<PAGE>

     As filed with the Securities and Exchange Commission on July 23, 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
            (Primary Standard Industrial Classification Code Number)
                                                            (I.R.S. Employer
      (State or                                           Identification No.)
   jurisdiction of
   incorporation or
    organization)

                            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:
          Bruce Schaeffer, Esq                    Warren Lazarow, Esq.
           Andrew Zeif, Esq.                      Armando Castro, Esq.
           Craig Malina, Esq.                   Vahe H. Sarrafian, Esq.
    Gray Cary Ware & Freidenrich LLP              Andrew R. Hull, Esq.
          400 Hamilton Avenue               Brobeck, Phleger & Harrison LLP
    Palo Alto, California 94301-1825             Two Embarcadero Place
             (650) 833-2000                          2200 Geng Road
                                              Palo Alto, California 94303
                                                     (650) 424-0160

                                ---------------
  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. [_]
  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 Maximum
          Title of Each Class of               Aggregate          Amount of
      Securities to be Registered(a)       Offering Price(b) Registration Fee(b)
--------------------------------------------------------------------------------
<S>                                        <C>               <C>
Common Stock ($0.001 par value)..........    $127,809,563          $35,532
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(a) This Registration Statement covers the sale of shares of common stock, par
    value $0.001 per share, by the Registrant and by selling stockholders.
(b) Estimated solely for the purpose of determining the registration fee
    pursuant to Rule 457(o) promulgated under the Securities Act.
                                ---------------
  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 July 23, 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
preliminary prospectus is not an offer to sell and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.

                                5,340,000 Shares

                             [EMUSIC.COM INC. LOGO]

                                  Common Stock
                                 $   Per Share

--------------------------------------------------------------------------------
EMusic.com Inc. is offering 5,000,000 shares and the selling stockholders
identified in this prospectus are offering 340,000 shares. This is a firm
commitment underwriting.

The common stock is listed on the Nasdaq National Market under the symbol
"EMUS." On July 22, 1999, the last reported sale price of the common stock on
the Nasdaq National Market was $21.38 per share.

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

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
     <S>                                                         <C>       <C>
     Price to the public........................................    $      $
     Underwriting discounts.....................................
     Proceeds to EMusic.........................................
     Proceeds to the selling stockholders.......................
</TABLE>

EMusic has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 801,000 additional
shares from EMusic within 30 days following the date of this prospectus to
cover over-allotments.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

CIBC World Markets

         ING Barings

                  Prudential Securities

                                                    Volpe Brown Whelan & Company

                  The date of this prospectus is       , 1999
<PAGE>

  [Yellow background with the following text centered on the top portion of the
page:

                             "The way to download.

    So, there's this new way of listening to music. EMusic.com. A
    new site with thousands of MP3 downloadable music choices.
    Where you can sample and download alternative, rock, hip hop,
    jazz, blues and more. By the song or the album. Artists you've
    heard of, the coolest indie lables, new things to discover. All
    for less than the cost of a CD. EMusic.com is downloadable
    music. Created by people who know and love music as much as you
    do."

The bottom center of the page contains a picture of the back of a man's head
with headphones with our logo displayed on his head.

                                The bottom right-hand corner displays our logo.]

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN OUR COMMON STOCK ON NASDAQ IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."

                                       2
<PAGE>

                               Table Of Contents

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Prospectus Summary.......................................................    4
Risk Factors.............................................................    8
Use of Proceeds..........................................................   19
Dividend Policy..........................................................   19
Capitalization...........................................................   20
Dilution.................................................................   21
Selected Financial Data..................................................   22
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................   23
Business.................................................................   29
Management...............................................................   41
Certain Transactions and Relationships...................................   48
Principal and Selling Stockholders.......................................   49
Description of Capital Stock.............................................   51
Shares Eligible for Future Sale..........................................   55
Price Range of Common Stock..............................................   56
Changes in and Disagreements with Accountants on Accounting and Financial
 Disclosure..............................................................   56
Underwriting.............................................................   57
Legal Matters............................................................   58
Experts..................................................................   59
Where You Can Find More Information About Us.............................   59
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.

Unless we indicate otherwise, all information in this prospectus assumes the
conversion of our preferred stock into shares of common stock and that the
underwriters do not exercise their over-allotment option.

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.

The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.

Until     , 1999, 25 days after commencement of this offering, all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

                                       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 75 record
labels and over 1,200 recording artists, including such well known artists as
The Offspring, They Might be Giants, Jimi Hendrix and Ella Fitzgerald. We
currently have over 13,000 titles available for download on our EMusic.com
website. In addition, our IUMA subsidiary offers our customers access to over
3,700 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 $88.0 million in 1998 to $6.7
billion in 2003. Of this amount, Forrester further estimates that $1.1 billion
will represent sales of downloadable music.

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 EMusic........
                                         5,000,000 shares

Common stock offered by the selling
stockholders..........................
                                           340,000 shares

Common stock to be outstanding after    33,561,237 shares
this offering.........................

Use of proceeds.......................  We intend to use the net proceeds for
                                        the acquisition of additional content,
                                        corporate branding, expansion of our
                                        sales and marketing activities and
                                        general corporate purposes, including
                                        working capital and capital
                                        expenditures.

                                        We will not receive any proceeds from
                                        the sale of shares of common stock by
                                        the selling stockholders. See "Use of
                                        Proceeds" and "Management's Discussion
                                        and Analysis of Financial Condition and
                                        Results of Operations--Liquidity and
                                        Capital Resources."

<TABLE>
<S>                                             <C>
Nasdaq National Market symbol.................. EMUS
</TABLE>
------------------

These share numbers are based on shares outstanding as of July 15, 1999 and
exclude:

 . 6,297,750 shares of common stock issuable upon exercise of outstanding
   options at an average exercise price of $7.12;

 . 1,707,800 shares of common stock issuable upon exercise of outstanding
   warrants at an average exercise price of $13.31; and

 . 4,656,850 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  Nine months   January 8, 1998  Three months
                               (inception) to      ended      (inception) to      ended
                                June 30, 1998  March 31, 1999 March 31, 1998  March 31, 1999
                               --------------- -------------- --------------- --------------
                                                (unaudited)                    (unaudited)
<S>                            <C>             <C>            <C>             <C>
Statement of Operations Data:
Revenues.....................             --    $     41,527            --     $     21,062
Gross profit.................             --          27,687            --           11,938
Loss from operations.........    $(1,180,104)     (4,267,921)   $  (88,927)      (2,289,781)
Net loss.....................    $(1,180,104)   $ (4,264,105)   $  (88,927)    $ (2,288,867)
                                 ===========    ============    ==========     ============
Net loss applicable to common
 shares......................    $(1,180,104)   $(36,058,438)   $  (88,927)    $(33,914,153)
                                 ===========    ============    ==========     ============
Net loss per common share-
 basic and diluted...........    $     (0.12)   $      (2.48)   $    (0.01)    $      (2.31)
                                 ===========    ============    ==========     ============
Weighted average common
 shares outstanding-basic and
 diluted.....................     10,234,055      14,560,552     6,607,357       14,674,372
Pro forma basic and diluted
 net loss per share..........                   $      (2.43)                  $      (2.18)
                                                ============                   ============
Pro forma weighted average
 common shares outstanding-
 basic and diluted...........                     14,865,363                     15,588,805
</TABLE>

<TABLE>
<CAPTION>
                                                              Quarters Ended
                                         ------------------------------------------------------------
                                         March 31,   June 30,    Sept. 30,   Dec. 31,     March 31,
                                           1998        1998        1998        1998          1999
                                         ---------  -----------  ---------  -----------  ------------
                                                      (all quarterly data unaudited)
<S>                                      <C>        <C>          <C>        <C>          <C>
Quarterly Statement of Operations Data:
Net revenue............................        --            --  $  12,452  $     8,013  $     21,062
Gross profit...........................        --            --     12,175        3,574        11,938
Net loss...............................  $(88,927)  $(1,091,177)  (849,483)  (1,125,755)   (2,288,867)
Net loss applicable to common shares...   (88,927)   (1,091,177)  (849,483)  (1,294,802)  (33,914,153)
</TABLE>

<TABLE>
<CAPTION>
                                                          As of  March 31, 1999
                                                         -----------------------
                                                           Actual    As Adjusted
                                                         ----------- -----------
                                                         (unaudited)
<S>                                                      <C>         <C>
Balance Sheet Data:
Cash and cash equivalents............................... $32,618,240  $
Working capital.........................................  29,719,397
Total assets............................................  38,800,350
Total long-term debt....................................          --
Total debt..............................................          --
Redeemable convertible preferred stock..................  31,767,593
Total stockholders' equity..............................   3,850,482
</TABLE>
------------------
The pro forma weighted average common shares outstanding include preferred
stock on an as converted basis as well as common stock. The as adjusted balance
sheet data presented below reflect the receipt of the net proceeds from the
sale of the 5,000,000 shares of common stock offered by us at an offering price
of    and after deducting underwriting discounts, commissions and estimated
offering expenses as well as the effect of preferred stock on an as converted
basis.

                                       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.

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.

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

                                       8
<PAGE>

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 March 31, 1999, we had net losses of $37.2 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 July 15, 1999, there were approximately 28,561,237 shares of common stock
outstanding, of which approximately 4,045,400 were tradable without restriction
under the Securities Act and 11,015,300 were tradable under Rule 144. Upon the
effectiveness of this registration statement, substantially all of our
remaining outstanding stock will be tradable under Rule 144.

                                       9
<PAGE>

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." Our stock is held by a limited number of investors and
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, Inc. 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

  . incurrence of amortization expenses if an acquisition is accounted for as
    a purchase, resulting in significant goodwill and other charges.

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. For
additional information regarding competition, see "Business--Competition."

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 together with the net proceeds
to us from this offering 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 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 or defamatory.

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

                                       15
<PAGE>

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 will control approximately 21.7% of our
common stock and will have power to influence significant corporate matters,
which may delay, deter or prevent transactions that could benefit investors in
this offering.

Assuming the conversion of all our outstanding preferred stock, upon completion
of this offering, executive officers and directors will, in the aggregate,
beneficially own approximately 21.7% of our outstanding common stock. These
stockholders would be 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.

                                       17
<PAGE>

Investors will experience immediate and substantial dilution.

The public offering price is expected to be substantially higher than the net
tangible book value of each outstanding share of common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of approximately $    per share in the net tangible book
value of the common stock from the public offering price. Investors will incur
additional dilution upon the exercise of outstanding stock options and
warrants.

