positions with
Ashton-Tate, TeraData, and Lotus Development. Mr. Grady received a Masters
degree in Communications Studies from Emerson College and a Bachelor of Arts
degree in Public Communications from Ashland University.

                                       51
Peter Harter joined EMusic in March 1999 as Vice President, Global Public
Policy and Standards. From November 1995 through March 1999, Mr. Harter was
Global Public Policy Counsel for Netscape Communications Corp. From June 1994
through November 1995, Mr. Harter was Executive Director and General Counsel
for the National Public Telecomputing Network (NPTN) in Cleveland, Ohio. Mr.
Harter was a founder of the Internet Law and Policy Forum (ILPF), an ad-hoc
body of over twenty companies from around the world focused on developing open
draft legal standards for a variety of Internet law and policy matters.
Mr. Harter received a Bachelor of Arts degree in Rhetoric & Government from
Lehigh University and a J.D. from Villanova Law School.

Marv Su joined EMusic as Vice President, Interactive Marketing in February
1999. From January 1998 through January 1999, Mr. Su served as director of
Small Business Internet Marketing and Community at Intuit, Inc., a software
company. From February 1996 through December 1997, Mr. Su served as Senior
Director of Advertising Operations at Infoseek. From August 1991 through
February 1996, Mr. Su held various management and marketing positions at Apple
Computer. He received a Bachelor of Science in Electrical Engineering from
Stanford University and a Master of Science in Management from the M.I.T. Sloan
School of Management.

Brett A. Thomas joined EMusic in April 1998 as Vice President, Technology. From
November 1996 to January 1998, Mr. Thomas was Principal Engineer for Pretty
Good Privacy, where he was responsible for the design and implementation of PGP
4.5 and 5.0 for Win32, PGP for Unix and its key server software. Previously,
Mr. Thomas was a senior engineer for NCR, where he developed their check
processing software. Prior to NCR, he wrote automated document processing
programs for MCI, internal management software for an insurance company, and
inventory control systems under contract to IBM. Since 1994, Mr. Thomas has
been involved in the Linux software community, maintaining websites operating
on Linux platform and making several modifications to the source code of the
core of the Linux operating system.

Tor Braham, a Director since May 1999, is Managing Director and Head of the
Technology Mergers & Acquisitions Department for Warburg Dillon Read. From
February 1984 until November 1997, Mr. Braham was a partner of the law firm of
Wilson Sonsini Goodrich & Rosati. Mr. Braham received a Bachelor of Science
degree in English from Columbia University and a J.D. from the New York
University Law School.

Ralph Peer, II, a Director since June 1998, is Chairman and Chief Executive
Officer of peermusic, a global network of music publishing and production
companies. In addition, Mr. Peer is Vice President and Director of the National
Music Publishers' Association (U.S.A.) and the Harry Fox Agency. He is a
lifetime director and past president of the Country Music Association and a
publisher/director of ASCAP. Mr. Peer is also a director of Fox Agency
International (Singapore) and a consultant to the board of the Mechanical
Copyright Protection Society, U.K. He is a past president and a current
director of the International Confederation of Music Publishers and in 1997 was
elected "President d'Honneur" of the Confederation.

Ed Rosenblatt, became a Director in 1999. From 1994 until his retirement in
1999, Mr. Rosenblatt served as Chairman of Geffen Records. Mr. Rosenblatt
helped found Geffen Records in 1980, and served as its President and Chief
Operating Officer until 1994. Prior to Geffen Records, Mr. Rosenblatt served as
Senior Vice President of sales and promotion for Warner Brothers Records. Mr.
Rosenblatt received a degree in Applied Arts from Brooklyn College.

Board of Directors

The terms of the board of directors are divided into three classes: Class I,
whose term will expire at the annual meeting of stockholders to be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Robert Kohn and Tor
Braham, the Class II directors are Gene Hoffman, Jr. and Ed Rosenblatt, and the
Class III director is Ralph Peer. At each annual meeting of stockholders, the
successors to directors whose term expires will be elected to serve a term of
three years. This classification of directors may have the effect of delaying
or preventing changes in our control. Our board of

                                       52
directors consists of five members. Our amended and restated bylaws provide
that the authorized number of directors may be changed by resolution of the
board of directors.

Executive officers are elected by the board of directors annually. There are no
family relationships among any of our directors, officers or key executives.

Board Committees

We have established an Audit Committee and a Compensation Committee. The Audit
Committee, which currently consists of Messrs. Braham, Peer and Rosenblatt,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The Compensation Committee,
which currently consists of Messrs. Braham, Peer and Rosenblatt, reviews and
recommends to the Board of Directors the compensation and benefits of our
executive officers, establishes and reviews general policies relating to our
compensation and benefits and administers our stock plans.

Director Compensation

Directors do not receive cash compensation for their services as directors or
members of committees of the board of directors, but are reimbursed for
reasonable expenses incurred in attending meetings of the board. In May 1998,
we granted Mr. Peer a fully-vested, nonqualified stock option to purchase
100,000 shares of our common stock at an exercise price of $5.00 per share. In
June 1999, we granted Messrs. Braham and Rosenblatt fully-vested, nonqualified
stock options to purchase 35,000 and 100,000 shares of our common stock,
respectively, at an exercise price of $13.63 per share.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of the board of directors.

Change of Control Arrangements and Employment Agreements

Pursuant to agreements with Messrs. Kohn and Hoffman, upon any acquisition of
EMusic or if their employment is terminated other than for cause, the
repurchase right in favor of EMusic which applies to certain unvested shares
owned by them will terminate. Pursuant to agreements with Messrs. Howell, Astiz
and Chapman, upon any acquisition of EMusic, all unvested stock options held by
each will become vested in full. Further each executive officer is entitled to
twelve months severance in the event their employment is terminated other than
for cause.

Executive Compensation

 Summary Compensation Information

The following table sets forth information concerning the compensation we paid
for services rendered during the fiscal years ended June 30, 1998 and 1999 by
our Chief Executive Officer:

                           Summary Compensation Table
Long Term
                                                               Compensation
                                   Annual Compensation            Awards
                                -------------------------- ---------------------
        Name and                              Other Annual Securities Underlying
   Principal Position      Year Salary  Bonus Compensation        Options
   ------------------      ---- ------- ----- ------------ ---------------------
Gene Hoffman, Jr., Presi-
 dent and Chief            1999 $82,291   --       --             250,000
 Executive Officer.......  1998  31,250   --       --                 --
53
The stock option granted to Mr. Hoffman vests ratably over a four year term. No
other executive officer received a total salary and bonus during fiscal year
1998 or 1999 in excess of $100,000.

 Option Grants

The following table provides information regarding stock option grants made
during fiscal 1999 to Mr. Hoffman. Options may terminate before their
expiration date upon the termination of optionee's status as an employee or
upon the optionee's death or disability.

                       Option Grants in Fiscal Year 1999
Potential Realizable
                                                                             Value at Assumed
                                                                              Annual Rates of
                         Number of     % of Total                               Stock Price
                         Securities      Options                             Appreciation for
                         Underlying    Granted to     Exercise                Option Term(2)
                          Options     Employees in    Price Per Expiration ---------------------
          Name            Granted   Fiscal 1999(a)(1)   Share      Date       5%         10%
          ----           ---------- ----------------- --------- ---------- --------- -----------
Gene Hoffman, Jr. ......  250,000          5.9%        $13.63    6/10/09   $ 941,429 $ 2,080,312
------------------
(1) Based on an aggregate of 4,216,000 shares subject to options granted in
    fiscal 1999.
(2) Potential realizable values are net of exercise price, but before taxes
    associated with exercise. Amounts represent hypothetical gains that could
    be achieved for the options if exercised at the end of the option term. The
    assumed 5% and 10% rates of stock price appreciation are provided in
    accordance with rules of the SEC and do not represent our estimate or
    projection of the future common stock price.

 Option Exercises and Year-End Holdings

There were no option exercises by Mr. Hoffman during fiscal 1999. The following
table sets forth information concerning unexercised options held as of June 30,
1999 by Mr. Hoffman.

   Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
Number of Securities     Value of Unexercised
                                       Underlying              In-the-Money
                                       Unexercised              Options at
                                   Options at 6/30/99             6/30/99
                                  -----------------------  ----------------------
               Name                Vested     Unvested      Vested    Unvested
               ----               ---------  ------------  ----------------------
Gene Hoffman, Jr.................        --       250,000       --  $   1,750,000
We have not awarded stock appreciation rights to any employee of ours and we do
not have any multi-year incentive plans.

Stock Plans

1998 Stock Option Plan. Our 1998 stock option plan was approved by the board of
directors in March 1998 and was subsequently approved by our stockholders. The
1998 option plan provides for the grant to employees of incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended, and for grants of nonstatutory stock options to employees, non-
employee directors and consultants. Because non-employee directors are eligible
to receive grants under the 1998 option plan, we have not adopted a separate
plan which provides for the formula grant of stock options to non-employee
directors.

The 1998 option plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1998 option plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:

 . the number of shares of common stock covered by the option;

                                       54
. when the option becomes exercisable;

 . the per share option exercise price, which in the case of incentive stock
   options must be at least equal to the fair market value of a share of
   common stock on the grant date (or 110% of such fair market value for
   incentive stock options granted to 10% shareholders), and, in the case of
   nonstatutory stock options, must be at least 85% of the fair market value
   of a share of common stock on the grant date; and

 . the duration of the option (which may not exceed ten years, or, with
   respect to incentive stock options granted to 10% shareholders, five
   years).

Generally, options granted under the 1998 option plan become exercisable as the
underlying shares vest. Options granted under the 1998 option plan generally
vest over four years, although the board or committee may specify a different
vesting schedule for a particular grant. Options granted under the 1998 option
plan are non-transferable other than by will or the laws of descent and
distribution.

In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1998 option plan. The outstanding options will terminate to the extent that
such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.

As of September 30, 1999, six million shares are reserved for issuance under
the 1998 option plan, 195,985 shares have been issued upon the exercise of
options, options to purchase of a total of 2,796,165 shares at a weighted
average exercise price of $3.95 per share were outstanding and 3,007,850 shares
were available for future option grants.

1998 Nonstatutory Stock Option Plan. Our 1998 nonstatutory stock option plan
was approved by the board of directors in December 1998. The nonstatutory plan
provides for the grant of nonstatutory stock options to employees (who are not
officers or directors) and consultants.

The nonstatutory plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the nonstatutory plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:

 . the number of shares of common stock covered by the option;

 . when the option becomes exercisable;

 . the per share option exercise price, which must be at least equal to 85% of
   the fair market value of a share of common stock on the grant date; and

 . the duration of the option (which may not exceed ten years).

Generally, options granted under the nonstatutory plan become exercisable as
the underlying shares vest. Options granted under the nonstatutory plan
generally vest over four years, although the board or committee may specify a
different vesting schedule for a particular grant. Options granted under the
nonstatutory plan are non-transferable other than by will or the laws of
descent and distribution.

In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the nonstatutory plan. The outstanding options will terminate to the extent
that such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.

As of September 30, 1999, five million shares are reserved for issuance under
the nonstatutory plan, 20,000 shares have been issued upon the exercise of
options, options to purchase of a total of 3,827,200 shares at a weighted
average exercise price of $10.85 per share were outstanding and 1,152,800
shares were available for future option grants.

                                       55
1999 Employee Stock Purchase Plan. A total of 250,000 shares of common stock
have been reserved for issuance under our 1999 employee stock purchase plan,
none of which have been issued as of the effective date of this offering. The
purchase plan, which is intended to qualify under section 423 of the Internal
Revenue Code, is administered by the board or by a committee thereof. Our
employees (including our officers and employee directors) and those of any of
our subsidiaries designated by the board for participation in the purchase plan
are eligible to participate in the purchase plan if they are customarily
employed for more than 20 hours per week and more than five months per year.
The purchase plan will be implemented by sequential offerings of approximately
six months duration. We have not yet determined when the first offering period
will commence. Shares will be purchased on the last day of each offering
period. The board may change the dates or duration of one or more offerings,
but no offering may exceed 27 months. The purchase plan permits eligible
employees to purchase common stock through payroll deductions at a price no
less than 85% of the lower of the fair market value of the common stock on (a)
the first day of the offering, or (b) the purchase date. Participants generally
may not purchase more than 1,000 shares in a six-month offering period or stock
having a value (measured at the beginning of the offering) greater than $25,000
in any calendar year. In the event of certain changes in control of EMusic, the
board may accelerate the purchase date of the then current offering period to a
date prior to the change in control unless the acquiring or successor
corporation assumes or replaces the purchase rights outstanding under the
purchase plan.

Limitation of Liability and Indemnification

Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. Our amended and restated certificate of
incorporation and bylaws provide that we shall indemnify our directors,
officers, employees and agents to the full extent permitted by Delaware General
Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law. In addition, we intend to enter
into separate indemnification agreements with our directors and officers which
would require us, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature). We also
intend to continue to maintain director and officer liability insurance, if
available on reasonable terms. These indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of our officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.

At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents in which indemnification is
being sought nor are we aware of any threatened litigation that may result in a
claim for indemnification by any of our directors, officers, employees or other
agents.

                                       56
Certain Transactions and Relationships

We were formed on January 8, 1998 as a Delaware corporation under the name
GoodNoise Corporation. In February 1998, we issued 3,100,000 shares of common
stock to each of Robert Kohn, our chairman of the board, and Gene Hoffman, Jr.,
our chief executive officer and a member of our board, and 900,000 shares of
common stock to Gary Culpepper, our executive vice president of business
affairs. All such shares were issued at $0.001 per share. Of the shares issued
to Mr. Culpepper, approximately 600,000 shares were subject to repurchase
pursuant to a restricted stock purchase agreement. As of July 15, 1999, the
restricted stock purchase agreement provides us with the right to repurchase
approximately 311,000 of these shares at a nominal price subject to ratable
vesting over three years ending February 2001.

In February 1998, we entered into an agreement to borrow $10,000 from Mr. Kohn
and $50,000 from peermusic, and entity controlled by Ralph Peer, II, one of our
directors, through the issuance of promissory notes bearing interest at 10.0%
per annum, due in December 1998. On May 1, 1998, these notes were converted
into an aggregate of 150,000 shares of common stock at $0.40 per share.

On May 11, 1998, GoodNoise Corporation, a Florida corporation, formerly
Atlantis Ventures Corporation entered into an Agreement and Plan of
Reorganization pursuant to which it acquired GoodNoise Corporation, a Delaware
corporation. In connection with such acquisition, the Florida corporation
exchanged 11,015,300 shares of its common stock for all outstanding stock of
the Delaware corporation and assumed all outstanding options of the Delaware
corporation for the purchase of an additional 2,032,550 shares of the Florida
corporation's common stock. Following such transaction, the directors and
officers of the Delaware corporation became the directors and officers of the
Florida corporation. Of the shares issued as part of such transaction,
8,555,000 shares were issued to such directors and officers. The shareholders
of the Florida corporation prior to the Merger had no affiliation with the
Delaware corporation and following the Merger ceased to be affiliates of the
Florida corporation.

On March 23, 1999, we sold shares of Series B preferred stock through Warburg
Dillon Read LLC, a placement agent. Mr. Tor Braham was a managing director of
Warburg Dillon Read LLC at this time. Mr. Braham subsequently became a member
of our board of directors on May 5, 1999. Of the 117,570 shares of Series B
preferred stock sold on March 23, 1999, we sold 614 shares to peermusic III,
Ltd. which is affiliated with Ralph Peer, II, a member of our board of
directors. We also sold 33,334 and 16,832 shares of our Series B preferred
stock to affiliates of Invesco Private Capital and VantagePoint Venture
Partners, respectively. As a result, Invesco Private Capital and VantagePoint
are deemed to own over five percent of our outstanding common stock.