Our management has broad discretion as to the net proceeds we receive from this
offering and, if we do not allocate these proceeds wisely, your investment
could suffer.

The net proceeds we receive from this offering will be used for acquisitions of
additional content, corporate branding, expansion of our sales and marketing
activities and working capital and general corporate purposes. There is no
specific allocation of these net proceeds, and our management retains the right
to utilize net proceeds as they determine. Our management may not use the
proceeds effectively.

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
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>

                                Use Of Proceeds

We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $  . If the underwriters fully exercise
the over-allotment option, the net proceeds of the shares sold by us will be
$  . "Net Proceeds" is what we expect to receive after paying the underwriting
discount and other expenses of this offering. For the purpose of estimating net
proceeds, we are assuming that the public offering price will be $   per share.
We will not receive any proceeds from the sale of shares by the selling
stockholders.

We will use the net proceeds for:

  .  the acquisition of additional content;

  .  corporate branding; and

  .  the expansion of our sales and marketing activities.

 We will use the balance of the net proceeds for general corporate purposes,
including working capital.

The timing and amount of our actual expenditures will be based on many factors,
including:

  .  the extent to which we have opportunities to acquire new content;

  .  the extent to which corporate branding opportunities present themselves;
     and

  .  the rate at which we expand our sales and marketing efforts.

Until we use the net proceeds of this offering, we will invest the funds in
short-term investment grade interest-bearing securities.

                                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.

                                       19
<PAGE>

                                 Capitalization

The following table shows:

  . the capitalization of EMusic on March 31, 1999;

  . the capitalization of EMusic on March 31, 1999, pro forma to give effect
    to the conversion of Series B preferred stock and the issuance of shares
    in connection with the completion of the content acquisition agreement
    with Nordic Entertainment and the acquisition of Internet Underground
    Music Archive; and

  . the capitalization of EMusic on March 31, 1999, assuming completion of
    this offering at an assumed offering price of $  per share and the use of
    the net proceeds as described under "Use of Proceeds."

<TABLE>
<CAPTION>
                                                     March 31, 1999
                                           ------------------------------------
                                                                         Pro
                                                                        Forma
                                                                          as
                                              Actual      Pro Forma    Adjusted
                                           ------------  ------------  --------
<S>                                        <C>           <C>           <C>
Redeemable convertible preferred stock:
  Series B, $0.01 par value;
   120,000 shares authorized; 117,570
   shares issued and outstanding actual;
   no shares issued and outstanding, pro
   forma and as adjusted.................. $ 31,767,593  $         --   $
  Undesignated, $0.01 par value;
   380,000 shares authorized; no shares
   issued and outstanding actual, pro
   forma and pro forma as
   adjusted ..............................           --            --
Stockholders' equity:
  Common stock, $0.01 par value;
   200,000,000 shares authorized;
   15,655,479 shares issued and
   outstanding, actual; 28,561,237 shares
   issued and outstanding, pro forma; and
   33,561,237 shares issued and
   outstanding, as adjusted...............      156,555       285,612
  Additional paid-in capital..............   40,938,469    91,433,533
  Note receivable from employee...........       (6,000)       (6,000)
  Accumulated deficit.....................  (37,238,542)  (37,238,542)
                                           ------------  ------------   -----
   Total stockholders' equity.............    3,850,482    54,474,603
                                           ------------  ------------   -----
    Total capitalization.................. $ 35,618,075  $ 54,474,603   $
                                           ============  ============   =====
</TABLE>

------------------
The number of outstanding shares in the preceeding table excludes 1,707,800
shares of common stock issuable upon the exercise of outstanding warrants with
a weighted average exercise price of $13.31 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.

                                       20
<PAGE>

                                    Dilution

Our pro forma consolidated net tangible book value as of March 31, 1999 was
approximately $28,664,000 or $1.00 per share. "Net tangible book value" is
total assets minus the sum of liabilities and intangible assets. "Net tangible
book value per share" is net tangible book value divided by the total number of
shares outstanding before this offering.

After giving effect to adjustments relating to this offering, our pro forma net
tangible book value on March 31, 1999 would have been $   or $   per share. The
adjustments made to determine pro forma net tangible book value per share are
the following:

  . an increase in total assets to reflect the net proceeds of this offering
    as described under "Use of Proceeds" assuming that the public offering
    price will be $   per share; and

  . the addition of the number of shares offered by us to the number of
    shares outstanding.

The following table illustrates the pro forma increase in net tangible book
value of $   per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:

<TABLE>
   <S>                                                              <C>   <C>
   Assumed public offering price per share.........................       $
   Pro forma net tangible book value per share as of March 31,
    1999........................................................... $
   Increase in net tangible book value attributable to new public
    investors......................................................
                                                                    -----
   Pro forma as adjusted net tangible book value per share as of
    March 31, 1999 after giving effect to this offering............
                                                                          -----
   Dilution per share to new investors in this offering............       $
                                                                          =====
</TABLE>

The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the public offering price will be $   per share. The following table does not
give effect to sales of shares by the selling stockholders.

<TABLE>
<CAPTION>
                                               Shares         Total      Average
                                             Purchased    Consideration   Price
                                           -------------- --------------   Per
                                           Number Percent Amount Percent  Share
                                           ------ ------- ------ ------- -------
   <S>                                     <C>    <C>     <C>    <C>     <C>
   Existing stockholders..................              % $            % $
   New investors..........................
                                           -----   -----  ------  -----
     Total................................         100.0% $       100.0%
                                           =====   =====  ======  =====
</TABLE>

                                       21
<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 period from our inception on January
8, 1998 to June 30, 1998, and the balance sheet data at June 30, 1998, are
derived from our audited financial statements, which are included elsewhere in
this prospectus. The statement of operations data for the period from inception
to March 31, 1998 are derived from audited financial statements that are not
included in this prospectus. The statement of operations data for the nine
months ended March 31, 1999 and the period from inception through March 31,
1999 are derived from our unaudited financial statements included elsewhere in
this prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, that are necessary for the
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of future results. We have paid no cash
dividends on our common stock.

<TABLE>
<CAPTION>
                                                                           Combined
                                                                         Consolidated
                          January 8, 1998  Nine months   January 8, 1998 Nine Months
                          (inception) to      ended      (inception) to  ended March
                           June 30, 1998  March 31, 1999 March 31, 1999    31, 1999
                          --------------- -------------- --------------- ------------
<S>                       <C>             <C>            <C>             <C>
Statement of Operation
 Data:
Revenues................    $        --    $     41,527   $     41,527   $    392,885
Cost of revenues........             --          13,840         13,840         45,410
                            -----------    ------------   ------------   ------------
Gross profit............             --          27,687         27,687        347,475
                            -----------    ------------   ------------   ------------
Operating expenses:
  Product development...    $   961,349       3,580,014      4,541,363      3,723,661
  Selling general and
   administrative.......        218,755         715,594        934,349      5,585,286
  Amortization of
   deferred
   compensation.........             --              --             --        130,870
                            -----------    ------------   ------------   ------------
                              1,180,104       4,295,608      5,475,712      9,439,817
                            -----------    ------------   ------------   ------------
Operating loss..........     (1,180,104)     (4,267,921)    (5,448,025)    (9,092,342)
Interest income.........             --          39,365         39,365         39,471
Interest expense........             --         (35,549)       (35,549)       (35,549)
                            -----------    ------------   ------------   ------------
Net loss................    $(1,180,104)   $ (4,264,105)  $ (5,444,209)  $ (9,088,420)
                            -----------    ------------   ------------   ------------
Accretion of Series A
 and B preferred to
 redemption value.......             --        (177,255)      (177,255)      (177,255)
Beneficial conversion
 charge, Series B
 preferred stock........             --     (31,577,078)   (31,577,078)   (31,577,078)
Dividend on Series B
 preferred stock (Note
 3).....................             --         (40,000)       (40,000)       (40,000)
                            -----------    ------------   ------------   ------------
Net loss applicable to
 common shares..........    $(1,180,104)   $(36,058,438)  $(37,238,542)  $(40,882,753)
                            ===========    ============   ============   ============
Net loss per common
 share--basic and
 diluted................    $     (0.12)   $      (2.48)  $      (2.89)  $      (2.64)
                            ===========    ============   ============   ============
Weighted average common
 shares outstanding--
 basic and diluted......     10,234,055      14,560,552     12,889,520     15,498,691
Pro forma net loss per
 common share...........    $     (0.12)   $      (2.43)  $      (2.85)  $      (2.59)
                            ===========    ============   ============   ============
Weighted average common
 shares outstanding used
 in computing pro forma
 basic and diluted net
 loss per share.........     10,234,055      14,865,363     13,078,713     15,803,502
</TABLE>

<TABLE>
<CAPTION>
                                                                   Combined
                                                                 Consolidated
                                   June 30, 1998 March 31, 1999 March 31, 1999
                                   ------------- -------------- --------------
<S>                                <C>           <C>            <C>
Balance Sheet Data:
Cash and cash equivalents.........   $509,751     $32,618,240    $32,651,777
Working capital...................    395,913      29,719,397     28,691,105
Total assets......................    581,860      38,800,350     47,967,092
Total long-term debt..............         --              --        309,550
Total debt........................         --              --        493,188
Redeemable convertible preferred
 stock............................         --      31,767,593     31,767,593
Total stockholders' equity........    446,660       3,850,482     11,621,755
</TABLE>

                                       22
<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 March 31, 1999, we have incurred costs to organize and develop an
Internet website to conduct our business. We began selling musical recordings
over the Internet in July 1998. 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.

                                       23
<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
                         -------------------------------------------------------------
                         March 31,   June 30,     Sept 30,     Dec 31,     March 31,
                           1998        1998         1998        1998          1999
                         ---------  -----------  ----------  -----------  ------------
<S>                      <C>        <C>          <C>         <C>          <C>
Net revenue.............        --           --  $   12,452  $     8,013  $     21,062
Cost of revenue.........        --           --         277        4,439         9,124
                         ---------  -----------  ----------  -----------  ------------
Gross profit............        --           --      12,175        3,574        11,938
                         ---------  -----------  ----------  -----------  ------------
Operating expenses:
 Product development.... $  42,182  $   919,167     666,712      925,249     1,988,053
 Selling, general and
  administrative........    46,745      172,010     197,256      204,672       313,666
                         ---------  -----------  ----------  -----------  ------------
  Total operating
   expenses.............    88,927    1,091,177     863,968    1,129,921     2,301,719
                         ---------  -----------  ----------  -----------  ------------
Loss from operations....   (88,927)  (1,091,177)   (851,793)  (1,126,347)   (2,289,781)
Interest income.........        --           --       2,310          592        36,463
Interest expense........        --           --          --           --       (35,549)
                         ---------  -----------  ----------  -----------  ------------
Net loss................ $ (88,927) $(1,091,177) $ (849,483) $(1,125,755) $ (2,288,867)
                         ---------  -----------  ----------  -----------  ------------
Accretion of Series A
 and B preferred stock
 to redemption value....        --           --          --     (169,047)       (8,208)
Beneficial conversion
 charge, Series B
 preferred stock........        --           --          --           --   (31,577,078)
Dividend on Series B
 preferred stock........        --           --          --           --       (40,000)
                         ---------  -----------  ----------  -----------  ------------
Net loss applicable to
 common shares.......... $ (88,927) $(1,091,177) $ (849,483) $(1,294,802) $(33,914,153)
                         =========  ===========  ==========  ===========  ============
Net loss per common
 share-basic and
 diluted................ $   (0.01) $     (0.08) $    (0.06) $     (0.09) $      (2.31)
                         =========  ===========  ==========  ===========  ============
Weighted average common
 shares outstanding
 basic and diluted...... 6,607,357   12,847,724  14,591,336   14,581,212    14,674,372
</TABLE>

Net Revenues

We are a development stage company. We earned no revenue from inception through
June 30, 1998. For the three quarters ended March 31, 1999, our revenues
totaled $41,527. 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 three quarters ended March 31, 1999 totaled $13,840.
These costs consist of the cost of merchandise sold, credit card processing
fees and royalties on downloadable music. 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.

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;

  . certain non-recoverable advances to artists and artist development;

                                       24
<PAGE>

  . telecommunications charges; and

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

Product development expenses were $1,988,053 for the three months ended March
31, 1999, compared to $42,182 for the period ended March 31, 1998. They were
$3,580,014 for the nine months ended March 31, 1999 and $4,541,363 from
inception through March 31, 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.

Product development expenses included charges of $865,168 and $1,495,608 due to
stock and stock options granted to advisors during the three and nine months
ended March 31, 1999, respectively. Product development expenses included
similar charges of $751,714 from inception through June 30, 1998. Additionally,
we charged approximately $338,000 to product development expense for the
amortization of the intangibles associated with our acquisition of Creative
Fulfillment. Because we plan to continue to aggregate musical recordings and to
develop the software necessary to manage downloads, we expect that product
development expenses will increase in future periods.

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 have begun an extensive sales and marketing campaign.
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 $934,349 from inception
through March 31, 1999, related to general and administrative expenses. Of
these costs, $313,666 and $715,594 were incurred in the three and nine months
ended March 31, 1999, respectively. 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.

Liquidity and Capital Resources

We had a cash balance of $32,618,240 at March 31, 1999. For the period from
inception through March 31, 1999, net cash of $98,122 was used for operating
activities consisting of net losses of $5,444,209, substantially offset by:

  . non-cash expenses of $2,247,322 associated with stock and stock options
    granted to advisors; and

  . increased accrued liabilities of $2,615,422 principally related to
    issuance costs for our Series B preferred stock.

Additionally, we purchased approximately $180,300 in capital equipment from
inception through March 31, 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.

                                       25
<PAGE>

During the period from December 1998 through March 1999, we received loans in
the form of convertible notes payable totaling $1,743,500. 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 and Series A
shares, were $31,577,078, net of issuance costs of approximately $2,724,000, of
which approximately $2,500,000 remained in accrued liabilities at March 31,
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
period ended March 31, 1999.

In April 1999, we entered into a five-year lease agreement for 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.

Since inception, we have experienced significant losses and negative cash flows
from operations. We believe that our existing capital resources together with
the proceeds from this offering will be sufficient to fund our planned level of
operating activities, capital expenditures and other obligations through the
next 12 months. However, we may need to raise additional funds in future
periods through public or private financings, or other sources, to fund our
operations and potential acquisitions, if any, until we achieve profitability,
if ever. We may not be able to obtain adequate or favorable financing at that
time. Failure to raise capital when needed could harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.

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 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.

                                       26
<PAGE>

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, Inc. 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.

Quantitative and Qualitative Disclosures About Market Risk

We considered the provision 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 March 31, 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........................................... $509,751    $  --    $509,751
   Weighted Average Interest Rate................      4.9%      --
  Total Portfolio................................ $509,751    $  --    $509,751
                                                  ========    =====    ========
</TABLE>


                                       27
<PAGE>

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.

                                       28
<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 75
record labels and over 1,200 recording artists, including such well known
artists as The Offspring, They Might be Giants, Jimi Hendrix, and Ella
Fitzgerald. We currently have over 13,000 titles available for download on our
EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 3,700 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 will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
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.

                                       29
<PAGE>

Forrester estimates that total online music revenues in the United States are
expected to grow from $88.0 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. 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. According to Webnoize Inside, an affiliate of Digital Music
Network, Inc., mp3 is the most widely recognized digital music format. 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, 30% 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 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

                                       30
<PAGE>

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 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.

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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.

Compelling Music Selection. We currently have exclusive, multi-year, digital
download licenses to over 300,000 titles, from over 75 record labels and over
1,200 recording artists, including such well known artists as The Offspring,
They Might Be Giants, Jimi Hendrix and Ella Fitzgerald. In addition, IUMA
offers our customers access to over 3,700 unsigned artists. We currently have
over 13,000 titles available for download on our EMusic.com website. 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.


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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 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 Mp3 Association, Digital Music
Association and Electronic Frontier Foundation, organizations dedicated to
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.


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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 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 over 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

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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 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 Bunnyman'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, Inc. aimed at promoting the growth of downloadable music sales
    in the popular mp3 format. Adaptec is the developer

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   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 "back
    to school" and the holiday season.

 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 3,700 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 bios, 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.

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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.

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. This system
utilizes 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.

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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 servers. Our servers are 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;

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  . 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;

  . 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,

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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 July 22, 1999, we had 63 full-time employees, including 30 in content
acquisition and marketing, 12 in engineering and product development, 10 in
finance and operations and 11 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.

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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                                   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 July 15, 1999 are as
follows:

<TABLE>
<CAPTION>
Name                   Age                     Position(s)
----                   ---                     -----------
<S>                    <C> <C>
Robert H. Kohn *......  42 Chairman and Secretary
Gene Hoffman, Jr. *...  23 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........  49 Executive Vice President, Business Affairs
Brian Brinkerhoff.....  36 Vice President, Content Acquisition
Steve Grady...........  33 Vice President, Marketing
Peter Harter..........  30 Vice President, Global Public Policy and Standards
Spencer Leyton........  51 Vice President, Corporate Development, M&A
Marv Su...............  36 Vice President, Interactive Marketing
Brett A. Thomas.......  29 Vice President, Technology
Tor Braham............  41 Director
Ralph Peer, II........  54 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.


                                       41
<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 1999 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.

Brian Brinkerhof 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.

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.

                                       42
<PAGE>

Spencer Leyton joined EMusic in April 1999 as Vice President, Corporate
Development, M&A. 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.

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. Rosenblat 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.

                                       43
<PAGE>

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 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.

                                       44
<PAGE>

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>
------------------

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.

                                       45
<PAGE>

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;

 . 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 July 15, 1999, six million shares are reserved for issuance under the
1998 option plan, 45,400 shares have been issued upon the exercise of options,
options to purchase of a total of 2,946,750 shares at a weighted average
exercise price of $3.52 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).

                                       46
<PAGE>

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 July 15, 1999, five million shares are reserved for issuance under the
nonstatutory plan, no shares have been issued upon the exercise of options,
options to purchase of a total of 3,351,000 shares at a weighted average
exercise price of $10.29 per share were outstanding and 1,649,000 shares were
available for future option grants.

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.

                                       47
<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 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 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 its 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 July 15, 1999, 2,618,136 and 2,253,514 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.

                                       48
<PAGE>

                       Principal and Selling Stockholders

The following table sets forth, immediately before this offering and
immediately after this offering, the ownership of our voting stock, including
optioned shares, assuming the conversion of all of the outstanding shares of
our common stock 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;

 . all executive officers and directors as a group; and

 . other stockholders.

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 July 15, 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 July 15, 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.

<TABLE>
<CAPTION>
                              Before Offering                        After Offering
                          --------------------------           ---------------------------
                           Number of
                           Shares of                 Number of Number of Shares
                          Common Stock                Shares   of Common Stock
  Beneficial Owner(1)        Owned        Percent(2)  Offered       Owned       Percent(2)
  -------------------     ------------    ---------- --------- ---------------- ----------
<S>                       <C>             <C>        <C>       <C>              <C>
5% Stockholders
Citiventure 96
 Partnership, L.P.
 c/o Invesco Private
  Capital
 1166 Avenue of the
  Americas, 2700
 New York, NY 10036.....   3,333,400(3)      11.5%                3,333,400         9.8%
VantagePoint Venture
 Partners
 1001 Bayhill Drive,
  Suite 140
 San Bruno, CA 94066....   1,686,500(4)       5.8%                1,686,500         4.9%
Directors and Executive
 Officers
Robert H. Kohn..........   2,981,700         10.3%    100,000     2,881,700         8.5%
Gene Hoffman, Jr........   3,702,000(5)      12.7%    100,000     3,602,000        10.6%
Joseph H. Howell........     278,624(6)       *       100,000       178,624         *
Peter M. Astiz..........     236,000          *        20,000       216,000         *
James R. Chapman........      99,941(7)       *        20,000        79,941         *
Tor Braham..............      46,600(8)       *                      46,600         *
Ralph Peer, II..........     308,900(9)       1.0%                  308,900         *
Ed Rosenblatt...........     100,000(10)      *                     100,000         *
Executive officers and
 directors as a group (8
 persons)...............   7,753,765(11)     26.7%                7,413,765        21.7%
</TABLE>

                                       49
<PAGE>

------------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
    acquired by such person within 60 days upon the exercise of options.
    Calculations of percentages of beneficial ownership assume the exercise by
    only the respective named shareholders of all options for the purchase of
    common stock held by such shareholder which are exercisable within 60 days
    of July 15, 1999.
(2) Percentage of beneficial ownership excludes up to 5,761,145 shares issuable
    upon exercise of outstanding stock options and warrants.
(3) 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.
(4) 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.
(5) Includes 400,000 shares for which Gene Hoffman has voting rights pursuant
    to a voting agreement. Mr. Hoffman disclaims beneficiary ownership of such
    shares except to the extent of his pecuniary interest therein.
(6) Includes 268,264 shares issuable upon exercise of outstanding options.
(7) Includes 33,341 shares issuable upon exercise of outstanding options.
(8) Includes 35,000 shares issuable upon exercise of outstanding options.
(9) 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.
(10) Represents shares issuable upon exercise of outstanding options.
(11) Includes 536,605 shares issuable upon exercise of outstanding options.