Also in connection with the sale of our Series B preferred stock, on March 23,
1999 we entered into a shareholders' agreement with Mr. Kohn and Mr. Hoffman,
as well as the purchasers of the Series B preferred stock. This agreement
provides, among other things, that the shares of our common stock owned by
Messrs. Kohn and Hoffman be held subject to a right of repurchase in favor of
EMusic. As of September 30, 1999, 2,335,916 and 2,010,598 shares of our common
stock owned by Messrs. Kohn and Hoffman, respectively, were subject to this
right of repurchase. This amount decreases by 72,726 and 62,598 shares monthly,
respectively, until March of 2002, when the right of repurchase expires.

                                       57
Principal Stockholders

The following table sets forth the beneficial ownership of our voting stock,
including optioned shares, as of September 30, 1999 by:

 . each person or entity who is known by us to beneficially own more than 5%
   of our outstanding common stock;

 . each of our directors and executive officers; and

 . all executive officers and directors as a group.

Unless otherwise indicated, the address for each of the named individuals is
c/o EMusic.com Inc., 1991 Broadway, 2nd Floor, Redwood City, California 94063.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.

Applicable percentage ownership in the table is based on shares of common stock
outstanding as of September 30, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Shares of
common stock subject to options that are presently exercisable or exercisable
within sixty (60) days of September 30, 1999 are deemed outstanding for the
purpose of computing the percentage ownership of the person or entity holding
such options, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person or entity. To the extent that any
shares are issued upon exercise of options, warrants or other rights to acquire
our capital stock that are presently outstanding or granted in the future or
reserved for future issuance under our stock plans, there will be further
dilution to new public investors. The number of shares of common stock
beneficially owned includes shares which are being registered for resale
pursuant to this registration statement.
Number of
                                                          Shares of
                                                         Common Stock
                                                         Beneficially
Beneficial Owner                                            Owned     Percent(1)
----------------                                         ------------ ----------
5% Stockholders
Citiventure 96 Partnership, L.P.
 c/o Invesco Private Capital
 1166 Avenue of the Americas, Suite 2700
 New York, NY 10036 (2).................................  3,333,400       8.0%
VantagePoint Venture Partners
 1001 Bayhill Drive, Suite 140
 San Bruno, CA 94066 (3)................................  1,686,500       5.0%
Directors and Executive Officers
Robert H. Kohn..........................................  2,881,700       8.5%
Gene Hoffman, Jr. ......................................  3,202,000       9.4%
Joseph H. Howell (4)....................................    211,401       *
Peter M. Astiz..........................................    216,000       *
James R. Chapman (5)....................................     96,607       *
Tor Braham (6)..........................................     46,600       *
Ralph Peer, II (7)......................................    308,900       *
Ed Rosenblatt (8).......................................    100,000       *
Executive officers and directors as a group
 (8 persons) (9)........................................  7,063,208      20.5%
------------------
* Less than 1%

                                       58
(1) Percentage of beneficial ownership excludes up to 6,162,957 shares issuable
    upon exercise of outstanding stock options and warrants.
(2) Represents shares owned by Invesco related partnerships as follows: 58,300
    shares owned by Chancellor Private Capital Offshore Partners I, C.V.;
    624,000 shares owned by Chancellor Private Capital Offshore Partners II,
    L.P.; 379,000 shares owned by Chancellor Private Capital III, L.P.;
    1,627,100 shares owned by Citiventure 96 Partnership, L.P.; and 645,000
    shares owned by Drake & Co. for the account of Citiventure Private
    Participations III.
(3) Represents shares owned by VantagePoint related partnerships as follows:
    3,300 shares owned by Jason Strober; 1,111,100 shares owned by VantagePoint
    Communications Partners, L.P.; 16,600 shares owned by VantagePoint Venture
    Advisors, LLC; and 555,500 shares owned by VantagePoint Venture Partners
    1996.
(4) Includes 175,401 shares issuable upon exercise of outstanding options.
(5) Includes 50,007 shares issuable upon exercise of outstanding options.
(6) Includes 35,000 shares issuable upon exercise of outstanding options.
(7) Includes 100,000 shares issuable upon exercise of outstanding options.
    Includes 61,400 shares of common stock held by peermusic III, Ltd. which
    are issuable upon conversion of shares of Series B preferred stock. Mr.
    Peer disclaims beneficial ownership of the shares held by peermusic III,
    Ltd. except to the extent of his pecuniary interest therein.
(8) Represents shares issuable upon exercise of outstanding options.
(9) Includes 460,408 shares issuable upon exercise of outstanding options.

                                       59
Description of Capital Stock

Our authorized capital stock consists of 200,000,000 shares of common stock,
par value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share.

This summary does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of our amended and restated certificate of
incorporation where such rights are set forth in full, and the provisions of
applicable law.

Common Stock

As of September 30, 1999, there were approximately 34,000,000 shares of common
stock outstanding held of record by approximately 200 shareholders. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of common stock. Subject to
preferences applicable to any then outstanding preferred stock, holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor. In the event
of a liquidation, dissolution, or winding up of EMusic, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
our liabilities and the liquidation preference of any preferred stock. Holders
of common stock have no preemptive or subscription rights, and there are no
redemption or conversion rights with respect to such shares. All outstanding
shares of common stock are fully paid and non-assessable.

Preferred Stock

Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by our stockholders. The issuance of
preferred stock by our board of directors could adversely affect the rights of
holders of common stock.

The potential issuance of preferred stock may have the effect of delaying or
preventing a change in control of EMusic, may discourage bids for our common
stock at a premium over the market price of the common stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
common stock. Immediately after this offering there will be no shares of
preferred stock outstanding, and we have no current plans to issue shares of
preferred stock.

Warrants

As of September 30, 1999, we had outstanding warrants to purchase an aggregate
of approximately 2,712,000 shares of our common stock. Warrants for 100,000
shares expire in October 2003 and have an exercise price equal to $7.10. The
exercise price of these warrants is subject to certain adjustments upon future
issuances of common stock or rights to acquire common stock at a price less
than the applicable exercise price. The warrants for the remaining shares have
an average exercise price of $14.12 and expire by September 2001. The exercise
price of all warrants is subject to customary adjustments on stock splits,
stock dividends, any merger or acquisition involving EMusic and similar
transactions, such as to permit the holders of warrants to receive upon
exercise of the warrants that which they would have received had they exercised
the warrants immediately prior to any such transaction.

Registration Rights of Certain Holders

In connection with the sale of shares of our Series B preferred stock, on March
23, 1999 we entered into an agreement with the holders of shares of our Series
B preferred stock and the holder of a warrant to purchase 100,000 shares of our
common stock to register the shares of our common stock into which these
securities are

                                       60
convertible or exercisable. In accordance with this agreement, we have included
these shares as part of this registration statement. As of September 30, 1999,
we have not granted registration rights to any other holders of our securities.

Anti-Takeover, Limited Liability and Indemnification Provisions

Effect of Delaware Anti-takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law, as amended, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless:

  . prior to such date, the board of directors of the corporation approved
    either the business combination or the transaction that resulted in the
    stockholder becoming an interested stockholder;

  . upon consummation of the transaction that resulted in the stockholder
    becoming an interested stockholder, the interested stockholder owned at
    least 85% of the voting stock of the corporation outstanding at the time
    the transaction commenced, excluding for purposes of determining the
    number of shares outstanding those shares owned (1) by persons who are
    directors and also officers and (2) by employee stock plans in which
    employee participants do not have the right to determine confidentially
    whether shares held subject to the plan will be tendered in a tender or
    exchange offer; or

  . on or subsequent to such date, the business combination is approved by
    the board of directors and authorized at an annual or special meeting of
    stockholders, and not by written consent, by the affirmative vote of at
    least 66 2/3% of the outstanding voting stock that is not owned by the
    interested stockholder.

Section 203 defines business combinations to include:

  . any merger or consolidation involving the corporation and any interested
    stockholder;

  . any sale, transfer, pledge or other disposition of 10% or more of the
    assets of the corporation involving the interested stockholder;

  . any transaction that results in the issuance or transfer by the
    corporation of any stock of the corporation to the interested
    stockholder;

  . any transaction involving the corporation that has the effect of
    increasing the proportionate share of the stock of any class or series of
    the corporation beneficially owned by the interested stockholder; or

  . the receipt by the interested stockholder of the benefit of any loans,
    advances, guarantees, pledges or other financial benefits provided by or
    through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

Certificate of Incorporation and Bylaw Provisions. Our amended and restated
certificate of incorporation and amended and restated bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of EMusic or an unsolicited acquisition proposal that a stockholder
might consider favorable, including a proposal that might result in the payment
of a premium over the market price for the shares held by stockholders. These
provisions are summarized in the following paragraphs.

Classified Board of Directors. Our amended and restated certificate of
incorporation and amended and restated bylaws provide for our board to be
divided into three classes of directors serving staggered, three year terms.
The classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board of directors.

                                       61
Supermajority Voting. Our amended and restated certificate of incorporation
requires the approval of the holders of at least 66 2/3% of our combined voting
power to effect certain amendments to the amended and restated certificate of
incorporation with respect to the bylaws, directors, stockholder meetings and
indemnification, or to effect any business combination (as defined in Section
203) relating to us. Our amended and restated bylaws may be amended by either a
majority of the board of directors, or the holders of a majority of our voting
stock, provided that certain amendments approved by stockholders require the
approval of at least 66 2/3% of our combined voting power.

Authorized but Unissued or Undesignated Capital Stock. Our authorized capital
stock consists of 200,000,000 shares of common stock and 20,000,000 shares of
preferred stock. As of September 30, 1999, no preferred stock has been
designated. As of September 30, 1999, we had outstanding approximately
34,000,000 shares of common stock. The authorized but unissued (and in the case
of preferred stock, undesignated) stock may be issued by the board of directors
in one or more transactions. In this regard, our amended and restated
certificate of incorporation grants the board of directors broad power to
establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to the board of
director's authority described above could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of
EMusic. The board of directors does not currently intend to seek stockholder
approval prior to any issuance of preferred stock, unless otherwise required by
law or the rules of any exchange on which our securities are then traded.

Special Meetings of Stockholders. Our amended and restated bylaws provide that
special meetings of stockholders of EMusic may be called only by the board of
directors, or by the chairman of our board of directors or our president.

No Stockholder Action by Written Consent. Our amended and restated certificate
of incorporation and amended and restated bylaws provide that an action
required or permitted to be taken at any annual or special meeting of the
stockholders of EMusic may only be taken at a duly called annual or special
meeting of stockholders. This provision prevents stockholders from initiating
or effecting any action by written consent.

Notice Procedures. Our amended and restated bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders of EMusic, including proposals relating to the
nomination of candidates for election as directors, the removal of directors
and amendments to our amended and restated certificate of incorporation or
amended and restated bylaws. These procedures provide that notice of such
stockholder proposals must be timely given in writing to the secretary of
EMusic prior to the meeting. Generally, to be timely, notice must be received
by our secretary not less than 120 days prior to the meeting. The notice must
contain certain information specified in the amended and restated bylaws.

Limitation of Director Liability. Our amended and restated certificate of
incorporation limits the liability of our directors (in their capacity as
directors but not in their capacity as officers) to us or our stockholders to
the fullest extent permitted by Delaware law. Specifically, directors will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability:

  .  for any breach of the director's duty of loyalty to us or our
     stockholders;

  .  for acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

  .  under Section 174 of the Delaware General Corporation Law, which relates
     to unlawful payments of dividends or unlawful stock repurchases or
     redemptions; or

  .  for any transaction from which the director derived an improper personal
     benefit.

Indemnification Arrangements. Our amended and restated bylaws provide that our
directors and officers shall be indemnified and provide for the advancement to
them of expenses in connection with actual or threatened proceedings and claims
arising out of their status as such to the fullest extent permitted by the
Delaware

                                       62
General Corporation Law. We intend to enter into indemnification agreements
with each of our directors and executives officers that will provide them with
rights to indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.

Transfer Agent

The transfer agent and registrar for our common stock is Interwest Transfer
Company, Inc. Its address is 1981 East 4800 South, Suite 100, Salt Lake City,
Utah 84117, and its telephone number at this location is (801) 272-9294.

                                       63
Shares Eligible for Future Sale

As of September 30, 1999, we had outstanding approximately 34,000,000 shares of
common stock. Of these shares, 5,750,000 shares sold in our underwritten public
offering are freely tradable without restrictions or further registration under
the Securities Act unless such shares are purchased by "affiliates" of EMusic,
as that term is defined under Rule 144 under the Securities Act. Shares
purchased by affiliates are subject to certain limitations and restrictions as
described below.

Sales of Restricted Shares

The remaining approximately 28,081,000 shares of common stock held by existing
stockholders were issued and sold by us in reliance upon exemptions from the
registration requirements of the Securities Act. 13,112,367 of such shares will
be freely tradable upon the effectiveness of the registration statement to which
this prospectus is a part except to the extent that such shares are held by
affiliates of EMusic. Of the remaining shares, approximately 4,045,000 are
freely tradeable, approximately 10,729,000 shares are eligible for resale
pursuant to, and subject to the requirements of Rule 144. Approximately 448,000
shares will not be eligible for resale pursuant to Rule 144 until June 2000. As
of September 30, 1999, approximately 20,993,000 of our outstanding shares were
subject to "lock-up" agreements described below.

In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period, a number of shares that does not exceed the greater of:

 . 1% of the number of shares of common stock then outstanding, which will
   equal approximately 330,000 shares immediately after this offering; or

 . the average weekly trading volume of the common stock on the Nasdaq
   National Market during the four calendar weeks preceding the filing of a
   notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain other requirements regarding
the manner of sale, notice filing and the availability of current public
information about us.

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "Rule 144(k) shares" may be sold without restriction.

Options

As of September 30, 1999, there were a total of approximately 6,623,000 shares
of common stock subject to outstanding options under our stock option plans,
approximately 2,439,000 of which were vested. All shares issuable upon exercise
of options granted under our stock option plans as well as shares issuable
under our 1999 employee stock purchase plan are generally available for resale
in the public market.

Warrants

As of September 30, 1999, approximately 2,712,000 shares of our common stock
were subject to outstanding warrants. Of such shares, 110,000 are subject to
the registration statement to which this prospectus is a part. We have no
contractual obligation to file a registration statement with respect to the
other shares issuable upon exercise of the warrants. If we do not file such a
registration statement, such shares will begin to be eligible for resale under
Rule 144 if such warrants are exercised on a "net exercise" basis beginning in
June 2001.

                                       64
Lock-up Agreements

Our officers, directors and some other stockholders, holding in total
approximately 8,893,000 of our outstanding shares, have agreed with CIBC World
Markets Corp. not to sell or otherwise dispose of any of their shares for a
period of 90 days after September 24, 1999. Other stockholders holding in total
approximately 12,100,000 of our outstanding shares are subject to agreements
with us which require that they not, directly or indirectly, offer, sell,
pledge or otherwise dispose of any of their shares for the same 90-day period.
CIBC World Markets Corp., however, may in its sole discretion and at any time,
without notice, release all or any portion of the shares subject to these
agreements.

                          Price Range of Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol
"EMUS." Prices reported represent prices between dealers, do not include
markups, markdowns or commissions and do not necessarily represent actual
transactions. The market for our shares has been sporadic and at times very
limited.