                                       50
<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 July 15, 1999, there were approximately 28,561,000 shares of common stock
outstanding held of record by approximately 201 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 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
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 July 15, 1999, we had outstanding warrants to purchase an aggregate of
1,707,800 shares of our common stock. Warrants as to 100,000 shares expire in
October 2003 and have an exercise price equal to $7.91. 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
exercise price of $13.63 and expire in June 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 convertible or exercisable. In accordance with this agreement,
we intend to file a registration statement with the

                                       51
<PAGE>

SEC with respect to the resale of up to approximately 13,200,000 shares of our
common stock prior to the completion of this offering. All shares subject to
such filing will be subject to the lock-up restrictions described below. As of
July 15, 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.


                                       52
<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. No preferred stock will be designated upon consummation of
this offering. After this offering, we will have outstanding approximately
33,561,000 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

                                       53
<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 numbers at this location is
(801) 272-9294.

                                       54
<PAGE>

                        Shares Eligible for Future Sale

Upon completion of this offering, we will have outstanding approximately
33,561,000 shares of common stock, assuming no exercise of options or warrants
after July 15, 1999. Of these shares, the 5,340,000 shares sold in this
offering will be 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 28,221,237 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. We intend to file a registration statement
with the SEC covering the resale of 13,032,367 of such shares. Upon the
effectiveness of such registration statement, such shares will be freely
tradeable without restriction except to the extent that such shares are held by
affiliates of EMusic. Of the remaining shares, approximately 4,045,400 are
freely tradeable, approximately 10,695,300 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. Of
the outstanding shares, approximately           will be subject to "lock-up"
agreements described below on the effective date of the offering.

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   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.

Prior to this offering, there has been only a limited public market for our
common stock, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of our common
stock cannot be predicted. Nevertheless, sales of substantial amounts of these
shares in the public market, or the perception that these sales could occur,
could adversely affect the trading price of our common stock and could impair
our future ability to raise capital through an offering of our equity
securities.

Options

As of July 15, 1999, there were a total of 6,297,750 shares of common stock
subject to outstanding options under our stock option plans, 1,872,259 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.

                                       55
<PAGE>

Warrants

As of July 15, 1999, 1,707,800 shares of our common stock were subject to
outstanding warrants. Of such shares, 100,000 are subject to a registration
statement which we intend to file with the SEC prior to the completion of this
offering. 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.

Lock-up Agreements

Our officers, directors and some other stockholders, holding in total
approximately           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 the date of this offering. Other stockholders holding
in total approximately            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 year ending June 30, 1999 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
</TABLE>

On July 22, 1999, the last sale price reported on the Nasdaq National Market
for our common stock was $21.38 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.

                                       56
<PAGE>

                                  Underwriting


EMusic and the selling stockholders have entered into an underwriting agreement
with the underwriters named below. CIBC World Markets Corp., ING Barings LLC,
Prudential Securities and Volpe Brown Whelan & Company, LLC are acting as
representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of common stock set forth opposite its name
below:

<TABLE>
<CAPTION>
                                                                       Number of
   Underwriters                                                         Shares
   ------------                                                        ---------
   <S>                                                                 <C>
   CIBC World Markets Corp............................................
   ING Barings LLC....................................................
   Prudential Securities Incorporated.................................
   Volpe Brown Whelan & Company, LLC..................................
                                                                         ----
       Total..........................................................
                                                                         ====
</TABLE>

This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.

The representatives have advised EMusic and the selling stockholders that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to certain securities dealers
at such price less a concession of $     per share. The underwriters may also
allow, and such dealers may reallow, a concession not in excess of $     per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.

EMusic has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of      additional shares from
EMusic to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $     million, and the total proceeds to EMusic will be $    .
The underwriters have severally agreed that, to the extent the over-allotment
option is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.

The following table provides information regarding the amount of the discount
to be given to the underwriters by EMusic and the selling stockholders.

<TABLE>
<CAPTION>
                                       Total Without Exercise  Total With Full Exercise
                            Per Share of Over-Allotment Option of Over-Allotment Option
                            --------- ------------------------ ------------------------ ---
   <S>                      <C>       <C>                      <C>                      <C>
   EMusic..................    $                $                        $
   Selling stockholders....
   Total...................
</TABLE>

                                       57
<PAGE>

EMusic estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $    .

EMusic and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.

EMusic, its officers and directors and some other stockholders have agreed to a
90-day "lock up" with respect to approximately    shares of common stock and
certain other EMusic securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that,
subject to certain exceptions, for a period of 90 days following the date of
this prospectus, EMusic and such persons may not directly or indirectly offer,
sell, pledge or otherwise dispose of the EMusic securities without the prior
written consent of CIBC World Markets Corp. 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.

Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:

 . Stabilizing transactions--The representatives may make bids or purchases
   for the purpose of pegging, fixing or maintaining the price of the shares,
   so long as stabilizing bids do not exceed a specified maximum.

 . Over-allotments and syndicate covering transactions--The underwriters may
   create a short position in the shares by selling more shares than are set
   forth on the cover page of this prospectus. If a short position is created
   in connection with the offering, the representatives may engage in
   syndicate covering transactions by purchasing shares in the open market.
   The representatives may also elect to reduce any short position by
   exercising all or part of the over-allotment option.

 . Penalty bids--If the representatives purchase shares in the open market in
   a stabilizing transaction or syndicate covering transaction, they may
   reclaim a selling concession from the underwriters and selling group
   members who sold those shares as part of this offering.

 . Passive market making--Market makers in the shares who are underwriters or
   prospective underwriters may make bids for or purchases of shares, subject
   to certain limitations, until the time, if ever, at which a stabilizing bid
   is made.

Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.

Neither EMusic nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.

                                 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 83 shares of our Series B preferred stock
(convertible into 8,300 shares of common stock). Various legal matters relating
to our common stock will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Palo Alto, California.

                                       58
<PAGE>

                                    Experts

The financial statements of EMusic.com Inc. as of June 30, 1998 and for the
period then ended, 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 issued by us and the
selling stockholders. This prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedule filed therewith. For
further information with respect to EMusic and the common stock, reference is
made to the Registration Statement and the exhibits and schedules 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.

                                       59
<PAGE>

                         Index to Financial Statements

                  Index to Financial Statements- June 30, 1998

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report Of Independent Accountants.........................................   F2
Balance Sheet.............................................................   F3
Statements of Operations..................................................   F4
Statement of Stockholders' Equity.........................................   F5
Statement Of Cash Flows...................................................   F6
Notes To Financial Statements.............................................   F7

       Index to Unaudited Condensed Financial Statements- March 31, 1999

<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Unaudited Condensed Consolidated Balance Sheets...........................  F14
Condensed Consolidated Statements of Operations...........................  F15
Condensed Consolidated Statements Of Cash Flows...........................  F16
Notes To Condensed Consolidated Financial Statements......................  F17

                    Index to Pro Forma Financial Statements

<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Unaudited Pro Forma Condensed Combining Financial Information.............  F23
Unaudited Pro Forma Condensed Combining Income Statement Data--Nine Months
 Ended
 March 31, 1999...........................................................  F24
Unaudited Pro Forma Condensed Combining Income Statement Data--Twelve
 Months Ended
 June 30, 1998............................................................  F25
Unaudited Pro Forma Condensed Combining Balance Sheet--March 31, 1999.....  F26
Notes to the Unaudited Pro Forma Condensed Combining Financial
 Statements...............................................................  F27

           Index to Financial Statements- Creative Fulfillment, Inc.

<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report Of Independent Accountants.........................................  F28
Balance Sheets............................................................  F29
Statements of Operations..................................................  F30
Statement of Stockholders' Equity (Deficit)...............................  F31
Statements Of Cash Flows..................................................  F32
Notes To Financial Statements.............................................  F33

                      Index to Financial Statements- IUMA

<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report Of Independent Accountants.........................................  F37
Balance Sheets............................................................  F38
Statements of Operations..................................................  F39
Statement of Stockholders' Deficit........................................  F40
Statements of Cash Flows..................................................  F41
Notes To Financial Statements.............................................  F42
</TABLE>

                                      F-1
<PAGE>

                       Report of Independent Accountants

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

In our opinion, the accompanying balance sheet and the related 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) at June 30, 1998, and
the results of its operations and its cash flows for the period from January 8,
1998 (Inception) to June 30, 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 audit. We conducted our audit 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.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations since
inception and has to obtain additional capital to fund its ongoing operations.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP

San Jose, California
October 28, 1998

                                      F-2
<PAGE>

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

                                 BALANCE SHEET

                                 June 30, 1998

<TABLE>
<S>                                                                 <C>
ASSETS
Current Assets:
 Cash.............................................................. $  509,751
 Prepaid expenses and other current assets.........................     21,362
                                                                    ----------
  Total current assets.............................................    531,113
Property and equipment, net........................................     34,227
Other assets.......................................................     16,520
                                                                    ----------
    Total assets................................................... $  581,860
                                                                    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Accounts payable.................................................. $  118,218
 Accrued compensation..............................................     16,982
                                                                    ----------
  Total current liabilities........................................    135,200
                                                                    ----------
Commitments (Note 5)
Stockholders' Equity:
 Preferred Stock, $0.01 par value; 500,000 shares authorized; no
  shares issued and outstanding....................................         --
 Common Stock, $0.01 par value; 200,000,000 shares authorized;
  14,715,300 shares issued and outstanding.........................    147,153
 Additional paid-in capital........................................  1,485,611
 Notes receivable from employees...................................     (6,000)
 Deficit accumulated during the development stage.................. (1,180,104)
                                                                    ----------
  Total stockholders' equity.......................................    446,660
                                                                    ----------
    Total liabilities and stockholders' equity..................... $  581,860
                                                                    ==========
</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)

                            STATEMENT OF OPERATIONS
        For the Period from January 8, 1998 (Inception) to June 30, 1998

<TABLE>
<S>                                                                <C>
Revenues.......................................................... $        --
                                                                   -----------
Operating expenses:
  Product development.............................................     961,349
  General and administrative......................................     218,755
                                                                   -----------
                                                                     1,180,104
                                                                   -----------
Net loss.......................................................... $(1,180,104)
                                                                   ===========
Net loss per share--basic and diluted............................. $     (0.12)
                                                                   ===========
Weighted average common shares outstanding--basic and diluted.....  10,234,055
                                                                   ===========
</TABLE>



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

                                      F-4
<PAGE>

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

                       STATEMENT OF STOCKHOLDERS' EQUITY
          for the Period January 8, 1998 (Inception) to June 30, 1998

<TABLE>
<CAPTION>
                                                                           Deficit
                                                                         Accumulated
                             Common Stock     Additional      Notes      during the       Total
                          -------------------  Paid-In      Receivable   Development  Stockholders'
                            Shares    Amount   Capital    from Employees    Stage        Equity
                          ---------- -------- ----------  -------------- -----------  -------------
<S>                       <C>        <C>      <C>         <C>            <C>          <C>
Issuance of common stock
 at inception of the
 Company................   8,378,000 $ 83,780 $  (83,780)    $     --    $        --   $        --
Issuance of common stock
 on March 30, 1998......   1,191,800   11,918     (1,818)     (10,100)            --            --
Issuance of common stock
 in exchange for
 services on March 30,
 1998...................     672,600    6,726     (1,026)          --             --         5,700
Issuance of common stock
 in exchange for
 services on April 12,
 1998...................     271,400    2,714      4,186           --             --         6,900
Conversion of notes
 payable into common
 stock on May 1, 1998...     501,500    5,015    164,985           --             --       170,000
Payment on note
 receivable.............          --       --         --        4,100             --         4,100
Issuance of shares in
 connection with merger
 (Note 1)...............   3,700,000   37,000    651,350           --             --       688,350
Issuance of options to
 advisors...............          --       --    751,714           --             --       751,714
Net loss for the period
 from January 8, 1998
 (inception) through
 June 30, 1998..........          --       --         --           --     (1,180,104)   (1,180,104)
                          ---------- -------- ----------     --------    -----------   -----------
Balance at June 30,
 1998...................  14,715,300 $147,153 $1,485,611     $ (6,000)   $(1,180,104)  $   446,660
                          ========== ======== ==========     ========    ===========   ===========
</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)

                            STATEMENT OF CASH FLOWS
        for the Period from January 8, 1998 (Inception) to June 30, 1998

<TABLE>
<S>                                                               <C>
Cash flows from operating activities:
Net loss......................................................... $(1,180,104)
Adjustments to reconcile net loss to net cash used in operating
 activities:
 Depreciation....................................................       3,157
 Common stock issued for services................................      12,600
 Options issued to advisors......................................     751,714
 Changes in assets and liabilities, net of effects of merger:
 Prepaid expenses and other current assets.......................     (21,362)
 Accounts payable................................................     116,568
 Accrued compensation............................................      16,982
 Other assets....................................................     (16,520)
                                                                  -----------
Net cash used in operating activities............................    (316,965)
                                                                  -----------
Cash flows from investing activities:
Purchase of property and equipment...............................     (37,384)
Cash flows from financing activities:
Proceeds from repayment of notes receivable from employees.......       4,100
Issuance of common stock in connection with merger (Note 1)......     690,000
Proceeds from issuance of notes payable..........................     170,000
                                                                  -----------
Net cash provided by financing activities........................     864,100
                                                                  -----------
Cash at end of period............................................ $   509,751
                                                                  ===========
Supplemental cash flow disclosures:
Non cash transactions:
Conversion of notes payable into common stock.................... $   170,000
Issuance of common stock for notes receivable.................... $    10,100
</TABLE>


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


                                      F-6
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                         Notes to Financial Statements

                                 June 30, 1998

1. The Company and Summary of Significant Accounting Policies

The Company, its Recapitalization and Liquidity

EMusic.com (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 has been presented
as a recapitalization of the Company. Atlantis is 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 of $690,000,
liabilities of $1,650 and an accumulated deficit of $1,650. Following the
recapitalization, Atlantis changed its name to GoodNoise Corporation. The
accompanying financial statements reflect all share amounts after giving effect
to the recapitalization.

The Company has incurred losses from operations since inception and has to
obtain additional capital to fund its ongoing operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management is in the process of pursuing additional equity financing although
there can be no assurance that they will be successful in their efforts. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.

 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.

 Fair Value of Financial Instruments

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

 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.

 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

                                      F-7
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998

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 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." The Company accounts for stock
issued to non employees in accordance with provisions of SFAS 123.

 Net Loss Per Share

The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. The weighted average shares used to
compute basic net loss per share include outstanding shares of common stock
from the date of issuance and excludes, for the period from January 8, 1998
(inception) through June 30, 1998, 508,056 shares of common stock subject to
repurchase rights. In addition, the calculation of diluted net loss per share
excludes common stock issuable upon exercise of employee stock options and
shares subject to repurchase as their effect is antidilutive. At June 30, 1998
potentially dilutive seurities arising from options outstanding amounted to
908,297 common stock equivalents.

 Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. There are no differences between the net loss for the
period from January 8, 1998 (inception) to June 30, 1998 and comprehensive
income (loss) for the same period.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 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 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 FASB 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 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-8
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998


2.  Property and Equipment

<TABLE>
<CAPTION>
                                                                       June 30,
                                                                         1998
                                                                       --------
   <S>                                                                 <C>
   Software........................................................... $ 5,215
   Computer equipment.................................................  27,169
   Furniture and fixtures.............................................   5,000
                                                                       -------
                                                                        37,384
   Less: Accumulated depreciation.....................................  (3,157)
                                                                       -------
                                                                       $34,227
                                                                       =======
</TABLE>

3. Borrowings

During the period ended June 30, 1998, the Company entered into agreements to
borrow $170,000, through the issuance of promissory notes which bore interest
at 10.0% per annum, of which $110,000 were issued to two of the Company's
directors and one member of its advisory board. All outstanding principal and
interest related to these notes was to be converted at the closing of the
Company's initial sale of Series A Preferred Stock. The Company did not issue
the Series A Preferred Stock and, on May 1, 1998, these notes were converted
into 501,500 shares of Common Stock.

4. Related Party Transactions

At June 30, 1998, the Company had notes receivable related to stock purchases
by certain employees of the Company totaling $6,000. The notes are non-interest
bearing and are payable on demand.

See Note 3 for additional related party transactions.

5. Commitments

The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $12,934 for the period from January 8,
1998 (inception) to June 30, 1998.

Future minimum lease payments under this noncancelable operating lease are as
follows:

<TABLE>
<CAPTION>
   Year Ending June 30,
   <S>                                                                  <C>
   1999................................................................ $ 46,425
   2000................................................................   51,892
   2001................................................................   32,590
                                                                        --------
                                                                        $130,907
                                                                        ========
</TABLE>

6. Stockholders' Equity

 Restricted stock

A total of 8,378,000 shares of Common Stock were issued to founders of which
1,062,000 shares were issued under a Restricted Stock Purchase Agreement (the
"Agreement") to one of the founders. The Agreement

                                      F-9
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)
                   Notes to Financial Statements--(Continued)
                                 June 30, 1998

provides the Company with the right to repurchase 590,000 of these shares at
$0.01, subject to ratable vesting over three years. As of June 30, 1998, a
total of 508,056 shares were subject to repurchase by the Company.

 Stock Option Plan

On March 30, 1998, the Company adopted the 1998 Stock Option Plan ("1998 Plan")
that provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock and
for stock-based awards to officers, directors and key employees of the Company
and to non-employee consultants and independent contractors. Options granted to
employees under the 1998 Plan generally vest ratably over three years.

Option activity under the 1998 plan for the period January 8, 1998 (inception)
to June 30, 1998 was as follows:

<TABLE>
<CAPTION>
                                                           Outstanding Options
                                                           ----------------------
                                                                       Weighted
                                                Options                 Average
                                               Available               Exercise
                                               for Grant     Shares      Price
                                               ----------  ----------- ----------
   <S>                                         <C>         <C>         <C>
   Authorized.................................  2,360,000           --  $    --
   Granted.................................... (2,437,550)   2,437,550     0.85
   Authorized.................................    640,000           --       --
                                               ----------  -----------
   As of June 30, 1998........................    562,450    2,437,550     0.85
                                               ==========  ===========
</TABLE>

The following table summarizes information with respect to stock options
outstanding at June 30, 1998:

<TABLE>
<CAPTION>
                      Options Outstanding                Options Exercisable
             ----------------------------------------  -------------------------
               Average                      Weighted                   Weighted
  Range       Remaining        Number       Average       Number       Average
 Exercise    Contractual     Outstanding    Exercise    Exercisable    Exercise
  Price      Life (Years)   June 30, 1998    Price     June 30, 1998    Price
 --------    ------------   -------------   --------   -------------   --------
<S>          <C>            <C>             <C>        <C>             <C>
$0.01-0.03       4.83         2,032,550      $0.03        416,606       $0.02
      5.00       4.92           405,000       5.00        380,694        5.00
                              ---------                   -------
                              2,437,550       0.85        797,300        2.40
                              =========                   =======
</TABLE>

Fair Value Disclosures

Had compensation cost for the Company's Stock Option Plan been determined based
on the fair value at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share for
the period from January 8, 1998 (inception) through June 30, 1998 would have
been as follows:

<TABLE>
<CAPTION>
                                                                     Period
                                                                      Ended
                                                                    June 30,
                                                                      1998
                                                                   -----------
   <S>                                                             <C>
   Net loss--as reported.......................................... $(1,180,104)
   Net loss--pro forma............................................  (1,458,199)
   Net loss per share basic and diluted--as reported..............       (0.12)
   Net loss per share basic and diluted--pro forma................       (0.14)
</TABLE>

                                      F-10
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998


The above pro forma disclosures are not necessarily representative of the
effects on reported net income for future years.

The aggregate fair value and weighted average fair value per share of options
granted to employees and advisors in fiscal 1998 were $1,121,000 and $0.46 per
share, respectively. Of this amount, $751,714 was recorded as product
development expense representing the fair value of 280,000 options issued to
various advisors of the Company which vested upon issuance. 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>
   <S>                                                                   <C>
   Expected volatility..................................................     55%
   Risk-free interest...................................................   5.73%
   Expected life........................................................ 5 years
   Expected dividend yield..............................................   0.00%
</TABLE>

 Warrants

As a result of the merger described in Note 1, the Company has 1,500,000
warrants outstanding to purchase an aggregate of 300,000 shares of common stock
as five warrants entitle the holder to purchase one common share for $1.00. The
warrants remained outstanding at June 30, 1998 and were exercised in August
1998. See Note 8.