The following table sets forth the high and low bid quotations for the common
stock for the fiscal years ending June 30, 1999 and 2000 and the portion of the
fiscal year ended June 30, 1998 for which our common stock was traded.
High   Low
                                                                  ------ ------
Fiscal Year Ended June 30, 1998
     Fourth Quarter (after May 12, 1998)......................... $ 6.50 $ 5.00
   Fiscal Year Ended June 30, 1999
     First Quarter............................................... $ 8.00 $ 5.88
     Second Quarter..............................................   7.50   5.00
     Third Quarter...............................................  23.88   7.00
     Fourth Quarter..............................................  29.13  13.63
   Fiscal Year Ending June 30, 2000
     First Quarter .............................................. $26.19 $11.56
     Second Quarter (through October 12, 1999)...................  17.13  15.00
On October 12, 1999, the last sale price reported on the Nasdaq National Market
for our common stock was $15.81 per share.

                 Changes in and Disagreements with Accountants
                     on Accounting and Financial Disclosure

In June 1998, EMusic retained PricewaterhouseCoopers LLP as EMusic's
independent accountants and dismissed Barry L. Friedman P.C., Atlantis Ventures
Corporation's former accountants. The decision to change independent
accountants was ratified by our board of directors. During the two most recent
fiscal years audited by Barry Friedman through June 29, 1998, there were no
disagreements with Barry Friedman regarding any matters with respect to
accounting principles or practices, financial statement disclosure or audit
scope or procedure, which disagreements, if not resolved to the satisfaction of
the former accountants, would have caused Barry Friedman to make reference to
the subject matter of the disagreement in connection with this report. The
former accountants reports for the years and periods audited by them are not
part of our financial statements included in this prospectus. Such reports did
not contain an adverse opinion or disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles. Prior to
retaining PricewaterhouseCoopers LLP, we did not consult with
PricewaterhouseCoopers LLP regarding the application of accounting principles
or the type of audit opinion that might be rendered on our financial
statements.

                                       65
Legal Matters

The validity of the shares of common stock offered hereby will be passed upon
for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of the
date of this prospectus, an investment partnership of Gray Cary Ware &
Freidenrich owned an aggregate of 8,300 shares of common stock. This investment
partnership is also a selling stockholder.

                                    Experts

The financial statements of EMusic.com Inc. as of June 30, 1999 and for the
period January 8, 1998 (inception) to June 30, 1998, the year ended June 30,
1999 and the period January 8, 1998 (inception) to June 30, 1999, the financial
statements of Creative Fulfillment, Inc. as of December 31, 1998 and for each
of the two years in the period ended December 31, 1998 and the financial
statements of Internet Underground Music Archive Inc. as of June 30, 1998 and
for each of the two years in the period ended June 30, 1998 included in this
prospectus, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in auditing and accounting.

                  Where You Can Find More Information About Us

We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock registered hereby.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in our registration statement and
the exhibits filed therewith. For further information with respect to EMusic
and the common stock, reference is made to the registration statement and the
exhibits filed therewith. Statements contained in this prospectus regarding the
contents of any agreement or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of such agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.

You may read and copy any document we file at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
Our SEC filings are also available to the public from the SEC's website at
http://www.sec.gov.

Since September 20, 1998, we have been subject to the information and periodic
reporting requirements of the Securities Exchange Act of 1934, and, in
accordance therewith, file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the SEC's website, which is described above.

                                       66
Index to Financial Statements

                  Index to Financial Statements- June 30, 1999
Page
                                                                          ----
Report of Independent Accountants........................................  F-2
Consolidated Balance Sheets..............................................  F-3
Consolidated Statements of Operations....................................  F-4
Consolidated Statement of Stockholders' Equity...........................  F-5
Consolidated Statements of Cash Flows....................................  F-6
Notes To Consolidated Financial Statements...............................  F-7

                    Index to Pro Forma Financial Statements
Page
                                                                          ----
Unaudited Pro Forma Condensed Combining Financial Information............ F-20
Unaudited Pro Forma Combining Condensed Statement of Operations Data..... F-21
Notes to the Unaudited Pro Forma Combining Condensed Statement of
 Operations Data......................................................... F-22

           Index to Financial Statements- Creative Fulfillment, Inc.
Page
                                                                          ----
Report of Independent Accountants........................................ F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statement of Stockholders' Equity (Deficit).............................. F-26
Statements of Cash Flows................................................. F-27
Notes To Financial Statements............................................ F-28

                      Index to Financial Statements- IUMA
Page
                                                                          ----
Report of Independent Accountants........................................ F-32
Balance Sheets........................................................... F-33
Statements of Operations................................................. F-34
Statement of Stockholders' Deficit....................................... F-35
Statements of Cash Flows................................................. F-36
Notes To Financial Statements............................................ F-37
F-1
Report of Independent Accountants

To the Board of Directors and Stockholders
EMusic.com Inc. (formerly GoodNoise Corporation)

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
EMusic.com Inc. (formerly GoodNoise Corporation) (a development stage
enterprise) and its subsidiaries at June 30, 1998 and 1999, and the results of
their operations and cash flows for the period January 8, 1998 (Inception) to
June 30, 1998, the year ended June 30, 1999 and the period January 8, 1998
(Inception) to June 30, 1999 in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 26, 1999

                                      F-2
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a Development Stage Enterprise)

                          CONSOLIDATED BALANCE SHEETS
Proforma
                                       June 30, 1998 June 30, 1999 June 30, 1999
                                       ------------- ------------- -------------
                                                                    (unaudited)
                                       (in thousands, except share and per share
                                                         data)
ASSETS
Current Assets:
  Cash................................    $   510      $ 19,002      $ 18,433
                                                                     --------
  Accounts receivable.................         --            51
  Prepaid expenses and other assets...         21           224
                                          -------      --------
    Total current assets..............        531        19,277
Property and equipment, net...........         34         1,076
Music content, net....................         --         8,758
Trade names, net......................         --        24,680
Other assets..........................         17           430
                                          -------      --------
    Total assets......................    $   582      $ 54,221
                                          =======      ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current Liabilities:
  Accounts payable....................    $    67      $    637
  Accrued liabilities.................         51         1,679
  Accrued compensation and related
   benefits...........................         17           368
                                          -------      --------
    Total current liabilities.........        135         2,684
                                          -------      --------
Commitments Note 8
Redeemable Convertible Preferred
 Series B Stock.......................         --        32,550            --
                                          -------      --------      --------
Stockholders' Equity:
  Preferred Stock, $0.001 par value;
   380,000 shares authorized; no
   shares issued and outstanding......         --            --            --
  Common Stock, $0.001 par value;
   200,000,000 shares authorized;
   14,715,300,16,804,237 and
   28,561,237 (unaudited) pro-forma
   shares issued and outstanding,
   respectively.......................         15            17            29
  Additional paid-in capital..........      1,618        67,827        99,796
  Note receivable from employee.......         (6)           --            --
  Deficit accumulated during the
   development stage..................     (1,180)      (48,857)      (48,857)
                                          -------      --------      --------
    Total stockholders' equity........        447        18,987      $ 50,968
                                          -------      --------      --------
      Total liabilities, redeemable
       convertible preferred stock and
       stockholders' equity...........    $   582      $ 54,221
                                          =======      ========
The accompanying notes are an integral part of these financial statements.

                                      F-3
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)
January 8, 1998 Year ended   January 8, 1998
                                   (Inception) to   June 30,    (Inception) to
                                    June 30, 1998     1999       June 30, 1999
                                   --------------- -----------  ---------------
Revenues.........................    $        --   $        92    $        92
Costs of revenues................             --            27             27
                                     -----------   -----------    -----------
Gross profit.....................             --            65             65
                                     -----------   -----------    -----------
Operating expenses:
  Product development............            961        11,690         12,651
  Selling and marketing..........             --           556            556
  General and administrative.....            219         1,599          1,818
  Amortization of trade names....             --         1,682          1,682
                                     -----------   -----------    -----------
    Total operating expenses.....          1,180        15,527         16,707
                                     -----------   -----------    -----------
Operating loss...................         (1,180)      (15,462)       (16,642)
Interest income..................             --           359            359
Interest expense.................             --           (37)           (37)
                                     -----------   -----------    -----------
Net loss.........................    $    (1,180)  $   (15,140)   $   (16,320)
                                     -----------   -----------    -----------
Accretion of Series A Preferred
 Stock to redemption value.......             --           (25)           (25)
Beneficial conversion charge,
 Series A Preferred Stock........             --          (144)          (144)
Accretion of Series B Preferred
 Stock to redemption value.......             --          (222)          (222)
Beneficial conversion charge,
 Series B Preferred Stock .......             --       (31,577)       (31,577)
Dividend on Series B Preferred
 Stock...........................             --          (569)          (569)
                                     -----------   -----------    -----------
Net loss applicable to common
 shares..........................    $    (1,180)  $   (47,677)   $   (48,857)
                                     ===========   ===========    ===========
Net loss per common share--basic
 and diluted.....................    $     (0.12)  $     (3.52)   $     (4.87)
                                     ===========   ===========    ===========
Weighted average common shares
 outstanding--basic and diluted..     10,234,055    13,563,606     10,027,231
                                     ===========   ===========    ===========
Pro forma net loss per common
 share--basic and diluted........                  $     (0.95)   $     (1.39)
                                                   ===========    ===========
Shares used in pro forma net loss
 per common share................                   16,731,464     12,299,002
                                                   ===========    ===========
The accompanying notes are an integral part of these financial statements.

                                      F-4
Emusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                (in thousands, except share and per share data)
Deficit
                                                            Note    Accumulated
                                                         Receivable During the      Total
                          Number of  Common  Additional     From    Development Stockholders'
                            Shares   Stock  Paid Capital  Employee     Stage       Equity
                          ---------- ------ ------------ ---------- ----------- -------------
Issuance of common stock
 at inception of the
 company................   8,378,000  $ 8     $    (8)      $--      $     --      $    --
Issuance of common stock
 on March 30, 1998......   1,191,800    1           9       (10)           --           --
Issuance of common stock
 in exchange for
 services on March 30,
 1998...................     672,600    1           5        --            --            6
Issuance of common stock
 in exchange for
 services on April 12,
 1998...................     271,400   --           7        --            --            7
Conversion of notes
 payable into common
 stock on May 1, 1998...     501,500    1         169        --            --          170
Payment on note
 receivable.............          --   --          --         4            --            4
Issuance of shares in
 connection with
 merger.................   3,700,000    4         684        --            --          688
Issuance of options to
 advisors...............          --   --         752        --            --          752
Net loss for the period
 from January 8, 1998
 (inception) through
 June 30, 1998..........          --   --          --        --        (1,180)      (1,180)
                          ----------  ---     -------       ---      --------      -------
BALANCE, June 30, 1998..  14,715,300   15       1,618        (6)       (1,180)         447
Issuance of common stock
 for acquisition of
 Creative Fulfillment,
 Inc....................     630,179    1       5,557        --            --        5,558
Issuance of common stock
 related to Nordic
 Entertainment
 transaction............     665,188    1      11,083        --            --       11,084
Issuance of common stock
 for acquisition of
 IUMA, Inc..............     448,000   --       7,771        --            --        7,771
Issuance of warrants in
 conjunction with the
 purchase of music
 content ...............          --   --       1,327        --            --        1,327
Issuance of warrants
 with Series A preferred
 stock..................          --   --         343        --            --          343
Accretion of Series A
 preferred stock to
 redemption value.......          --   --          --        --           (25)         (25)
Beneficial conversion
 charge, Series A
 preferred stock........          --   --         144        --          (144)          --
Accretion of Series B
 preferred stock to
 redemption value.......          --   --          --        --          (222)        (222)
Beneficial conversion
 charge, Series B
 preferred stock........          --   --      31,577        --       (31,577)          --
Dividends on Series B
 preferred stock........          --   --          --        --          (569)        (569)
Exercise of warrants to
 purchase common stock..     300,000   --         300        --            --          300
Exercise of options to
 purchase common stock..      45,400   --           1        --            --            1
Payment on note
 receivable from
 employee...............          --   --          --         6            --            6
Issuance of common stock
 for services...........         170   --          --        --            --
Issuance of options to
 advisors...............          --   --       2,379        --            --        2,379
Issuance of warrants for
 product development....          --   --       5,682        --            --        5,682
Issuance of common stock
 options in exchange for
 assets.................          --   --          45        --            --           45
Net loss for the year
 ended June 30, 1999....          --   --          --        --       (15,140)     (15,140)
                          ----------  ---     -------       ---      --------      -------
BALANCE, June 30, 1999..  16,804,237  $17     $67,827       $--      $(48,857)     $18,987
                          ==========  ===     =======       ===      ========      =======
The accompanying notes are an integral part of these financial statements.

                                      F-5
Emusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
January 8, 1998               January 8, 1998
                                  (Inception) to   Year ended   (Inception) to
                                   June 30, 1998  June 30, 1999  June 30, 1999
                                  --------------- ------------- ---------------
Cash flows from operating
 activities:
 Net loss........................     $(1,180)      $(15,140)      $(16,320)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities (net of
  the effects of acquisitions):
 Depreciation....................           3             93             96
 Amortization of trade names.....          --          1,682          1,682
 Loan interest converted into
  Series B preferred stock.......          --             34             34
 Amortization of music content...          --              2              2
 Issuance of common stock for
  services.......................          13             --             13
 Fair value of warrants issued
  for product development........          --          5,682          5,682
 Fair value of options issued to
  advisors.......................         752          2,379          3,131
 Changes in assets and
  liabilities:
  Accounts receivable............          --            (51)           (51)
  Prepaid expenses...............         (21)          (203)          (224)
  Other assets...................         (17)          (413)          (430)
  Accounts payable...............          67            149            216
  Accrued liabilities............          51            652            703
  Accrued payroll and related
   benefits......................          17            152            169
                                      -------       --------       --------
   Net cash used in operating
    activities...................        (315)        (4,982)        (5,297)
                                      -------       --------       --------
Cash flows from investing
 activities:
 Purchase of trade names.........          --           (468)          (468)
 Purchase of music content.......          --         (7,317)        (7,317)
 Purchase of property and
  equipment......................         (37)        (1,091)        (1,128)
                                      -------       --------       --------
   Net cash used in investing
    activities...................         (37)        (8,876)        (8,913)
Cash flows from financing
 activities:
 Proceeds from issuance of
  common stock...................          --            301            301
 Common stock issued in
  connection with merger.........         688             --            688
 Proceeds from issuance of
  Series A Preferred Stock and
  warrants.......................          --            500            500
 Proceeds from issuance of
  Series B Preferred Stock.......          --         29,800         29,800
 Proceeds from issuance of
  convertible notes..............         170          1,743          1,913
 Proceeds from repayment of
  employee notes receivable......           4              6             10
                                      -------       --------       --------
   Net cash provided by financing
    activities...................         862         32,350         33,212
                                      -------       --------       --------
Net increase in cash.............         510         18,492         19,002
Cash at beginning of period......          --            510             --
                                      -------       --------       --------
Cash at end of period............     $   510       $ 19,002       $ 19,002
                                      =======       ========       ========
Supplemental disclosure of non-
 cash financing activities:
 Conversion of notes payable into
  common stock...................     $   170       $     --       $    170
                                      =======       ========       ========
 Issuance of common stock for
  notes receivable...............          10             --             10
                                      =======       ========       ========
 Accretion of Series A preferred
  stock to redemption value......          --             25             25
                                      =======       ========       ========
 Beneficial conversion charge
  Series A preferred stock.......          --            144            144
                                      =======       ========       ========
 Conversion of notes payable and
  interest to Series B preferred
  stock..........................                      1,777          1,777
                                      =======       ========       ========
 Accretion of Series B preferred
  stock to redemption value......          --            222            222
                                      =======       ========       ========
 Beneficial conversion charge,
  Series B preferred stock.......          --         31,577         31,577
                                      =======       ========       ========
 Conversion of Series A preferred
  into series B preferred stock..          --            182            182
                                      =======       ========       ========
 Issuance of common stock options
  for assets.....................          --             44             44
                                      =======       ========       ========
 Issuance of warrants for music
  content........................          --          1,327          1,327
                                      =======       ========       ========
 Issuance of common stock in
  conjunction with acquisitions..          --         13,329         13,329
                                      =======       ========       ========
 Issuance of common stock to
  Nordic.........................          --         11,084         11,084
                                      =======       ========       ========
 Accrued dividend payable on
  Series B preferred stock.......          --            569            569
                                      =======       ========       ========
 Accrual for amount due on
  content licence................          --            116            116
                                      =======       ========       ========
The accompanying notes are an integral part of these financial statements.