7. Income Taxes

There is no provision for income taxes for the period from January 8, 1998
(inception) through June 30, 1998 as the Company incurred a net loss. The
Company's deferred tax assets at June 30, 1998 principally relate to its net
operating loss and approximated $170,000. Due to the uncertainty surrounding
recoverability, a full valuation allowance has been established against this
amount.

  Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating loss and tax credit carryforwards that can be utilized in the future
may be impaired or limited in certain circumstances, including changes in
ownership, as defined.

8. Subsequent Events

On July 30, 1998, the Company commenced selling musical recordings over the
Internet.

On August 10, 1998, the 1,500,000 warrants described in Note 6 were exercised
to purchase 300,000 shares of common stock for cash proceeds of $300,000.

On October 8, 1998, the Company entered into agreements to acquire certain
assets from online music company, Nordic Entertainment Worldwide, a privately
held provider of downloadable music on the Internet and to acquire Creative
Fulfillment Inc., a privately held entertainment and Internet marketing
company, for stock and cash. Under the terms of the transactions, the Company
will issue up to 2,100,000 shares of common stock subject to certain closing
conditions. Among other conditions, the closing of these transactions is
dependant upon satisfactory due diligence and the Company obtaining $3,000,000
of additional financing.

On October 28, 1998, the Company issued 500 shares of Series A Preferred Stock
("Series A") and warrants to purchase 100,000 shares of the Company's common
stock for gross proceeds of $500,000 to one accredited

                                      F-11
<PAGE>

                                EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)
                   Notes to Financial Statements--(Continued)
                                 June 30, 1998

investor. The agreements, subject to various conditions, provide for the
issuance of an additional 500 shares of Series A and warrants to purchase
100,000 shares of common stock under the same terms as the initial issuance
except that the warrant price will be based upon the current market price of
the common stock.

The Series A Shares are not entitled to any preference with respect to dividend
payments and have no voting rights except as required by law. Upon any
liquidation, dissolution or winding up of the affairs of the Company, the
holder of each Series A Share shall be entitled to be paid $1,000 per share
(the amount initially paid for such shares) plus an amount calculated at the
rate of six percent per annum of such price per share. If the assets of the
Company upon such event are insufficient to make such payment in full, then the
holders of Series A Shares shall be entitled to pro rata distribution of all
assets of the Company. After payment in full of the liquidation preference to
the holders of Series A Shares, such holders are entitled to no further
distributions.

The Series A Shares are convertible into shares of common stock at the election
of the holder at a price (the "Conversion Rate") equal to the lower of (i)
$7.91, (ii) 110% the closing price on the day 180 days following October 28,
1998 or (iii) the market price when a holder of Series A Shares delivers notice
of his election to convert such shares. "Market price" is generally determined
by the average of the four lowest closing prices for the 20 trading days prior
to the applicable date. Any Series A Shares outstanding three years after the
date such shares were initially issued automatically convert into shares of the
Company's common stock at the then applicable Conversion Rate. The Conversion
Rate is initially based on a conversion price equal to the lower of 85% of the
average of the four lowest closing prices of the Company's common stock during
the twenty trading days before the conversion date or $7.91. 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 the then applicable Conversion Rate. Under certain
circumstances, the Company has the right to redeem the Series A Shares. Under
certain other circumstances, the holder has the right to require the Company to
redeem the Series A Shares. As a result, the Series A Shares will be reflected
as redeemable stock and the Company will record a charge for the "in the money"
conversion feature of such shares.

The warrants have a four year term and an exercise price equal to the lower of
(i) the closing price the day prior to the date of issuance of such warrant or
(ii) the closing price on the day six months following the original date of
issuance of such warrant. The initial exercise price of the warrants is $7.10
per share. The exercise price of the warrants is subject to adjustments on
stock splits, stock dividends, any merger or acquisition involving the Company
and similar transactions, such as to permit the investors to receive upon
exercise of the warrants that which they would have received had they exercised
the warrants immediately prior to any such transaction. The exercise price of
the warrants is also subject to certain other adjustments upon future issuances
of common stock or rights to acquire common stock at a price less than the then
applicable exercise price.

The Company is obligated to promptly file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to cover the resale of the Company's common stock issuable upon the
conversion of the Series A Shares and exercise of the Warrants as well as
subsequently issuable Series A Shares and Warrants. The Company is obligated to
use its reasonable best efforts to have the Registration Statement declared
effective by the SEC and remain effective until the Company's common stock
subject to the registration statement may otherwise be freely traded without
registration. The Company is also obligated to list such shares on the OTC
Bulletin Board and to take certain actions to comply with applicable state
securities laws and regulations.

                                      F-12
<PAGE>




                       This page intentionally left blank

                                      F-13
<PAGE>

                                EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                       March 31,     June 30,
                                                          1999         1998
                                                      ------------  -----------
                                                      (Unaudited)
<S>                                                   <C>           <C>
Assets
Current Assets:
 Cash...............................................  $ 32,618,240  $   509,751
 Accounts receivable................................         6,892           --
 Prepaid expenses and other assets..................       276,540       21,362
                                                      ------------  -----------
  Total current assets..............................    32,901,672      531,113
Property and equipment, net.........................       156,317       34,227
Intangible assets, net..............................     5,725,841           --
Other assets........................................        16,520       16,520
                                                      ------------  -----------
   Total assets.....................................  $ 38,800,350  $   581,860
                                                      ============  ===========
Liabilities, Redeemable Convertible Preferred Stock
and
Stockholders' Equity
Current Liabilities:
 Accounts payable...................................  $    338,780  $    67,041
 Accrued liabilities................................     2,773,910       51,177
 Acquisition related liabilities....................        31,512           --
 Accrued payroll and related benefits...............        38,073       16,982
                                                      ------------  -----------
  Total current liabilities.........................     3,182,275      135,200
                                                      ------------  -----------
Redeemable Convertible Preferred Stock                  31,767,593           --
Stockholders' Equity:
 Preferred Stock, $0.01 par value...................            --           --
 Common Stock, $0.01 par value......................       156,555      147,153
 Additional paid-in capital.........................    40,938,469    1,485,611
 Notes receivable from employees....................        (6,000)      (6,000)
 Deficit accumulated during the development stage...   (37,238,542)  (1,180,104)
                                                      ------------  -----------
  Total stockholders' equity........................     3,850,482      446,660
                                                      ------------  -----------
   Total liabilities, redeemable convertible
    preferred
    stock and stockholders' equity..................  $ 38,800,350  $   581,860
                                                      ============  ===========
</TABLE>


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

                                      F-14
<PAGE>

                                EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                  Nine months   January 8, 1998 January 8, 1998
                                     ended      (Inception) to  (Inception) to
                                 March 31, 1999 March 31, 1998  March 31, 1999
                                 -------------- --------------- ---------------
<S>                              <C>            <C>             <C>
Revenues.......................   $     41,527     $      --     $     41,527
Cost of revenues...............         13,840            --           13,840
                                  ------------     ---------     ------------
Gross profit...................         27,687            --           27,687
                                  ------------     ---------     ------------
Operating expenses:
 Product development...........      3,580,014        42,182        4,541,363
 General and administrative....        715,594        46,745          934,349
                                  ------------     ---------     ------------
                                     4,295,608        88,927        5,475,712
                                  ------------     ---------     ------------
Operating loss.................     (4,267,921)      (88,927)      (5,448,025)
Interest income................         39,365            --           39,365
Interest expense...............        (35,549)           --          (35,549)
                                  ------------     ---------     ------------
Net loss.......................   $ (4,264,105)    $ (88,927)    $ (5,444,209)
                                  ------------     ---------     ------------
Accretion of Series A and B
 Preferred to redemption
 value.........................       (177,255)           --         (177,255)
Beneficial conversion charge,
 Series B Preferred Stock (Note
 3)............................    (31,577,078)           --      (31,577,078)
Dividend on Series B Preferred
 Stock (Note 3)................        (40,000)           --          (40,000)
                                  ------------     ---------     ------------
Net loss applicable to common
 shares........................   $(36,058,438)    $ (88,927)    $(37,238,542)
                                  ============     =========     ============
Net loss per Common share--
 basic and diluted.............   $      (2.48)    $   (0.01)    $      (2.89)
                                  ============     =========     ============
Weighted average common shares
 outstanding--basic and
 diluted.......................     14,560,552     6,607,357       12,889,520
                                  ============     =========     ============
</TABLE>


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

                                      F-15
<PAGE>

                                EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                   Nine months   January 8, 1998 January 8, 1998
                                      ended      (Inception) to  (Inception) to
                                  March 31, 1999 March 31, 1998  March 31, 1999
                                  -------------- --------------- ---------------
<S>                               <C>            <C>             <C>
Cash flows from operating
 activities:
 Net loss.......................   $(4,264,105)    $   (88,927)    $(5,444,209)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities:
  Depreciation..................        27,618             380          30,775
  Amortization of intangible
   assets.......................       338,134              --         338,134
  Issuance of common stock for
   services.....................            --              --          12,600
  Fair value of options issued
   to advisors..................     1,495,608           5,700       2,247,322
  Interest expense converted
   into Series B Preferred......        33,750              --          33,750
  Changes in assets and
   liabilities, net of effects
   of merger:
  Accounts receivable...........        (3,830)             --          (3,830)
  Prepaid acquisition costs.....      (105,191)             --        (105,191)
  Prepaid expenses and other
   assets.......................      (149,987)         (2,576)       (171,349)
  Other assets..................            --         (14,020)        (16,520)
  Accounts payable..............       261,510          25,458         326,901
  Accrued liabilities...........     2,564,245              --       2,615,422
  Accrued payroll and related
   benefits.....................        21,091              --          38,073
                                   -----------     -----------     -----------
   Net cash provided by (used
    in) operating activities....       218,843         (73,985)        (98,122)
                                   -----------     -----------     -----------
Cash flows from investing
 activities:
 Purchase of property and
  equipment.....................      (142,934)        (10,794)       (180,318)
 Cash paid for acquisition net
  of cash received..............      (311,148)             --        (311,148)
                                   -----------     -----------     -----------
   Net cash used in investing
    activities..................      (454,082)        (10,794)       (491,466)
                                   -----------     -----------     -----------
Cash flows from financing
 activities:
 Proceeds from issuance of
  common stock..................       300,400              --         300,400
 Common stock issued in
  connection with merger........            --              --         690,000
 Proceeds from issuance of
  Series A Preferred Stock and
  warrants......................       500,000              --         500,000
 Proceeds from issuance of
  Series B Preferred Stock......    29,799,828              --      29,799,828
 Proceeds from issuance of
  convertible notes.............     1,743,500         110,000       1,913,500
 Proceeds from repayment of
  employee notes receivable.....            --              --           4,100
                                   -----------     -----------     -----------
   Net cash provided by
    financing activities........    32,343,728         110,000      33,207,828
                                   -----------     -----------     -----------
Net increase in cash............    32,108,489          25,221      32,618,240
Cash at beginning of period.....       509,751              --              --
                                   -----------     -----------     -----------
Cash at end of period...........   $32,618,240     $    25,221     $32,618,240
                                   ===========     ===========     ===========
Supplemental disclosure of non-
 cash transactions:
 Conversion of notes payable
  into common stock.............   $        --     $    25,221     $   170,000
 Issuance of common stock for
  notes receivable..............   $        --     $    10,100     $    10,100
 Accretion of Series A Preferred
  to redemption value...........   $   169,047     $        --     $   169,047
 Accretion of Series B Preferred
  to redemption value...........   $     8,208     $        --     $     8,208
 Beneficial conversion charge,
  Series B Preferred Stock......   $31,577,078     $31,577,078     $31,577,078
 Issuance of common stock
  options for intangible
  assets........................   $    44,885     $        --     $    44,885
</TABLE>

        The accompanying notes are an integral part of these statements.
                                      F-16
<PAGE>

         Notes to Unaudited Condensed 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") 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, aggregating
musical content, acquiring operating assets and raising capital. The Company
operates within one industry segment, primarily in the United States.

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 organized in August 1989 and had
no revenues or operations prior to the merger with the Company. As of May 11,
1998, Atlantis Common stock was traded on the NASD OTC bulletin board. Atlantis
had cash balances of $690,000, liabilities of $1,650 and an accumulated deficit
of $1,650. Following the recapitalization, Atlantis changed its name to
GoodNoise Corporation.

The Company has incurred losses from operations since inception and has had to
obtain additional capital to fund its ongoing operations. On March 23, 1999,
the Company completed a private placement of 117,570 shares of Series B
Convertible Preferred Stock ("Series B") for aggregate net proceeds of
approximately $31 million. See Note 3 below.

Basis of Presentation

In the opinion of management, the unaudited consolidated condensed financial
statements included herein have been prepared on a consistent basis with prior
periods reported consolidated financial statements and include all material
adjustments, consisting of normal recurring adjustments, necessary to fairly
present the information set forth therein.

The unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.

Certain information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the unaudited interim financial statements are adequate to
ensure that the information presented is not misleading. The results of
operations for the interim reporting periods presented herein are not
necessarily indicative of any future operating results.

The financial information as of June 30, 1998 is derived from the Company's
Form 10-SB/A as filed with the Securities Exchange Commission on December 24,
1998 (the "Form 10"). The interim financial statements presented herin should
be read in conjunction with the financial statements and the notes thereto
included in the Form 10SB.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.

                                      F-17
<PAGE>

  Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)


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. Consequently, the
Company is considered to be a development stage enterprise.

Net Loss per Common Share

The weighted average shares used to compute basic net loss per share includes
outstanding shares of common stock from the date of issuance and excludes
shares of common stock subject to repurchase by the Company. The calculation of
diluted net loss per share excludes common stock issuable upon exercise of
employee stock options and common stock issuable upon the conversion of Series
B preferred shares, as their effect is antidilutive. Therefore, the 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:

<TABLE>
<CAPTION>
                                 Nine months   January 8, 1998 January 8, 1998
                                    ended      (Inception) to  (Inception) to
                                March 31, 1999 March 31, 1998  March 31, 1999
                                -------------- --------------- ---------------
<S>                             <C>            <C>             <C>
Net loss.......................  $ (4,264,105)   $  (88,927)    $ (5,444,209)
Accretion of Series A and B
 Preferred to redemption
 value.........................      (177,255)           --         (177,255)
Beneficial conversion charge,
 Series B Preferred Stock......   (31,577,078)           --      (31,577,078)
Dividend on Series B Preferred
 Stock.........................       (40,000)           --          (40,000)
                                 ------------    ----------     ------------
Net loss applicable to common
 shares........................  $(36,058,438)   $  (88,927)    $(37,238,542)
                                 ============    ==========     ============
Weighted average common shares
 outstanding...................    15,119,317     7,118,513       13,441,088
Common Shares subject to
 repurchase....................      (558,765)     (511,156)        (551,568)
                                 ------------    ----------     ------------
Weighted average common shares
 outstanding-- basic and
 diluted.......................    14,560,552     6,607,357       12,889,520
                                 ============    ==========     ============
Net loss per share--basic and
 diluted.......................  $      (2.48)   $    (0.01)    $      (2.89)
                                 ============    ==========     ============
</TABLE>

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.

Reclassifications

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

Recent Accounting Pronouncements

In June of 1998 the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging activities" (SFAS 133)
which establishes accounting and reporting

                                      F-18
<PAGE>

  Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has evaluated the effects of this standard and believes there will
be no material impact on the company's financial position or results of
operations. The Company will adopt SFAS 133 as required for its first quarterly
filing of the year 2000.

In April 1998, the American Institute of Certified Public Accountants issued
statement of position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use. The Company has not yet determined the impact, if
any, of adopting this statement. The disclosure prescribed by SOP 98-1 will be
effective for the year ending December 31, 1999.

Note 2--Notes Payable

During the period from December 1998 through March 1999, the Company obtained
loans in the form of convertible notes payable totaling $1,743,500. 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 $33,750 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 3 below.

Note 3--Mandatorily Redeemable Convertible Preferred Stock

Convertible Preferred Stock at March 31, 1999 was composed of the following:

<TABLE>
<CAPTION>
                                          Shares
                                  ---------------------- Liquidation Redemption
                                  Authorized Outstanding   Amount      Amount
                                  ---------- ----------- ----------- -----------
   <S>                            <C>        <C>         <C>         <C>
   Series B......................  120,000     117,570   $35,271,000 $34,800,000
   Undesignated..................  380,000          --            --          --
                                   -------     -------   ----------- -----------
                                   500,000     117,570   $35,271,000 $34,800,000
                                   =======     =======   =========== ===========
</TABLE>

 Series A

On October 28, 1998, the Company raised proceeds of approximately $500,000
through the sale of 500 shares of Series A Preferred Stock ("Series A") and
warrants to purchase 100,000 shares of the Company's common stock to one
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. In accordance with the accounting rules, as defined by SEC staff
announcement topic D-60 "Accounting for the Issuance of Convertible, Preferred
Stock and Debt Securities with Nondetachable Conversion Features," the
difference between the conversion price and the market value is deemed to be a
"beneficial conversion feature." Consequently, the Company recorded a preferred
dividend charge to deficit accumulated during the development stage in the
amount of $143,740 during the three months ended December 31, 1998. 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 March 31, 1999 and which have a term
of four years with an initial exercise price of $7.31 per share, have been
valued and recorded as additional paid-in capital for financial statement
purposes at $343,000.

                                      F-19
<PAGE>

  Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)


 Series B

On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of approximately 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 and Series A shares, were $31,577,078, net of
issuance costs of approximately $2,724,000, of which approximately $2,500,000
remained in accrued liabilities at March 31, 1999.

Under the terms of the Series B Stock Purchase Agreement, each share of Series
B stock 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 share by the conversion price per common share of $3.00.

In accordance with the accounting rules, as defined by SEC staff announcement
topic D-60 "Accounting for the Issuance of Convertible, Preferred Stock and
Debt Securities with Nondetachable Conversion Features," the difference between
the conversion price and the market value is deemed to be a "beneficial
conversion feature." On the Issuance Date, the Company's common stock price
closed at $22.63. Accordingly, the Series B shares were deemed to contain a
beneficial conversion feature. Consequently, during the three months ended
March 31, 1999, the Company was required to record a charge to accumulated
deficit for the difference between the conversion price and the market value.
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, using the
effective interest rate method, as a charge to deficit accumulated during the
development stage.

During the three months ended March 31, 1999, the Company recorded a $40,000
charge to accumulated deficit related to dividends accrued on the Series B
Preferred Stock. The key terms of the Series B Preferred Stock Purchase
Agreement include:

Voting Rights. The holders of the Series B Shares are entitled to a number of
votes equal to the number of shares of Common Stock issuable upon conversion of
the Series B preferred Shares. The holders of the Series B Shares 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 Shareholders 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 underwriten
public offering, is sold or until March 31, 2004.

Conversion. Each Series B Share is initially convertible into 100 shares of
Common Stock at the election of the holder thereof. All Series B Shares 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 Shares.

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.

                                      F-20
<PAGE>

  Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)


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

Registration Rights. The Company is obligated to promptly (and in any event
within 120 days of the first sale of the Series B Shares) file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") to cover the resale of the Company's Common Stock
issuable upon the conversion of the Series B Shares.

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 4--Creative Fulfillment Acquisition

On January 31, 1999, the Company completed the acquisition of Creative
Fulfillment, Inc. ("Creative") for a combination of cash and stock, at which
time Creative became a wholly owned subsidiary of the Company. The acquisition
has been accounted for using the purchase method of accounting. At the date of
acquisition Creative had nominal net assets and accordingly, the Company has
allocated substantially all of the total purchase price of approximately $6.0
million to the domain name and trademark "EMusic" which, the Company will
amortize over its estimated life of three years using the straight-line method.

The total purchase price of approximately $6,020,000 consisted of 630,179
shares of the Company's Common Stock (valued at $8.82 per share, the average
trading price during the several days before and after the transaction
announcement date), cash consideration of $312,500 and other acquisition
related expenses of approximately $150,000, consisting primarily of
professional fees. The acquisition has been structured as a tax free exchange
of stock, therefore, the difference between the recognized fair values of the
acquired assets and their historical tax bases are not deductible for tax
purposes.

The following unaudited pro forma consolidated financial information reflects
the results of operations for the nine months ended March 31, 1999 and the
period from January 8, 1998 (inception) through March 31, 1999 as if the
acquisition had occurred on July 1, 1998 and January 8, 1998, respectively, and
after giving effect to the acquisition accounting adjustments. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what operating results would have been had the acquisition
actually taken place on July 1, 1998 or January 8, 1998, nor is it an
indication of future operating results.