                                      F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--The Company and Summary of Significant Accounting Policies

The Company, its Recapitalization and Liquidity

Emusic.com Inc (formerly GoodNoise Corporation), (the "Company"), a Delaware
corporation, was incorporated on January 8, 1998 to develop and market a
repertoire of musical recordings offered for sale to consumers by direct file
transfer, or "downloading," over the Internet. Since its inception, the Company
has been in the development stage devoting its efforts primarily to organizing
itself as a public reporting entity, recruiting management and technical staff,
developing its product, acquiring operating assets and raising capital. The
Company operates within one industry segment.

On May 11, 1998, Atlantis Ventures Corporation ("Atlantis"), a Florida
Corporation, acquired 9,335,000 shares of Common Stock of the Company
representing its then outstanding common stock in exchange for 11,015,300
shares of Atlantis. Prior to the merger, Atlantis had 3,700,000 shares issued
and outstanding. For accounting purposes, this transaction was presented as a
recapitalization of the Company. Atlantis was a publicly traded company that
was organized in August 1989 and had no revenues or operations prior to the
merger with the Company. As of May 11, 1998, Atlantis had cash balances of
$690,000, liabilities of $2,000 and an accumulated deficit of $2,000. Following
the recapitalization, Atlantis changed its name to GoodNoise Corporation.

On July 22, 1999, the Company changed its name to Emusic.com Inc. and
recapitalized as a Delaware corporation. The accompanying financial statements
reflect all share amounts after giving effect to these recapitalizations.

 Principles of Consolidation

These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries from the dates of acquisition. All significant
intercompany-balances and transactions have been eliminated.

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

 Risks and Uncertainties

The Company is in the development stage and is subject to various risks,
including the need for additional financing, dependence on key personnel and
the establishment of its operations as a viable business model. Furthermore,
the Company is subject to the risks and uncertainties associated with Internet
commerce. In addition the Company has made substantial investments in music
content for its website. To date the Company does not have sufficient operating
history to determine whether it can fully recover the cost of such investments.

 Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash,
accounts receivable and accounts payable, approximate their fair value due to
their relatively short maturities.

                                      F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Music Content and Advance Royalty Payments

In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to acquire music content are recorded as an asset. 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
subjected to an impairment reserve and charged to expense during the period in
which the loss becomes evident.

Advances to artists are recorded as an asset if past performance and current
popularity of the artist to which the advance is made provide a sound basis for
estimating the probable future recoupment of such advances.

 Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
two to three years, or the lease term of the respective assets.

 Revenue Recognition

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided the Company has no significant remaining obligations
and collection of the resulting receivable is probable.

Revenue from music downloads and physical merchandise are recognized in the
period in which the download or shipment occurs. Revenues from music downloads
and physical merchandise have not been significant to date.

 Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25 "Accounting for Stock Issued to
Employees," and complies with disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS
123.

 Income Taxes

Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

                                      F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Net Loss per Common Share

The weighted average shares used to compute basic net loss per share include
outstanding shares of common stock from the date of issuance, and exclude
shares of common stock subject to repurchase by the Company. The calculation of
diluted net loss per share for all periods presented excludes shares of common
stock issuable upon exercise of employee stock options and common stock
issuable upon the conversion of Series B preferred stock, as their effect would
be antidilutive. Therefore, the weighted average number of shares used in the
calculation of basic and dilutive net loss per common share is the same. The
following table summarizes the computation of basic and diluted net loss per
share (in thousands, except share and per share data):
January 8, 1998             January 8, 1998
                                     (Inception) to  Year ended   (Inception to
                                        June 30,      June, 30      June 30,
                                          1998          1999          1999
                                     --------------- ----------  ---------------
Net loss...........................    $   (1,180)   $  (15,140)   $  (16,320)
Accretion of Series A preferred
 stock to redemption value.........            --           (25)          (25)
Beneficial conversion charge Series
 A preferred stock.................            --          (144)         (144)
Accretion of Series B preferred
 stock to redemption value.........            --          (222)         (222)
Beneficial conversion charge,
 Series B preferred stock..........            --       (31,577)      (31,577)
Dividend on Series B preferred
 stock.............................            --          (569)         (569)
                                       ----------    ----------    ----------
Net loss applicable to common
 shares............................    $   (1,180)   $  (47,677)   $  (48,857)
                                       ----------    ----------    ----------
Net loss per common share - basic
 and diluted.......................    $    (0.12)   $    (3.52)   $    (4.87)
                                       ----------    ----------    ----------
Weighted average common shares
 outstanding - basic and diluted...    10,234,055    13,563,606    10,027,231
                                       ----------    ----------    ----------
Antidilutive securities:
 Options to purchase common stock..       908,297     2,183,091     1,710,861
 Common stock subject to
  repurchase.......................       508,056     1,596,492     1,257,344
 Series B Preferred Stock..........            --     3,167,858     2,271,771
 Warrants..........................            --        35,267        21,471
                                       ----------    ----------    ----------
                                        1,416,353     6,982,708     5,261,447
                                       ==========    ==========    ==========
In addition, the effects of warrants for the purchase of 1,508,000 and 100,000
shares of common stock exercisable at $13.63 and $18.00 respectively have been
excluded from the above calculation as their effect would be antidilutive for
purposes of the calculation of diluted earnings per share.

 Comprehensive Net Loss

There are no differences between the Company's net loss as reported for any of
the periods reported herein and the Company's comprehensive loss, as defined by
Statement of Financial Accounting Standards No. 130, for each of these
respective periods.

 Segment information

Effective for the year ended June 30, 1999, the Company has adopted the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
During all periods presented, the Company operated in a single business
segment, marketing a repertoire of musical recordings offered for sale to
consumers by direct file transfer, or "downloading," over the Internet. Through
June 30, 1999, foreign operations have not been significant.

 Cash and Cash Equivalents

The Company considers all highly liquid investments with an original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are deposited with two major

                                      F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

banks in the United States. Deposits in these banks may exceed the amount of
insurance provided on such deposits. The Company has not experienced any losses
on its deposits of its cash and cash equivalents.

 Reclassifications

Certain previously reported amounts have been reclassified to conform to the
current financial statement presentation format included herein.

 Recent Accounting Pronouncements

In March 1998 the Accounting Standards Executive Committee issued Statement of
Position No. 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which provides guidance on accounting
for the cost of computer software developed or obtained for internal use. SOP
98-1 is effective for the fiscal years beginning after December 15, 1998. The
Company is currently evaluating the impact of SOP 98-1 on its financial
statements and related disclosures.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company
believes the adoption of SOP 98-5 will not have a material impact on its
results of operations.

In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years beginning
after June 15, 2000. The Company does currently hold derivative instruments or
engage in hedging activities.

Note 2--Acquisitions

On January 31, 1999, the Company completed the acquisition of Creative
Fulfillment, Inc. ("Creative Fulfillment") for a combination of cash and stock,
at which time Creative Fulfillment became a wholly owned subsidiary of the
Company. The results of Creative Fulfillment have been included in the
Consolidated Results of Operations since the date of acquisition. The total
purchase price of $6,030,000 consisted of 630,179 shares of the Company's
common stock valued at $5,557,000, cash consideration of $313,000 net
liabilities assumed of $11,000 and other acquisition related expenses of
approximately $150,000. Substantially all of the purchase price has been
allocated, based on an independent appraisal to the domain name and trademark
"EMusic" which the Company is amortizing over its estimated life of three years
using the straight-line method.

On June 18, 1999, the Company completed the acquisition of Internet Underground
Music Archive, Inc. ("IUMA") for a combination of cash and stock, at which time
IUMA became a wholly owned subsidiary of the Company. The results of IUMA have
been included in the Consolidated Statement of Operations since the date of
acquisition. The total purchase price of $8,990,000 consisted of 448,000 shares
of the Company's common stock valued at $7,771,000, net liabilities assumed of
$1,119,000 and professional fees of approximately $100,000. The acquisition has
been accounted for using the purchase method of accounting and, based on a
preliminary review, the Company has allocated substantially all of the purchase
price to the tradename "IUMA". The Company has engaged an independent
valuations consultant to perform a review of the Company's preliminary
allocation of the purchase price. Any adjustments arising as a result of their
review will be recorded upon its completion. The Company is amortizing this
intangible asset over its estimated life of three years using the straight-line
method.

                                      F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Summarized below are the unaudited pro-forma results of the Company as though
Creative Fulfillment and IUMA had been acquired on January 8, 1998 (Inception).
Adjustments have been made for the estimated increases in amortization relating
to the intangible assets acquired and other immaterial pro forma adjustments
(in thousands except per share amounts).
January 8, 1998   Year
                                                      (Inception) to   ended
                                                         June 30,     June, 30
                                                           1998         1999
                                                      --------------- --------
Revenue..............................................     $   182     $    444
Net loss.............................................      (4,594)     (19,964)
Net loss per common share, basic and diluted.........     $ (0.41)    $  (3.66)
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma financial information presented
above is not necessarily indicative of either the results of operations that
would have occurred had the acquisition taken place on January 8, 1998
(Inception) or of future results of operations of the combined companies.

Note 3--Music Content, net

Music content and advanced royalty balances is comprised of payments for the
following as of June 30 (in thousands):
1998  1999
                                                                    ---- ------
Acquired sound recordings.......................................... $--  $2,343
Digital distribution rights........................................  --   6,417
                                                                    ---  ------
                                                                     --   8,760
Earned royalty.....................................................  --      (2)
                                                                    ---  ------
                                                                    $--  $8,758
                                                                    ===  ======
On June 30, 1999 the Company purchased certain music master sound recordings,
copyrights and trademarks, including the full physical and electronic download
distribution rights and other intangible assets related to certain record
labels. The total purchase price of $2,343,000 consisted of the fair value of
warrants to purchase 35,000 shares of the Company's common stock at a price of
$13.63 per share, estimated as $143,000 using the Black-Scholes model, and cash
of $2,200,000.

The Company has acquired rights to distribute other musical recordings over the
Internet for periods generally ranging from three to five years for a total
consideration of $6,356,000, consisting of advances paid on future royalties of
$5,117,000 in cash and warrants to purchase up to 229,500 shares of common
stock exercisable at prices ranging from $13.63 to $18.00 with a fair value,
estimated using the Black-Scholes model, of $1,184,000. In addition an amount
of $116,000 due under the terms of one contract remains outstanding at June 30,
1999. This amount is included in accrued liabilities.

                                      F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4--Property and Equipment

Property and equipment balances comprise the following as of June 30 (in
thousands):
1998   1999
                                                                   ----  ------
Computer equipment................................................ $27   $  495
Software..........................................................   5       81
Furniture and fixtures............................................   5      584
                                                                   ---   ------
                                                                    37    1,160
Less: Accumulated depreciation....................................  (3)     (84)
                                                                   ---   ------
                                                                   $34   $1,076
                                                                   ===   ======
Note 5--Trade Names

Trade names consist of the following as of June 30 (in thousands):
1998   1999
                                                                 ------ -------
EMusic trade and domain name:
  From Creative Fullfillment acquisition (see note 2)........... $   -- $ 6,018
  Purchased from Nordic Entertainment...........................     --  11,354
                                                                 ------ -------
  Total.........................................................     --  17,372
IUMA trade and domain name (see note 2).........................     --   8,990
Less: Accumulated amortization..................................     --  (1,682)
                                                                 ------ -------
                                                                 $   -- $24,680
                                                                 ====== =======
On April 27, 1999 the Company completed a purchase of the rights related to the
EMusic domain name and certain digital music distribution rights from Nordic
Entertainment Worldwide, Inc. and affiliated entities ("Nordic"). Nordic
continued as a stand-alone business following this transaction. The total
purchase price of $11,459,000 consisted of 665,188 shares of the Company's
common stock valued at $11,084,000, and cash consideration of $375,000. The
total purchase price was allocated to the EMusic domain name and music
distribution rights in the amounts of $11,354,000 and $205,000, respectively.
The trade name is being amortized over its estimated useful life of three years
on a straight-line basis.

Note 6--Notes Payable

During the period from December 1998 through March 1999, the Company obtained
loans in the form of convertible notes payable totaling $1,743,000. The notes,
which bore interest at 10% per annum and were due to mature on March 31, 1999,
represented bridge loans in advance of the Series B Preferred Stock financing.
All outstanding principal and accrued interest of $34,000 due under these notes
converted into 7,109 shares of Series B preferred stock upon the closing of the
sale of such stock on March 23, 1999 (See Note 7).

Note 7--Mandatorily Redeemable Convertible Preferred Stock

Mandatorily redeemable convertible preferred stock at June 30, 1999 was
comprised of the following:
Shares
                                          ----------------------   Liquidation
                                          Authorized Outstanding     Amount
                                          ---------- ----------- ---------------
Series B.................................  120,000     117,570   $35,271,000
Undesignated.............................  380,000          --            --
                                           -------     -------   -----------
                                           500,000     117,570   $35,271,000
                                           =======     =======   ===========
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Series A

On October 28, 1998, the Company raised proceeds of $500,000 through the sale
of 500 shares of Series A mandatorily redeemable preferred stock ("Series A ")
and warrants to purchase 100,000 shares of the Company's common stock to an
accredited investor. The Series A shares were convertible into shares of the
Company's common stock based on a conversion formula and contained certain
redemption provisions. The Company recorded a charge to deficit accumulated
during the development stage in the amount of $144,000 arising from the "in-
the-money" conversion feature attached to the Series A shares. In conjunction
with the Company's Series B financing discussed below, all 500 shares of Series
A were converted into 2,048 shares of Series B redeemable convertible preferred
stock.

The warrants, which remain outstanding at June 30, 1999, have a term of four
years with an initial exercise price of $7.10 per share and have been recorded
at fair value, estimated using the Black Scholes Model, as additional paid in
capital of $343,000.

 Series B

On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of 117,570 shares of Series B Convertible Preferred Stock ("Series B"), which
includes the conversion of outstanding convertible notes and Series A shares
into Series B Shares. Total proceeds, including proceeds from the convertible
notes were $31,577,000 net of issuance costs of approximately $2,724,000.

Under the terms of the Series B Purchase Agreement, each share of Series B is
convertible into 100 shares of the Company's common stock. The conversion
factor of 100 is determined by dividing the redemption value of $300 per Series
B by the conversion price per common share of $3.00.

During the year ended June 30, 1999, the Company has recorded a charge to
accumulated deficit for the "in-the-money" conversion feature attached to the
Series B stock. The amount of this charge is limited to the aggregate amount of
the net proceeds received of $31.6 million. The remaining difference between
the Series B carrying value and its redemption value, resulting from issuance
costs associated with the transaction, will be accreted through March 2004, the
earliest redemption date, using the effective interest rate method, as a charge
to deficit accumulated during the development stage.

The key terms of the Series B Preferred Stock Purchase Agreement include:

Voting Rights. The holders of the Series B are entitled to a number of votes
equal to the number of shares of Common Stock issuable upon conversion of the
Series B. The holders of the Series B are also entitled to elect one member of
the Board of Directors.

Liquidation Preference. Upon any liquidation, dissolution or winding up of the
affairs of the Company, the holder of each Series B Share shall be entitled to
be paid $300 per share (the "Series B Preference Amount"). If the assets of the
Company upon such event are insufficient to make such payment in full, then the
holders of Series B shares shall be entitled to pro rata distribution of all
the assets of the Company. After payment in full of the liquidation preference
to the holders of Series B shares, such holders are entitled to no further
distributions.

Dividends. The Series B stockholders are entitled to cumulative dividends at an
annual rate of 6% of the Series B Preference Amount. The payment of such
amounts may be deferred until the Company completes an initial underwritten
public offering, is sold, or until March 31, 2004. During the year ended June
30, 1999, the Company recorded a charge of approximately $569,000 to deficit
accumulated during the development stage, representing the accrued dividends on
the Series B.

                                      F-13
Conversion. Each Series B is initially convertible into 100 shares of Common
Stock at the election of the holder thereof. All Series B are subject to
conversion on the closing of an underwritten public offering with gross
proceeds of $25 million or more at a per share price of $6 or more or the
approval of the holders of 67% of the Series B.

Adjustments to Conversion Rate. The Conversion Rate is subject to proportional
adjustment upon any stock split, stock dividend or other similar change to the
capital stock of the Company and certain other adjustments upon future
issuances of common stock or rights to acquire Common Stock at a price less
than $3 per share.

Redemption. In the event of certain defaults by the Company or if the Series B
have not been converted after five years, the holders of the Series B have the
right to require the Company to redeem the Series B.

Registration Rights. The Company is obligated to promptly (and in any event
within 120 days of the first sale of the Series B) file a registration
statement with the Securities and Exchange Commission to cover the resale of
the Company's common stock issuable upon the conversion of the Series B shares.
The Company has received a waiver from the holders of Series B extending this
date until the earlier of 10 days after the closing of the Company's follow on
offering (see Note 10) or September 30, 1999.

Fundamental Changes. Certain corporate actions, as more fully defined in the
Company's restated articles of incorporation, require the approval of the
holders of 67% of the series B preferred shares.

Note 8--Commitments:

The Company leases office space under a non-cancelable operating lease that
expires in March 2004. The monthly rent amount includes certain maintenance
costs associated with the leased space, and is subject to annual increases
based on the Consumer Price Index. In addition, the Company has a lease for its
former offices under which it is committed to pay monthly rentals of $4,000
until March 31, 2001. The Company has entered into a subleasing agreement for
these premises for which it receives monthly payments of $4,000 until March 31,
2001. The Company is exposed to credit risk as the sublease does not relieve it
of it's obligation under the original lease.

Rent expense, net of sublease income, was $13,000, $231,000 and $244,000 for
the period from January 8, 1998 (Inception) to June 30, 1998, the year ended
June 30, 1999, and the period from January 8, 1998 (Inception) to June 30,
1999, respectively.

Future minimum lease payments under these leases, net of sublease income, are
as follows (in thousands):
Year Ending June 30,
2000.................................................................. $  804
   2001..................................................................    804
   2002..................................................................    804
   2003..................................................................    804
   2004..................................................................    603
                                                                          ------
                                                                          $3,819
                                                                          ======
Note 9--Stockholders' Equity

Restricted Common Stock

A total of 8,378,000 shares of common stock were issued to the Company's
founders, of which 1,062,000 were issued subject to a restricted stock purchase
agreement with one of the founders. The agreement provides the

                                      F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company with the right to repurchase 590,000 of these shares at $0.01 per share
subject to ratable vesting over three years. As of June 30, 1999, a total of
311,389 shares were subject to repurchase by the Company under this agreement.
In March 1999, pursuant to the stockholders' agreement entered into in
conjunction with the Series B preferred stock issuance (Note 6), an additional
4,897,650 shares of the common stock originally issued to the Company's two
other founders, were designated as newly restricted shares, subject to
repurchase by the Company at $0.01 per share. The shares vest ratably over
three years from the date of the Series B preferred stock issuance. As of June
30, 1999, 4,465,679 of these shares remained subject to repurchase by the
Company.

Stock Option Plans

On March 30, 1998, the Company adopted the 1998 Stock Option Plan and on
December 31, 1998 the Company adopted the 1998 Non-Statutory Stock Option Plan
(the "Plans") that provides for the granting of either incentive or
nonqualified stock options to purchase shares of the Company's common stock,
and for stock-based awards to officers, directors key employees of the Company
and to non-employee consultants. Options granted to employees generally vest
ratably over a period of three or four years, and expire ten years from the
date of grant. On June 30, 1999, there were 1,656,850 shares of common stock
available for grant under the Plans.

Option activity under the Plans is as follows:
Weighted
                                                                       Average
                                                                      Exercise
                                             Number of    Exercise    Price Per
                                              Shares        Price       Share
                                             ---------  ------------- ---------
Granted................................... 2,437,550  $ 0.01--$5.00  $ 0.85
                                             ---------
Balance at June 30, 1998.................... 2,437,550                 $ 0.85
  Granted................................... 4,216,000  $5.75--$13.63  $10.76
  Exercised.................................   (45,400) $        0.03  $ 0.03
  Canceled..................................  (310,400) $       11.00  $11.00
                                             ---------
Balance at June 30, 1999.................... 6,297,750                 $ 7.12
                                             =========
The following table summarizes information with respect to stock options
outstanding at June 30, 1999:
Options Outstanding              Options Exercisable
               --------------------------------------  ------------------------
                              Weighted-
                 Number        Average     Weighted-     Number      Weighted-
 Range of      Outstanding    Remaining     Average    Exercisable    Average
 Exercise      at June 30,   Contractual   Exercise    at June 30,   Exercise
 Prices           1999       Life Years      Price        1999         Price
 --------      -----------   -----------   ---------   -----------   ---------
$0.01-$0.03     1,951,750       8.79        $ 0.03        906,184      $0.03
 5.00-6.75      1,145,000       9.28          5.04        569,613       5.42
 7.19-8.38        625,000       9.54          7.47         85,000       7.26
 11.00-13.63    2,576,000       9.89         13.11        191,000      13.55
                ---------                               ---------
                6,297,750       9.40          7.12      1,751,797       3.60
                =========                               =========
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fair Value Disclosures

The aggregate fair value and weighted average fair value per share of options
granted to employees and advisors was $1,121,000 and $0.46, $21,786,000 and
$5.17, respectively, in the period January 8, 1998 (Inception) through June 30,
1998 and the year ended June 30, 1999 respectively. In the year ended June 30,
1999, $2,379,000 of the aggregate amount was recorded as Product Development
expense in the Consolidated Statement of Operations representing the estimated
fair value of 666,000 options issued to various Company advisors which vested
upon issuance. In the period January 8, 1998 (Inception) through June 30, 1998,
$752,000 of the aggregate amount, representing the estimated fair value 280,000
options issued to Company advisors, was recorded in the Consolidated Statement
of Operations.

The fair value of each option grant is estimated on the date of grant using the
Black Scholes Option Pricing Model with the following assumptions:
January 8, 1998  Year
                                                           (Inception)    Ended
                                                             through      June
                                                            June 30,       30,
                                                              1998        1999
                                                         --------------- -------
Expected volatility..................................         55%         46%
   Risk-free interest...................................       5.73%        6.0%
   Expected life........................................     5 years     5 years
   Expected dividend yield..............................          0%          0%
Pro forma stock compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the fair value at the grant date for the awards in 1998 and 1999 consistent
with the provisions of SFAS No. 123, the Company's net loss for 1998 and 1999,
respectively, would have been as follows (in thousands except per share data):
January 8, 1998
                                                        (Inception)     Year
                                                          through      Ended
                                                         June 30,     June 30,
                                                           1998         1999
                                                      --------------- --------
Net loss applicable to common shares - as report-
    ed..............................................      $(1,180)    $(47,677)
   Net loss applicable to common shares - pro
    forma...........................................      $(1,458)    $(49,009)
   Net loss per common share basic and diluted - as
    reported........................................      $ (0.12)    $  (3.52)
   Net loss per common share basic and diluted - pro
    forma...........................................      $ (0.14)    $  (3.61)
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.

Warrants

Warrants to purchase 300,000 shares of the Company's common stock were
exercised on August 10, 1998 for cash proceeds of $300,000. Warrants to
purchase 100,000 shares of the Company's common stock at $7.31 per share, which
expire on October 28, 2002, remain outstanding at June 30, 1999.

In conjunction with the acquisition of music content on June 30, 1999 (Note 2),
the Company issued warrants to purchase 35,000 shares of the Company's common
stock at a price of $13.63 per share. The warrants, which

                                      F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

expire on June 10, 2001, were valued at $143,000 and were recorded as an
addition to paid in capital. These warrants remain outstanding at June 30,
1999.

During the year ended June 30, 1999, the Company issued warrants for the
purchase of 1,388,300 common shares in exchange for product development
activities by various individuals operating in the music industry. The warrants
were issued with exercise prices ranging from $7.10 to $13.625 and have two-
year terms. The fair value of these warrants, estimated using the Black-Scholes
Model, of $5,682,000 has been recorded as a charge to Product Development
expense in the Consolidated Statement of Operations. All these warrants remain
outstanding as of June 30, 1999.

In connection with agreements to license digitally downloadable rights from
various record labels the Company issued warrants to purchase up to 229,500
shares of common stock at exercise prices ranging between $13.63 and $18.00.
These warrants remain outstanding as of June 30, 1999.

Note 10--Income Taxes

At June 30, 1999, the Company had approximately $10 million of federal and $10
million state Net Operating Loss carryforwards available to offset future
taxable income which will expire in varying amounts beginning in 2018 and 2006,
respectively. Under the Tax Reform Act of 1986, the amounts of and benefits
from Net Operating Loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of Net Operating
Losses that the company may utilize in any one year include, but are not
limited to, a cumulative change in ownership.

Deferred Taxes are composed of the following (in thousands):
June 30
                                                                   ------------
                                                                   1998   1999
                                                                   ----  ------
Deferred tax assets:
       Net Operating Losses....................................... $400  $4,120
       Accruals and reserves......................................   --      80
       Depreciation and amortization..............................   --     200
                                                                   ----  ------
                                                                    400   4,400
       Less Valuation Allowance:                                   (398)     --
                                                                   ----  ------
                                                                      2   4,400
     Deferred tax liabilities:
       Non-deductible intangible assets...........................   --  (4,400)
       Depreciation and amortization..............................   (2)     --
                                                                   ----  ------
       Total asset/(liability).................................... $ --  $   --
                                                                   ====  ======
The acquisitions of IUMA and Creative Fulfillment were structured as tax-free
exchanges of stock, therefore, the differences between the recognized fair
values of acquired net assets and their historical tax bases are not deductible
for tax purposes. A deferred tax liability has been recognized for the
differences between assigned fair values of intangibles for book purposes and
the tax bases of such assets. The Company has recognized deferred tax assets to
the extent of deferred tax liabilities.

                                      F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 11--Subsequent Events

 Investment in Crunch Music Ltd

On July 6, 1999 the Company invested approximately $833,000 in Crunch Music
Ltd. ("Crunch"), in exchange for a 19.5% ownership interest and a seat on the
Crunch board of directors. Crunch is a company incorporated in England and
Wales which operates a website selling downloadable music in the mp3 format
from independent British dance labels. Under a separate distribution agreement,
the Company and Crunch agreed to distribute each others musical content in
their respective territories.

 Approval of Name Change

On July 16, 1999, the stockholders approved a proposal to amend the Company's
Restated Articles of Incorporation in order to change its name from GoodNoise
Corporation to EMusic.com Inc. and to recapitalize as a Delaware corporation.
In connection with these changes, the par value of the Company's common shares
changed from $0.01 per share to $0.001 per share. The accompanying financial
statements reflect all share amounts after giving effect to this
recapitalization.

 Approval of Increase in Number of Shares for Stock Option Plans.

On July 16, 1999, the stockholders approved an increase in the number of shares
available for issuance under the Plans from 8 million to 11 million shares.

 Approval of Employee Stock Purchase Plan

On July 16, 1999 the stockholders approved the 1999 Stock Purchase Plan Under
the terms of the plan, eligible employees may purchase shares of common stock
at a discount through payroll deductions. A total of 250,000 shares of common
stock were reserved for issuance under the plan.

 Increase in authorized capital

On July 16, 1999 the stockholders approved an increase in the authorized number
of preferred shares to 20,000,000.

 Intention to Sell Additional Shares

On July 23, 1999 the Company filed a registration statement with the Securities
and Exchange Commission relating to an offering of up to 5.5 million shares of
common stock. Of the shares offered, it is expected that 5.0 million shares
will be sold by the Company and that up to 500,000 shares will be sold by
certain selling stockholders.

                                      F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12--Unaudited Pro Forma Net Loss Per Common Share And Pro Forma
Stockholders Deficit

Pro forma basic net loss per common share has been computed as described in
Note 1 and also gives effect to common equivalent shares from the conversion of
the Series B preferred stock, which will occur automatically on the completion
of the Company's follow-on offering (using the as-converted method) for the
year ended June 30, 1999.

A reconciliation of the numerator and denominator used in the calculation of
pro forma and diluted net loss per common share follows (in thousands except
share and per share data):
January 8,
                                                        Year Ended   1998 to
                                                         June 30,    June 30,
                                                           1999        1999
                                                        ----------  ----------
Pro forma net loss per common share, basic and
    diluted:
     Net loss attributable to common stockholders.....  $  (47,677) $  (48,857)
   Accretion of Series B preferred stock to redemption
    value.............................................         222         222
   Beneficial conversion charge, Series B preferred
    Stock.............................................      31,577      31,577
                                                        ----------  ----------
   Net loss...........................................  $  (15,878) $  (17,058)
                                                        ----------  ----------
   Shares used in computing net loss per common share,
    basic and diluted.................................  13,563,606  10,027,231
   Adjustments to effect the assumed conversion of the
    preferred stock...................................   3,167,858   2,271,771
                                                        ----------  ----------
   Shares used in computing pro forma net loss per
    common share, basic and diluted...................  16,731,464  12,299,002
                                                        ==========  ==========
   Pro forma net loss per common share, basic and
    diluted...........................................  $    (0.95) $    (1.39)
                                                        ==========  ==========
If the offering contemplated by the registration statement is consummated, all
of the Series B stock will be automatically converted into an aggregate of
11,757,000 shares of common stock and the accumulated dividend of $569,000 will
be paid in cash to the holders of Series B. Unaudited pro forma stockholders
equity as at June 30, 1999, as adjusted for the conversion of the Series B
stock, is disclosed on the Balance Sheet.

                                      F-19
Unaudited Pro Forma Condensed Combining Financial Information

The following unaudited Pro Forma Combined Condensed Statement of Operations
data assume a business combination between the Company, including its wholly
owned subsidiary Creative Fulfillment, Inc. ("Creative Fulfillment"), and
Internet Underground Music Archive ("IUMA"), which was accounted for as a
purchase acquisition. The Pro Forma Combined Condensed Statement of Operations
data are based on the audited financial statements and the notes thereto of the
Company the historical financial statements and notes thereto of Creative
Fulfillment and the historical financial statements and the notes thereto of
IUMA all of which we included in this prospectus.

The Pro Forma Combined Condensed Statement of Operations combine the Company's
historical condensed statement of operations for:

  . the twelve months ended June 30, 1999 (including the operations of
    Creative Fulfillment from the date of its acquisition), the condensed
    consolidated statement of operations of Creative Fulfillment for the six
    months ended January 31, 1999 (prior to its acquisition by the Company)
    and IUMA's condensed statement of operations for the nine months ended
    April 30, 1999;

The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have occurred if
the Merger had been consummated at the beginning of the periods presented, nor
is it necessarily indicative of future operating results or financial position.
The unaudited Pro Forma Combined Condensed Financial Statements do not
incorporate any benefits from cost savings or synergy of operations of the
combined company.

The Company incurred direct transaction costs of approximately $100,000
associated with the Merger that will be included in the purchase price
allocated to acquired net assets. There can be no assurance the Company will
not incur additional charges in subsequent quarters to reflect costs associated
with the Merger or that management will be successful in its efforts to
integrate the operations of the two companies.

These Pro Forma Combined Condensed Statement of Operations data should be read
in conjunction with the historical financial statements and the related notes
thereto of the Company, and the financial statements and the notes thereto of
the Company included herein.

                                      F-20
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENT OF OPERATIONS DATA
(in thousands, except share and per share data)
Creative
                           EMusic.com     Fulfillment          Pro Forma                IUMA            Pro Forma
                          ------------- ---------------- ------------------------  -------------- ------------------------
                              Year         Six Months                               Nine Months
                              Ended          Ended                                     Ended
                          June 30, 1999 January 31, 1999 Adjustments    Combined   April 30, 1999 Adjustments    Combined
                          ------------- ---------------- -----------   ----------  -------------- -----------   ----------
Revenues................   $       92         $103         $   (50)(B) $      145     $   299           --            $444
Cost of revenues........           27           32                             59         --            --              59
                           ----------         ----         -------     ----------     -------       -------     ----------
  Gross profit (loss)...           65           71             (50)            86         299           --             385
                           ----------         ----         -------     ----------     -------       -------     ----------
Operating expenses:
 Product development....       11,690           57             (38)(B)     11,709         255           --          11,964
 Selling and marketing..          556          --              --             556         --            --             556
 General and
  administrative........        1,599           13             --           1,612       1,120           --           2,732
 Amortization of trade
  names.................        1,682          --            1,502 (C)      3,184         --          2,235 (E)      5,419
                           ----------         ----         -------     ----------     -------       -------     ----------
  Total operating
   expenses.............       15,527           70           1,464         17,061       1,375         2,235         20,671
                           ----------         ----         -------     ----------     -------       -------     ----------
Income (loss) from
 operations.............      (15,462)           1          (1,514)       (16,975)     (1,076)       (2,235)       (20,286)
Interest and other
 (expense) income, net..          322          --              --             322         --            --             322
                           ----------         ----         -------     ----------     -------       -------     ----------
Net income (loss).......   $  (15,140)        $  1         $(1,514)    $  (16,653)    $(1,076)      $(2,235)    $  (19,964)
                                              ====         =======     ==========     =======       =======
Accretion of Series A
 and B Preferred to
 redemption value.......         (391)                                       (391)                                    (391)
Beneficial conversion
 charge, Series B
 Preferred..............      (31,577)                                    (31,577)                                 (31,577)
Dividend on Series B
 Preferred..............         (569)                                       (569)                                    (569)
                           ----------                                  ----------                               ----------
Net loss applicable to
 common stockholders....   $  (47,677)                                 $  (49,190)                              $  (52,501)
                           ==========                                  ==========                               ==========
Net loss per share,
 basic and diluted......   $    (3.52)                                 $    (3.53)                              $    (3.66)
                           ==========                                  ==========                               ==========
Weighted average common
 shares outstanding,
 basic and diluted......   13,563,606                      367,604 (A) 13,931,210                   410,667 (D) 14,341,877
                           ==========                      =======     ==========                   =======     ==========
See accompanying notes

                                      F-21
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA

1. The preliminary allocation of the purchase price among the identifiable
   tangible and intangible assets was based on a preliminary assessment of the
   fair market value of those assets. Such preliminary purchase price
   allocation is subject to adjustment based upon the Company's further
   analysis, which adjustment could be material in amount. The amounts
   preliminarily identified as intangible assets arising from the transaction
   are expected to be amortized over an estimated useful life of three years.

2. The following pro forma adjustments are reflected in the unaudited pro forma
   condensed combining financial information and are required to allocate the
   preliminary purchase price and acquisition costs to the net assets acquired
   from Creative Fulfillment and IUMA based on their fair value:

  Adjustments reflecting the acquisition of Creative Fulfillment:

  (A) Reflects the weighted average effect of the issuance of 630,179 shares
      of Common Stock as if the issuance occurred at the beginning of the
      period.

  (B) Reflects the elimination of inter-company transactions including
      development consulting revenue paid by the Company to Creative
      Fulfillment and a short-term loan of $13,000 made by the Company to
      Creative Fulfillment in January 1999.

  (C) Reflects the amortization of intangible assets associated with the
      purchase of Creative Fulfillment as if the acquisition was completed as
      of the beginning of the period. Amortization is over the estimated
      useful lives of the assets acquired of three years.

  Adjustments reflecting the acquisition of IUMA:

  (D) Reflects the weighted average issuance of 448,000 shares of Common
      Stock as if its issuance occurred at the beginning of the period.

  (E) Reflects the amortization of intangible assets associated with the
      purchase of IUMA as if the acquisition was completed as of the
      beginning of the period. Amortization is over the estimated useful
      lives of the assets acquired of three years.

                                      F-22
Report of Independent Accountants

The Boards of Directors and Shareholders
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Creative
Fulfillment, Inc. (d.b.a. "Emusic") (a development stage enterprise) at October
31, 1998, and the results of its operations and its cash flows for the years
ended October 31, 1997 and 1998 and for the period from March 14, 1995
(inception) through October 31, 1998 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
March 31, 1999

                                      F-23
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                                 BALANCE SHEETS
October 31, January 31,
                                                            1998        1999
                                                         ----------- -----------
                                                                     (Unaudited)
ASSETS
Current assets:
 Cash and cash equivalents.............................   $   1,770   $  13,852
 Accounts receivable...................................          --       3,062
                                                          ---------   ---------
  Total current assets.................................       1,770      16,914
Property and equipment, net............................       9,664       6,774
                                                          ---------   ---------
   Total assets........................................   $  11,434   $  23,688
                                                          =========   =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Commitments (Note 4)
Current liabilities:
 Accounts payable and accrued liabilities..............   $  18,402   $   9,443
 Related party liabilities (Notes 3 & 7)...............       7,066      13,286
                                                          ---------   ---------
  Total current liabilities............................      25,468      22,729
                                                          ---------   ---------
Shareholders' equity:
 Common stock, no par value; 25,000,000 shares
  authorized, 17,079,965 shares issued and
  outstanding..........................................     186,133     186,133
 Deficit accumulated during the development stage......    (200,167)   (185,174)
                                                          ---------   ---------
  Total shareholders' equity (deficit).................     (14,034)        959
                                                          ---------   ---------
   Total liabilities and shareholders' equity..........   $  11,434   $  23,688
                                                          =========   =========
The accompanying notes are an integral part of these financial statements.

                                      F-24
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                            STATEMENTS OF OPERATIONS
Years Ended      March 14, 1995   Three Months Ended    March 14, 1995
                            October 31,      (Inception) to       January 31,       (Inception) to
                         ------------------   October 31,   -----------------------  January 31,
                           1997      1998         1998         1998        1999          1999
                         --------  --------  -------------- ----------- ----------- --------------
                                                            (Unaudited) (Unaudited)  (Unaudited)
Revenues:
 Music revenues......... $272,253  $117,993     $685,481      $38,431     $10,092     $ 695,573
 Advertising revenues...      191    39,560       39,751           --      10,296        50,047
 Other revenues.........      118    37,083       37,201           --      50,000        87,201
                         --------  --------    ---------      -------     -------     ---------
  Total revenues........  272,562   194,636      762,433       38,431      70,388       832,821
Cost of revenues:
 Cost of music
  revenues..............  244,307   113,753      625,605       35,011      11,747       637,352
 Cost of other
  revenues..............       --    17,730       17,730           --          --        17,730
                         --------  --------    ---------      -------     -------     ---------
  Total cost of
   revenues.............  244,307   131,483      643,335       35,011      11,747       655,082
                         --------  --------    ---------      -------     -------     ---------
Gross profit............   28,255    63,153      119,098        3,420      58,641       177,739
                         --------  --------    ---------      -------     -------     ---------
Operating expenses:
 Product development....   48,371    76,859      158,851        4,089      40,349       199,200
 Sales, general and
  administrative........   21,052    68,333      156,132        2,323       3,299       159,431
                         --------  --------    ---------      -------     -------     ---------
  Total operating
   expenses.............   69,423   145,192      314,983        6,412      43,648       358,631
                         --------  --------    ---------      -------     -------     ---------
Income (loss) from
 operations.............  (41,168)  (82,039)    (195,885)      (2,992)     14,993      (180,892)
Interest and other
 expense, net...........   (1,731)     (951)      (4,282)      (1,057)         --        (4,282)
                         --------  --------    ---------      -------     -------     ---------
Net income (loss)....... $(42,899) $(82,990)   $(200,167)     $(4,049)    $14,993     $(185,174)
                         ========  ========    =========      =======     =======     =========
The accompanying notes are an integral part of these financial statements.

                                      F-25
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Deficit
                                                     Accumulated     Total
                                    Common Stock     During the  Shareholders'
                                 ------------------- Development    Equity
                                   Shares    Amount     Stage      (Deficit)
                                 ---------- -------- ----------- -------------
Issuance of Common Stock to
 Founders for services.......... 13,500,000 $ 15,000  $      --    $ 15,000
Net loss........................                        (29,104)    (29,104)
                                 ---------- --------  ---------    --------
Balance at October 31, 1995..... 13,500,000   15,000    (29,104)    (14,104)
Issuance of Common Stock to
 Founder in exchange for fixed
 assets.........................  2,000,000   20,000         --      20,000
Issuance of Common Stock in
 exchange for advertising
 services.......................     96,665    4,833         --       4,833
Issuance of Common Stock in
 exchange for cancellation of
 note payable...................  1,000,000   50,000         --      50,000
Net loss........................         --       --    (45,174)    (45,174)
                                 ---------- --------  ---------    --------
Balance at October 31, 1996..... 16,596,665   89,833    (74,278)     15,555
Sale of Common Stock for Cash...     47,500    9,500         --       9,500
Issuance of Common Stock for
 Services.......................    125,000   24,640         --      24,640
Net loss........................         --       --    (42,899)    (42,899)
                                 ---------- --------  ---------    --------
Balance at October 31, 1997..... 16,769,165  123,973   (117,177)      6,796
Issuance of Common Stock for
 Services.......................    310,800   62,160         --      62,160
Net loss........................         --       --    (82,990)    (82,990)
                                 ---------- --------  ---------    --------
Balance at October 31, 1998..... 17,079,965  186,133   (200,167)    (14,034)
Net income (unaudited)..........         --       --     14,993      14,993
                                 ---------- --------  ---------    --------
Balance at January 31, 1999
 (unaudited).................... 17,079,965 $186,133  $(185,174)   $    959
                                 ========== ========  =========    ========
The accompanying notes are an integral part of these financial statements.

                                      F-26
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
                        (a Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS
Years Ended      March 14, 1995   Three Months Ended    March 14, 1995
                             October 31,      (Inception) to       January 31,       (Inception) to
                          ------------------   October 31,   -----------------------  January 31,
                            1997      1998         1998         1998        1999          1999
                          --------  --------  -------------- ----------- ----------- --------------
                                                             (Unaudited) (Unaudited)  (Unaudited)
Cash flows from
 operating activities:
Net income (loss).......  $(42,899) $(82,990)   $(200,167)     $(4,049)    $14,993     $(185,174)
Adjustments to reconcile
 net income (loss) to
 net cash used in
 operating activities:
 Depreciation...........    12,277    12,856       30,453        3,221       2,890        33,343
 Issuance of common
  stock in exchange for
  services..............    24,640    62,160      106,633           --          --       106,633
 Changes in operating
  assets and
  liabilities:
 Accounts receivable....        --        --           --           --      (3,062)       (3,062)
 Accounts payable and
  accrued liabilities...     5,180     1,617       25,468       (4,251)    (15,239)       10,229
                          --------  --------    ---------      -------     -------     ---------
Net cash used by
 operating activities...      (802)   (6,357)     (37,613)      (5,079)       (418)      (38,031)
                          --------  --------    ---------      -------     -------     ---------
Cash flows from
 investing activities:
Acquisition of property
 and equipment..........    (2,623)   (1,464)     (20,117)          --          --       (20,117)
                          --------  --------    ---------      -------     -------     ---------
Net cash provided by
 investing activities...    (2,623)   (1,464)     (20,117)          --          --       (20,117)
                          --------  --------    ---------      -------     -------     ---------
Cash flows from
 financing activities:
Proceeds from issuance
 of note................        --        --       50,000           --      12,500        62,500
Net proceeds from
 issuance of common
 stock..................     9,500        --        9,500           --          --         9,500
                          --------  --------    ---------      -------     -------     ---------
Net cash provided by
 financing activities...     9,500        --       59,500           --      12,500        72,000
                          --------  --------    ---------      -------     -------     ---------
Net increase/(decrease)
 in cash................     6,075    (7,821)       1,770       (5,079)     12,082        13,852
Cash at beginning of
 period.................     3,516     9,591           --        9,591       1,770            --
                          --------  --------    ---------      -------     -------     ---------
Cash at end of period...  $  9,591  $  1,770    $   1,770      $ 4,512     $13,852     $  13,852
                          --------  --------    ---------      -------     -------     ---------
Supplemental disclosures
 of cash flow
 information:
Issuance of Common Stock
 in exchange for fixed
 assets.................  $     --  $     --    $  20,000      $    --     $    --     $  20,000
Conversion of notes
 payable to Common
 Stock..................  $     --  $     --    $  50,000      $    --     $    --     $  50,000
The accompanying notes are an integral part of these financial statements.

                                      F-27
Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                         Notes to Financial Statements

1. Nature of Business and Significant Accounting Policies

Organization and Business

Creative Fulfillment, Inc. ("Creative" or the "Company"), a California
corporation, was incorporated on March 14, 1995 to develop an Internet web site
to sell musical recordings on CD's, the fulfillment and shipping of which is
performed by a third party. Since its inception, the Company has been in the
development stage devoting its efforts primarily to developing its web site,
acquiring operating assets and raising capital. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.

Significant Accounting Policies

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

 Unaudited Interim Results

The accompanying interim financial statements as of January 31, 1999 and for
the three months ended January 31, 1998 and 1999 are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of January 31, 1999 and for the three months ended January 31,
1998 and 1999. The financial data and other information disclosed in these
notes to financial statements related to these periods are unaudited. The
results for the three months ended January 31, 1999 are not necessarily
indicative of the results to be expected for the year ending October 31, 1999.

 Revenue Recognition

Music revenues are generally recognized in the period in which the shipment
occurs. A provision is made for returns based on historical return levels
experienced by the Company. All music sales are paid for by credit card.

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.

Other revenue consists primarily of consulting revenue, which is generally
recognized ratably over the term of the agreements, provided that the Company
has no significant remaining obligations and collection of the resulting
receivable is probable.

 Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. No individual customers represented
greater than 10% of sales in fiscal 1997 or 1998. In the three months ended
January 31, 1999 (unaudited), one customer accounted for 71% of total revenues.
See also Note 3 below.

                                      F-28
Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

 Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short maturities.

 Property and Equipment

Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.

 Comprehensive Income or Loss

There are no differences between the Company's net income or loss for the years
ended October 31, 1997 and 1998, for the period from March 14, 1995 (inception)
to October 31, 1998, the three months ended January 31, 1999 (unaudited) and
the period from March 14, 1995 (inception) to January 31, 1999 (unaudited) and
the Company's comprehensive income or loss for each of these periods.

 Product Development Costs

Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.

 Income Taxes

Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. It also provides guidance for accounting for changes
in the fair value of a derivative (i.e. gains and losses). SFAS 133 is
effective for all fiscal years beginning after June 15, 1999. The Company does
not expect that the adoption of SFAS 133 will have a material effect on its
financial statements.

                                      F-29
Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

2. Property and Equipment
October 31, January 31,
                                                            1998        1999
                                                         ----------- -----------
                                                                     (Unaudited)
Computer and office equipment........................  $ 40,117    $ 40,117
   Less accumulated depreciation........................   (30,453)    (33,343)
                                                          --------    --------
                                                          $  9,664    $  6,774
                                                          ========    ========
3. Related Party Transactions

The Company has incurred $18,000 and $19,000 in development expenses during
fiscal 1998 and the period from March 14, 1995 (inception) to October 31, 1998,
and incurred $31,010 (unaudited) and $43,510 in development expenses in the
period from March 14, 1995 (inception) to January 31, 1999 with Mango
Enterprises. Mango Enterprises is owned by the Founder and holder of 79% of the
outstanding Common Stock of Emusic.

The Company has incurred $3,927 in expenses during the period from March 14,
1995 (inception) to October 31, 1998 with WebCentral. There have been no
transactions with WebCentral since October 1998. WebCentral is owned by the
Founder and holder of 79% of the outstanding Common Stock of Emusic.

At October 31, 1998 and January 31, 1999, the Company owed $7,066 and $786
(unaudited) to the Founder of the Company for short-term advances made. Such
advances are not evidenced by a note, and are generally repaid within three
months or less.

See Note 7 below for additional related party transactions subsequent to
October 31, 1998.

4. Commitments

The Company does not have any equipment or facilities lease commitments as of
October 31, 1998 or January 31, 1999 (unaudited). Rent paid during fiscal 1997,
1998 and the three months ended January 31, 1999 (unaudited) was insignificant.

5. Income Taxes

There is no provision for income taxes for the period from March 14, 1995
(inception) through January 31, 1999 as the Company incurred a net loss. The
Company's deferred tax assets at October 31, 1998 principally relate to its net
operating loss and approximate $175,000. Due to uncertainty surrounding
recoverability, a full valuation allowance has been established against this
amount.

Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before full
utilization.

6. Common Stock

The Company's is authorized to issue 25,000,000 shares of Common Stock, of
which 17,079,965 shares were issued and outstanding as of October 31, 1998 and
January 31, 1999 (unaudited). Of the total shares issued and outstanding,
17,032,465 shares were issued for other than cash proceeds. The value of such
shares was based on sales of similar instruments for cash, or the value of the
goods or services received, whichever was more readily determinable.

                                      F-30
Creative Fulfillment, Inc. (d.b.a. "Emusic")
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

7. Subsequent Events

 Merger

On January 25, 1999, EMusic.com Inc. (formerly GoodNoise Corporation)
("EMusic") acquired all of the Company's outstanding shares of Common Stock, at
which time the Company became a wholly owned subsidiary of EMusic.

 Related Party Loan and Consulting Revenues

In January 1999, EMusic loaned Creative $12,500, which was repaid to EMusic in
February 1999. In addition, during the three months ended January 31, 1999,
EMusic paid consulting fees totaling $50,000, which were recorded as revenue by
Creative.

                                      F-31
REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
Internet Underground Music Archive ("IUMA")

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Internet
Underground Music Archive ("IUMA") at July 31, 1998 and the results of its
operations and its cash flows for the years ended July 31, 1998 and 1997 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 21, 1999

                                      F-32
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
                                 BALANCE SHEETS
July 31,    April 30,
                                                           1998        1999
                                                         ---------  -----------
                                                                    (Unaudited)
ASSETS

Current assets:
  Cash and cash equivalents............................. $   1,684  $    33,537
  Accounts receivable...................................    40,204       21,797
  Prepaid expenses......................................       592        2,293
                                                         ---------  -----------
    Total current assets................................    42,480       57,627
Property and equipment, net.............................    33,468       41,613
Intangible assets, net..................................    15,921       12,884
Other assets............................................     1,700       64,570
                                                         ---------  -----------
    Total assets........................................ $  93,569  $   176,694
                                                         =========  ===========

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
  Accounts payable...................................... $  87,356  $   391,471
  Accrued payroll and related benefits..................        --      203,027
  Current portion of notes payable......................    51,468      183,638
                                                         ---------  -----------
    Total current liabilities...........................   138,824      778,136
                                                         ---------  -----------
Notes payable, less current portion.....................   131,145      309,550
                                                         ---------  -----------
Total liabilities.......................................   269,969    1,087,686
                                                         ---------  -----------

Commitments (Note 4)

Shareholders' equity (deficit):
  Common stock, no par value; 30,000,000 shares
   authorized, 3,351,750 and 4,432,480 shares issued and
   outstanding..........................................   554,810    1,105,168
  Notes receivable from shareholders....................        --       (8,655)
  Deferred compensation.................................  (328,527)    (528,971)
  Accumulated deficit...................................  (402,683)  (1,478,534)
                                                         ---------  -----------
    Total shareholders' equity (deficit)................  (176,400)    (910,992)
                                                         ---------  -----------
     Total liabilities and shareholders' equity
      (deficit)......................................... $  93,569  $   176,694
                                                         =========  ===========
The accompanying notes are an integral part of these financial statements.

                                      F-33
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                            STATEMENTS OF OPERATIONS
Years Ended July        Nine Months Ended
                                         31,                  April 30,
                                 --------------------  -----------------------
                                   1997       1998        1998        1999
                                 ---------  ---------  ----------- -----------
                                                       (unaudited) (unaudited)
Revenues:
 Website hosting...............  $  55,799  $ 137,200   $  53,061  $   136,958
 Advertising...................    162,447     79,326      55,327       64,140
 Other.........................    213,814      7,821       6,872       97,572
                                 ---------  ---------   ---------  -----------
  Total revenues...............    432,060    224,347     115,260      298,670
Operating expenses:
 Product development...........     50,524     99,616      88,793      123,657
 Selling, general and
  administrative...............    345,346    340,493     221,576    1,119,994
 Amortization of deferred
  compensation.................      4,158     13,662      12,492      130,870
                                 ---------  ---------   ---------  -----------
  Total operating expenses.....    400,028    453,771     322,861    1,374,521
                                 ---------  ---------   ---------  -----------
Income (loss) from operations..     32,032   (229,424)   (207,601)  (1,075,851)
Interest and other expense,
 net...........................        --      (1,011)        --           --
                                 ---------  ---------   ---------  -----------
Income (loss) before income
 taxes.........................     32,032   (230,435)   (207,601)  (1,075,851)
Income tax benefit (expense)...    (10,542)    10,542      10,542          --
                                 ---------  ---------   ---------  -----------
Net income (loss)..............  $  21,490  $(219,893)  $(197,059) $(1,075,851)
                                 =========  =========   =========  ===========
Net income (loss) per common
 share-basic...................  $    0.01  $   (0.07)  $   (0.06) $     (0.28)
                                 =========  =========   =========  ===========
Net income (loss) per common
 share-diluted.................  $    0.01  $   (0.07)  $   (0.06) $     (0.28)
                                 =========  =========   =========  ===========
Weighted average common shares
 outstanding-basic ............  3,270,000  3,310,875   3,297,250    3,829,615
                                 =========  =========   =========  ===========
Weighted average common shares
 outstanding-diluted...........  3,636,601  3,310,875   3,297,250    3,829,615
                                 =========  =========   =========  ===========
The accompanying notes are an integral part of these financial statements.

                                      F-34
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                       STATEMENT OF SHAREHOLDERS' DEFICIT
Notes due                                 Total
                                                  from       Deferred   Accumulated  Shareholders'
                          Shares     Amount   Shareholders Compensation   Deficit       Deficit
                         --------- ---------- ------------ ------------ -----------  -------------
Balance at July 31,
 1996................... 3,270,000 $  163,500   $   --      $     --    $  (204,280)  $   (40,780)
 Unearned stock-based
  compensation..........               17,333       --        (17,333)          --            --
 Amortization of stock-
  based compensation....       --         --        --          4,158           --          4,158
 Net income.............       --         --        --             --        21,490        21,490
                         --------- ----------   -------     ---------   -----------   -----------
Balance at July 31,
 1997................... 3,270,000    180,833       --        (13,175)     (182,790)      (15,132)
 Issuance of common
  stock for services....    81,750     44,963       --            --            --         44,963
 Unearned stock-based
  compensation..........              329,014       --       (329,014)          --            --
 Amortization of stock-
  based compensation....       --         --        --         13,662           --         13,662
 Net loss...............       --         --        --            --       (219,893)     (219,893)
                         --------- ----------   -------     ---------   -----------   -----------
Balance at July 31,
 1998................... 3,351,750    554,810       --       (328,527)     (402,683)     (176,400)
 Exercise of stock
  options...............   955,730      9,557    (8,655)                        --            902
 Issuance of common
  stock for services....   125,000    209,487       --            --            --        209,487
 Unearned stock-based
  compensation..........       --     331,314       --       (331,314)          --            --
 Amortization of stock-
  based compensation....       --         --        --        130,870           --        130,870
 Net income
  (unaudited)...........       --         --        --            --     (1,075,851)   (1,075,851)
                         --------- ----------   -------     ---------   -----------   -----------
Balance at April 30,
 1999 (unaudited)....... 4,432,480 $1,105,168   $(8,655)    $(528,971)  $(1,478,534)  $  (910,992)
                         ========= ==========   =======     =========   ===========   ===========
The accompanying notes are an integral part of these financial statements.

                                      F-35
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

                            STATEMENTS OF CASH FLOWS
Years Ended July       Nine Months Ended
                                         31,                  April 30,
                                  -------------------  -----------------------
                                    1997      1998        1998        1999
                                  --------  ---------  ----------- -----------
                                                       (unaudited) (unaudited)
Cash flows from operating
 activities:
Net income (loss)...............  $ 21,490  $(219,893)  $(197,059) $(1,075,851)
Adjustments to reconcile net
 income (loss) to net cash used
 in operating activities:
  Depreciation and
   amortization.................     6,341     14,481      13,128       14,892
  Amortization of deferred
   compensation.................     4,158     13,662      12,492      130,870
  Issuance of common stock for
   services.....................        --     44,963      44,963      209,487
  Changes in operating assets
   and liabilities:
    Accounts receivable.........   (52,372)    27,277      40,459       18,407
    Other assets................        --        (94)     (2,230)      (4,571)
    Prepaid expenses relating to
     acquisition................        --         --          --      (60,000)
    Accounts payable and accrued
     liabilities................    39,922     (3,834)    (15,702)     507,142
                                  --------  ---------   ---------  -----------
Net cash provided (used) by
 operating activities...........    19,539   (123,438)   (103,949)    (259,624)
                                  --------  ---------   ---------  -----------
Cash flows used in investing
 activities:
Acquisition of property and
 equipment......................   (19,349)   (18,077)    (12,955)     (20,000)
Cash paid for intangibles.......        --    (11,756)         --           --
                                  --------  ---------   ---------  -----------
Net cash used in investing
 activities.....................   (19,349)  (29,833)     (12,955)     (20,000)
                                  --------  ---------   ---------  -----------
Cash flows from financing
 activities:
Proceeds from issuance of
 notes..........................     4,100    149,342     131,145      315,100
Principal payments on notes.....        --         --          --       (4,525)
Proceeds from issuance of common
 stock..........................        --         --          --          902
                                  --------  ---------   ---------  -----------
Net cash provided by financing
 activities.....................     4,100    149,342     131,145      311,477
                                  --------  ---------   ---------  -----------
Net increase/(decrease) in
 cash...........................     4,290     (3,929)     14,241       31,853
Cash at beginning of period.....     1,323      5,613       5,613        1,684
                                  --------  ---------   ---------  -----------
Cash at end of period...........  $  5,613  $   1,684   $  19,854  $    33,537
                                  ========  =========   =========  ===========
Supplemental disclosures of cash
 flow information:
Cash paid during the year for:
  Interest......................  $     --  $   1,011   $      --  $       758
F-36
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

1. Nature of Business and Significant Accounting Policies

Organization and Business

Internet Underground Music Archive Inc. ("IUMA" or the "Company"), a California
corporation, was incorporated on July 1, 1995 to promote, distribute and sell
music from unsigned and independent musicians. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.

Significant Accounting Policies

 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

 Unaudited Interim Results

The accompanying interim financial statements as of April 30, 1999 and for the
nine months ended April 30, 1998 and 1999 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of April 30, 1999 and for the nine months ended April 30, 1998
and 1999. The results for the nine months ended April 30, 1999 are not
necessarily indicative of the results to be expected for the year ending July
31, 1999.

 Revenue Recognition

Website hosting and related service revenues are generally recognized ratably
over the term of the agreements, provided that the Company has no significant
remaining obligations and collection of the resulting receivable is probable.

Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.

Other revenue consists primarily of consulting revenue and commissions on music
sales. Consulting revenue is recognized ratably over the term of the
agreements. Commissions on music sales are derived from fulfillment of compact
disc sales on behalf of artists listed on the IUMA websites, and are recognized
upon shipment of the related product.

 Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. For the fiscal years ending July 31,
1997 and 1998 there were two different sets of customers, which accounted for
76% and 72% of revenues, respectively. Three customers accounted for 91% of
revenues for the nine months ending 4/30/99.

                                      F-37
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

 Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short-term maturities.

 Property and Equipment

Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.

 Net Income or Loss per Common Share

Basic earnings per share is computed by dividing net income or loss available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per common share is computed
giving effect to all dilutive options in issuance.

 Comprehensive Income or Loss

There are no differences between the Company's net income or loss for the years
ended July 31, 1997 and 1998 and for the nine months ended April 30, 1999
(unaudited) and the Company's comprehensive income or loss for the same
periods.

 Product Development Costs

Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.

 Income Taxes

Income taxes are accounted for using the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.

 Stock-based compensation

The Company accounts for stock-based awards/options to employees using the
intrinsic value method and has adopted the disclosure only provisions of
Financial Accounting Standard No. 123.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software for Internal Use," which provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect that the
adoption of SOP No. 98-1 will have a material impact on its financial
statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that entities recognize
all derivatives as either assets or liabilities and measure those instruments
at fair value. It also provides guidance for accounting for changes in the fair
value of a derivative (i.e. gains and losses). SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. The Company does not expect that
the adoption of SFAS 133 will have a material effect on its financial
statements.

                                      F-38
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

2. Property and Equipment
July
                                                              31,     April 30,
                                                             1998       1999
                                                            -------  -----------
                                                                     (unaudited)
Computer and office equipment........................... $48,601    $59,874
   Less accumulated depreciation........................... (15,133)   (18,261)
                                                            -------    -------
                                                            $33,468    $41,613
                                                            =======    =======
Book value for assets under capital lease at July 31, 1998 and April 30, 1999
totaled approximately $5,000 and $4,000, respectively.

Depreciation expense for the periods ended July 31, 1997, July 31, 1998 and
April 30, 1999 totaled approximately $5,000, $12,000 and $12,000, respectively.

The Company incurred rental expense of $17,000, $18,000, and $14,000 for the
years ended July 31, 1997 and July 31, 1998 and for the nine months ended,
respectively.

3. Related Party Transactions

Shares of Common Stock were issued to several employees in exchange for
promissory notes. As of April 30, 1999, none of these promissory notes have
been paid in full.

The Company had the following related party transactions during the periods
presented.

  . On July 12, 1996 the Company entered into an agreement with two
    shareholders, under which it borrowed approximately $33,000. Under the
    terms of the agreement and in return for consulting services provided,
    the shareholders received stock equivalent to 18% of the outstanding
    capital of the Company. The note was interest free and is payable upon
    receipt by the Company of additional financing in excess of $250,000. As
    of July 31, 1998 and April 30, 1999 (unaudited), the total amount
    borrowed remained outstanding.

  . Pursuant to an agreement dated October 23, 1998 one shareholder loaned
    the Company $5,000 at 5% per annum. The loan was unsecured and payable
    when the Company received additional financing.

  . Two shareholders are due approximately $27,000, pursuant to a consulting
    agreement dated February 5, 1997.

  . During the year ended July 31, 1998 a shareholder advanced the Company
    approximately $12,000 repayable at $100 per month, interest at 5.73% per
    annum. As of July 31, 1998 and April 30, 1999 (unaudited), the total
    amount borrowed remained outstanding.

4. Commitments

IUMA entered into a capital lease for equipment during the year ended July 31,
1998 and will have payments due of approximately $2,000 for each of the years
ended July 31, 1999, 2000 and 2001.

As of July 31, 1998, the Company had operating leases for equipment with
commitments of approximately 13,000, $13,000, 8,000 and 1000 for the years
ended July 31, 1999, 2000, 2001 and 2002, respectively.

As of July 31, 1998 the Company had a rental lease with minimum monthly
payments of approximately $1,000 for a total commitment of approximately
$12,000 for the year ended July 31, 1999.

                                      F-39
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

5. Income Taxes

The Company's deferred tax assets of approximately $79,000 at July 31, 1998
principally relate to its net operating loss. A full valuation allowance has
been established because of the uncertainty of realization.

Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to ownership changes. The annual
limitation may result in the expiration of net operating losses and credits
before full utilization.

6. Preferred Stock

The Company was authorized to issue 20,000,000 shares of Preferred Stock, of
which none were issued or outstanding at July 31, 1998 and April 30, 1999

7. Common Stock

The Company was authorized to issue 30,000,000 shares of Common Stock, of which
3,351,750 and 4,307,480 shares were issued and outstanding at July 31, 1998 and
April 30, 1999 (unaudited), respectively. The value of such shares was
determined based upon the value of the shares issued, as determined by cash
proceeds to the company on sales of similar instruments, or the value of the
goods or services received, whichever was more readily determinable.

8. Stock Options

 Option activity

Option activity during the year ended July 31, 1997 and 1998 is as follows:
Average
                                                                       Weighted
                                                                       Exercise
                                                               Shares   Price
                                                               ------- --------
Balance, July 31, 1996.....................................     --    $--
    Options granted........................................... 389,326    .01
                                                               -------
   Balance, July 31, 1997..................................... 389,326    .01
    Options granted........................................... 325,557    .01
                                                               -------
   Balance, July 31, 1998..................................... 714,883    .01
                                                               =======
At July 31, 1998, all outstanding options were exercisable of which 506,486
shares, at a weighted average exercise price of $0.01, are subject to the
Company's right of repurchase upon exercise.

 Pro forma stock compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the minimum value at the grant date for the awards in 1997 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net loss for 1997 and 1998,
respectively, would have been as follows (in thousands, except per share
amounts):
1997      1998
                                                          -------  ---------
Net income (loss) attributable to common stock
    holders--as reported................................. $21,490  $(219,893)
   Net income (loss) attributable to common
    stockholders--pro forma.............................. $17,214  $(233,892)
   Net income (loss) per common share--basic and diluted
    as reported.......................................... $ (0.01) $   (0.07)
   Net income (loss) per common share--basic and diluted
    pro forma............................................ $ (0.01) $   (0.06)
F-40
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
                       NOTES TO THE FINANCIAL STATEMENTS

Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.

The minimum value of each option grant is estimated on the date of grant using
a type of Black-Scholes option-pricing model with the following assumptions
used for grants:
1997  1998
                                                                     ----  ----
Weighted average risk-free interest rate......................... 6.49% 5.47%
   Expected life (from vesting date)................................    5     5
   Expected dividends...............................................  --    --
Based on the above assumptions, the aggregate fair value and weighted average
fair value per share of options granted in 1997 and 1998 were $18,501 and
$0.048 and $329,665 and $1.013, respectively. All options were granted with
exercise prices below the estimated market value at the date of grant.

The options outstanding (all of which are exercisable) by exercise price at
July 31, 1998 are as follows:

                              Options Outstanding
Weighted
                                                                                       Average
                                                                                      Remaining
                                                                                     Contractual
     Exercise                        Number                                             Life
      Prices                       Outstanding                                         (years)
     --------                      -----------                                       -----------
$0.01                          714,883                                            8.79
Deferred stock compensation

During the years ended July 31, 1997 and 1998, the Company issued options to
certain employees with exercise prices below the deemed fair market value of
the Company's common stock at the date of grant. In addition, the Company
allowed such options to be exercised in advance of full vesting, subject to
repurchase rights with respect to unvested shares. In accordance with the
requirements of APB 25, the Company has recorded deferred compensation for the
difference between the exercise price of the stock options and the fair market
value of the Company's stock at the date of grant. Deferred compensation is
being amortized over the vesting periods. At July 31, 1998, the Company
recorded deferred compensation of $328,527 (net of cancellations), of which
$4,158 and $13,662 had been amortized to expense during the years ended July
31, 1997 and 1998.

9. Subsequent Events

 Leases

During October 1999 the Company entered into a second rental lease with minimum
monthly payments of approximately $1,000. This lease was cancelled in May 1999.
In addition, during July 1999 the original rental lease was also cancelled.

 Merger

On June 30, 1999, EMusic.com Inc. (formerly GoodNoise Corporation) acquired all
of the Company's outstanding shares of Common Stock, at which time the Company
became a wholly owned subsidiary of EMusic.com Inc.

                                      F-41
[LOGO OF eMUSIC APPEARS HERE]
--------------------------------------------------------------------------------

                           [LOGO OF EMUSIC.COM INC.]

                               13,284,102 Shares

                                  Common Stock

                               -----------------
                                   PROSPECTUS
                               -----------------

                                October   , 1999

--------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
Part II

                     Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with this
offering. All amounts shown are estimates except for the SEC registration fee.
SEC registration fee................................................... $58,165
Nasdaq National Market additional listing fee..........................   2,000
Printing expenses......................................................   5,000
Legal fees and expenses................................................  20,000
Accounting fees and expenses...........................................   5,000
Transfer Agent and Registrar fees......................................   1,000
Miscellaneous expenses.................................................     835
                                                                        -------
  Total................................................................ $92,000
                                                                        =======
Item 14. Indemnification of Officers and Directors

Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. The Registrant's Amended and Restated
Certificate of Incorporation and Bylaws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the Registrant has entered into separate indemnification agreements
(Exhibit 10.1) with its directors and officers which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature). The Registrant also
intends to continue to maintain director and officer liability insurance, if
available on reasonable terms. These indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of the Registrant's officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

On May 6, 1998, we issued 2,500,000 shares of our common stock and warrants to
purchase a total of 500,000 shares of our common stock at an exercise price of
$1.00 per share to accredited investors in exchange for $500,000.00 in reliance
on Rule 504 of Regulation D promulgated under the Securities Act. Warrants to
purchase 200,000 shares of common stock were exercised at the time of their
issuance.

On May 11, 1998, we acquired all of the outstanding shares of GoodNoise
Corporation, a Delaware corporation, in exchange for 11,015,300 shares of our
common stock in reliance on Section 4(2) of the Securities Act. On the same
date, we assumed options to purchase 1,722,500 shares of the Delaware
corporation's common stock, which were automatically converted into options to
purchase 2,032,550 shares of our common stock at a weighted average exercise
price of approximately $0.03 per share.

On July 29, 1998, we issued 170 shares of our common stock to a consultant in
exchange for consulting services in reliance on Section 4(2) of the Securities
Act.

                                      II-1
On August 10, 1998, investors exercised warrants to purchase 300,000 shares of
our common stock in exchange for $300,000. These warrants had been issued as a
part of the private placement which occurred on May 6, 1998.

On October 28, 1998, we issued 500 shares of our Series A Preferred Stock and a
warrant to purchase 100,000 shares of our common stock at an exercise price of
$7.91 to an investor in reliance on Regulation D.

On December 16, 1998, we issued 10,000 shares of our common stock to an
employee upon exercise of an employee stock option in reliance on Rule 701.

On February 24, 1999, we acquired all of the outstanding shares of Creative
Fulfillment, Inc. in exchange for 630,179 shares of our common stock in
reliance on Section 4(2) of the Securities Act.

On March 23, 1999, we issued 117,570 shares of our Series B Preferred Stock to
accredited investors in exchange for $32,523,900.00 in cash, cancellation of
debt of $1,777,250 and conversion of the outstanding shares of our Series A
Preferred Stock in reliance on Rule 506 of Regulation D promulgated under the
Securities Act.

On April 27, 1999, we issued 665,188 shares of our common stock in
consideration of the acquisition of certain music rights in reliance on Section
4(2) of the Securities Act.

On June 11, 1999, we issued 448,000 shares of our common stock in exchange for
all of the outstanding shares of Internet Underground Music Archive, Inc. in
reliance on Section 4(2) of the Securities Act.

On June 10, 1999 we granted warrants for the purchase of 1,607,800 shares
solely to accredited investors in reliance on Regulation D.

From May 11, 1998 through September 20, 1998, we granted options to purchase
435,000 shares of our common stock at a weighted average exercise price of
approximately $5.07 per share. These options were granted to our employees and
consultants in exchange for services rendered in transactions exempt from
registration under the Securities Act under Rule 701. From September 21, 1998
through July 15, 1999, we granted options to purchase 4,186,000 shares of our
common stock at a weighted average purchase price of approximately $7.078 per
share. These options were granted to our employees and consultants in exchange
for services rendered in transaction exempt from registration under the
Securities Act under Section 4(2) thereof.

There were no underwriters employed in connection with any of the above
transactions.

                                      II-2
Item 16. Exhibits and Financial Statement Schedules
Exhibit
 Number                          Description of Document
 -------                         -----------------------
2.1(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Atlantis Ventures Corp., GN Acquisition Corp and certain
         other parties dated as of May 11, 1998
  2.2(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
         certain other parties dated as of October 8, 1998
  2.3(c) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, GNA Corporation, Internet Underground Music Archive, Inc.
         and certain shareholders of Internet Underground Music Archive, Inc.
         dated as of May 16, 1999
  2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
         corporation, and EMusic.com Inc., a Delaware corporation, dated as of
         July 21, 1999
  3.1(c) Amended and Restated Certificate of Incorporation
  3.2(c) Amended and Restated Bylaws
  5.1    Opinion of Gray Cary Ware & Freidenrich LLP
 10.1(c) Form of Indemnity Agreement
 10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
         Culpepper
 10.3(a) 1998 Stock Option Plan
 10.4(c) 1998 Nonstatutory Stock Option Plan
 10.5(c) 1999 Employee Stock Purchase Plan
 10.6(c) Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21(c)   Subsidiaries
 23.1    Consent of PricewaterhouseCoopers LLP
 23.2    Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
 24.1    Power of Attorney (see page II-5 of the Registration Statement)
 27.1    Financial Data Schedule
------------------
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
    December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
    1999.
(c) Previously filed as an exhibit to the Registrant's Form S-1 (Registration
    Statement No. 333-83685).

Item 17. Undertakings

The Registrant 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 of 1933 (the "Securities Act");

      (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 foregoing, 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 the "Calculation of
    Registration Fee" table in the effective registration statement;

                                      II-3
(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;
    provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
    apply if the information required to be included in a post-effective
    amendment by those paragraphs is contained in periodic reports filed by
    the Registrant pursuant to Section 13 or Section 15(d) of the
    Securities Exchange Act of 1934 that are incorporated by reference 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.

Insofar as indemnification by the Registrant 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 Securities and Exchange
Commission, 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.

The 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 EMusic 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 the time shall be
     deemed to be the initial bona fide offering thereof.

                                      II-4
Signatures

In accordance with the requirements of the Securities Act of 1933, EMusic
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of Redwood
City, State of California, on the 13th day of October, 1999.

                                          EMUSIC.COM INC.

                                                   /s/ Gene Hoffman, Jr.
                                          By: _________________________________
                                                     Gene Hoffman, Jr.
                                                  Chief Executive Officer

                               Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert H. Kohn, Gene Hoffman, Jr, Joseph
 H. Howell, and Peter M. Astiz, each of them acting individually, as his true
and lawful attorneys-in-fact and agents, each with full power of substitution,
for him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule 462(b)
increasing the number of securities for which registration is sought), and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, 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 for 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 his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

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 H. Kohn            Chairman of the Board and   October 13, 1999
______________________________________  Assistant Secretary
            Robert H. Kohn

      /s/ Gene Hoffman, Jr.            President, Chief Executive  October 13, 1999
______________________________________  Officer and Director
          Gene Hoffman, Jr.             (Principal Executive
                                        Officer)

        /s/ Joseph H. Howell           Executive Vice President    October 13, 1999
______________________________________  and Chief Financial
           Joseph H. Howell             Officer (Principal
                                        Financial and Accounting
                                        Officer)

         /s/ Ralph Peer, II            Director                    October 13, 1999
______________________________________
            Ralph Peer, II

           /s/ Tor Braham              Director                    October 13, 1999
______________________________________
              Tor Braham

         /s/ Ed Rosenblatt             Director                    October 13, 1999
______________________________________
            Ed Rosenblatt
II-5
Exhibit
 Number                          Description of Document
 -------                         -----------------------
2.1(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Atlantis Ventures Corp., GN Acquisition Corp and certain
         other parties dated as of May 11, 1998
  2.2(a) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
         certain other parties dated as of October 8, 1998
  2.3(c) Agreement and Plan of Reorganization by and among GoodNoise
         Corporation, GNA Corporation, Internet Underground Music Archive, Inc.
         and certain shareholders of Internet Underground Music Archive, Inc.
         dated as of May 16, 1999
  2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
         corporation, and EMusic.com Inc., a Delaware corporation, dated as of
         July 21, 1999
  3.1(c) Amended and Restated Certificate of Incorporation
  3.2(c) Amended and Restated Bylaws
  5.1    Opinion of Gray Cary Ware & Freidenrich LLP
 10.1(c) Form of Indemnity Agreement
 10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
         Culpepper
 10.3(a) 1998 Stock Option Plan
 10.4(c) 1998 Nonstatutory Stock Option Plan
 10.5(c) 1999 Employee Stock Purchase Plan
 10.6(c) Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21(c)   Subsidiaries
 23.1    Consent of PricewaterhouseCoopers LLP
 23.2    Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
 24.1    Power of Attorney (see page II-5 of the Registration Statement)
 27.1    Financial Data Schedule
------------------
 * Previously filed.
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
    December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
    1999.
(c) Previously filed as an exhibit to the Registrant's Form S-1 (Registration
    Statement No. 333-83685).