<TABLE>
<CAPTION>
                                 Nine months   January 8, 1998 January 8, 1998
                                    ended      (Inception) to  (Inception) to
                                March 31, 1999 March 31, 1998  March 31, 1999
                                -------------- --------------- ---------------
   <S>                          <C>            <C>             <C>
   Revenues....................  $     94,214    $   206,943    $    824,347
   Loss from operations........    (5,781,479)    (3,264,534)     (8,144,164)
   Net loss....................    (5,817,556)    (3,265,590)     (8,184,629)
   Net loss applicable to
    common stockholders........   (37,571,889)    (3,265,590)    (39,928,962)
   Net loss per share:
    Basic and diluted..........  $      (2.48)   $     (0.30)   $      (2.96)
    Weighted average shares....    15,179,494     10,864,234      13,512,811
</TABLE>

                                      F-21
<PAGE>

  Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)


Note 5--Subsequent Events

 Asset Purchase

On April 27, 1999, the Company completed a content acquisition agreement with
Nordic Entertainment and certain other parties (collectively "Nordic"). Under
the terms of the transaction, the Company has purchased from Nordic certain
digital music distribution rights, and other intangible assets related to the
EMusic domain name. In connection with the transaction, the Company issued
665,000 shares of common stock in addition to a cash payment of approximately
$375,000. These shares of common stock are not available for resale under the
Securities Act and are restricted pursuant to Rule 144(k) therein. The Company
plans to engage an independent valuations consultant to determine an
appropriate allocation of the purchase price and the estimated useful life over
which any intangibles should be amortized.

 Lease

In April, 1999, the Company entered into a five year lease agreement for office
facilities. Under the terms of the agreement, the Company shall make minimum
monthly lease payments of approximately $67,000 for a period of 60 months
commencing in April of 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.

                                      F-22
<PAGE>

         Unaudited Pro Forma Condensed Combining Financial Information

The following unaudited Pro Forma Combined Condensed Financial Statements
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 Financial Statements are based on
the historical financial statements and the notes thereto of the Company
included in the Annual Report on Form 10-SB/A filed with the Securities and
Exchange Commission on December 24, 1998 and the Quarterly Report on Form 10-
QSB for the quarter ended March 31, 1999, the historical financial statements
and notes thereto of Creative Fulfillment included on the Form 8K/A filed with
the Securities and Exchange Commission on April 13, 1999 and the historical
financial statements and the notes thereto of IUMA included herein.

The Pro Forma Combined Condensed Balance Sheet combines the Company's March 31,
1999 balance sheet with IUMA's balance sheet dated April 30, 1999, giving
effect to the Merger as if it had occurred on March 31, 1999.

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

  . the nine months ended March 31, 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 period from January 8, 1998 (date of inception) through June 30,
    1998, the condensed consolidated statement of operations of Creative
    Fulfillment for the year ended July 31, 1998 and the IUMA condensed
    statement of operations for the year ended July 31, 1998.

The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position 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 Financial Statements should be read in
conjunction with the historical financial statements and the related notes
thereto of the Company included in the Form 10-SB/A and Form 10-QSB filed with
the Securities and Exchange Commission, and the financial statements and the
notes thereto of the Company included herein.


                                      F-23
<PAGE>

         UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA

<TABLE>
<CAPTION>
                                         Creative
                        GoodNoise      Fulfillment                                       IUMA
                      -------------- ----------------                               --------------
                       Nine Months      Six Months           Pro Forma               Nine Months          Pro Forma
                          Ended           Ended       ----------------------------      Ended      ----------------------------
                      March 31, 1999 January 31, 1999 Adjustments       Combined    April 30, 1999 Adjustments       Combined
                      -------------- ---------------- -----------     ------------  -------------- -----------     ------------
<S>                   <C>            <C>              <C>             <C>           <C>            <C>             <C>
Revenues............   $     41,527      $102,688     $   (50,000)(B) $     94,215   $   298,670            --     $    392,885
Cost of revenues....         13,840        31,570                           45,410            --            --           45,410
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
  Gross profit......         27,687        71,118         (50,000)          48,805       298,670            --          347,475
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Operating expenses:
  Product
   development......      3,580,014        57,490         (37,500)(B)    3,600,004       123,657            --        3,723,661
  Selling, general
   and
   administrative...        715,594        13,038       1,501,648 (C)    2,230,280     1,119,994     2,235,012 (F)    5,585,286
  Amortization of
   deferred
   compensation.....             --            --              --               --       130,870            --          130,870
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
    Total operating
     expenses.......      4,295,608        70,528       1,464,148        5,830,284     1,374,521     2,235,012        9,439,817
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Income (loss) from
 operations.........     (4,267,921)          590      (1,514,148)      (5,781,479)   (1,075,851)   (2,235,012)      (9,092,342)
Interest and other
 (expense) income,
 net................          3,816           106              --            3,922            --            --            3,922
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Net income (loss)...   $ (4,264,105)     $    696     $(1,514,148)    $ (5,777,557)  $(1,075,851)  $(2,235,012)    $ (9,088,420)
                                         ========     ===========                    ===========   ===========
Accretion of Series
 A Preferred to
 redemption value...       (177,255)                                      (177,255)                                    (177,255)
Beneficial
 conversion charge,
 Series B
 Preferred..........    (31,577,078)                                   (31,577,078)                                 (31,577,078)
Dividend on Series B
 Preferred..........        (40,000)                                       (40,000)                                     (40,000)
                       ------------                                   ------------                                 ------------
Net loss applicable
 to common
 stockholders.......   $(36,058,438)                                  $(37,571,890)                                $(40,882,753)
                       ============                                   ============                                 ============
Net loss per share,
 basic and diluted..   $      (2.48)                                  $      (2.50)                                $      (2.64)
                       ============                                   ============                                 ============
Weighted average
 common shares
 outstanding, basic
 and diluted........     14,560,552                       490,139 (A)   15,050,691                     448,000 (D)   15,498,691
                       ============                   ===========     ============                 ===========     ============
</TABLE>

                            See accompanying notes


                                      F-24
<PAGE>

         UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA

<TABLE>
<CAPTION>
                                         Creative
                         GoodNoise     Fulfillment                                     IUMA
                      January 8, 1998 Twelve Months         Pro Forma             Twelve Months         Pro Forma
                      (Inception) to  Ended July 31, ---------------------------  Ended July 31, ---------------------------
                       June 30, 1998       1998      Adjustments      Combined         1998      Adjustments      Combined
                      --------------- -------------- -----------     -----------  -------------- -----------     -----------
<S>                   <C>             <C>            <C>             <C>          <C>            <C>             <C>
Revenues.............   $        --      $206,943    $        --     $   206,943    $ 224,347    $        --     $   431,290
Cost of revenues.....            --       153,035             --         153,035                          --         153,035
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
    Gross profit.....            --        53,908             --          53,908      224,347             --         278,255
Operating expenses:
  Product
   development.......       961,349        74,385             --       1,035,734       99,616             --       1,135,350
  Selling, general
   and
   administrative....       218,755        61,756      2,002,197 (C)   2,282,708      340,493      2,980,016 (F)   5,603,217
  Amortization of
   deferred
   compensation......            --            --             --              --       13,662             --          13,662
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
    Total operating
     expenses........     1,180,104       136,141      2,002,197       3,318,442      453,771      2,980,016       6,752,229
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Income (loss) from
 operations..........    (1,180,104)      (82,233)    (2,002,197)     (3,264,534)    (229,424)    (2,980,016)     (6,473,974)
Interest and other
 expense, net........            --        (1,056)            --          (1,056)      (1,011)            --          (2,067)
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Net income (loss)
 before income
 taxes...............    (1,180,104)      (83,289)    (2,002,197)     (3,265,590)    (230,435)    (2,980,016)     (6,476,041)
Income tax benefit...            --            --             --              --       10,542             --          10,542
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Net income (loss)....   $(1,180,104)     $(83,289)   $(2,002,197)    $(3,265,590)   $(219,893)   $(2,980,016)    $(6,465,499)
                        ===========      ========    ===========     ===========    =========    ===========     ===========
Net loss per share,
 basic and diluted...   $     (0.12)                                 $     (0.30)                                $     (0.57)
                        ===========                                  ===========                                 ===========
Weighted average
 common shares
 outstanding, basic
 and diluted.........    10,234,055                      630,179 (A)  10,864,234                     448,000 (D)  11,312,234
                        ===========                  ===========     ===========                 ===========     ===========
</TABLE>

                            See accompanying notes.

                                      F-25
<PAGE>

           UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA

<TABLE>
<CAPTION>
                          GoodNoise
                         Corporation      IUMA
                         ------------  -----------
                          March 31,     April 30,
                             1999         1999      Adjustments       Combined
                         ------------  -----------  -----------     ------------
<S>                      <C>           <C>          <C>             <C>
Assets
Current Assets:
  Cash.................. $ 32,618,240  $    33,537  $        --     $ 32,651,777
  Accounts receivable...        6,892       21,797           --           28,689
  Prepaid expenses and
   other assets.........      276,540        2,293           --          278,833
                         ------------  -----------  -----------     ------------
    Total current
     assets.............   32,901,672       57,627           --       32,959,299
                         ------------  -----------  -----------     ------------
Property and equipment,
 net....................      156,317       41,613           --          197,930
Intangible assets.......    5,725,841       12,884    8,990,048 (D)   14,728,773
Other assets............       16,520       64,570           --           81,090
                         ------------  -----------  -----------     ------------
    Total assets........ $ 38,800,350  $   176,694  $ 8,990,048     $ 47,967,092
                         ============  ===========  ===========     ============
Liabilities and
 stockholders' equity
Current Liabilities:
  Accounts payable...... $    338,780  $   391,471  $   307,783 (D) $  1,038,034
  Accrued Liabilities...    2,773,910           --           --        2,773,910
  Acquisition related
   liabilities..........       31,512           --           --           31,512
  Accrued payroll and
   related benefits.....       38,073      203,027           --          241,100
  Current portion of
   notes payable........           --      183,638           --          183,638
                         ------------  -----------  -----------     ------------
    Total current
     liabilities........    3,182,275      778,136      307,783        4,268,194
                         ------------  -----------  -----------     ------------
Notes payable, less
 current portion........           --      309,550           --          309,550
Redeemable Convertible
 Preferred
 Stock--Series B........   31,767,593           --           --       31,767,593

Stockholders' Equity
 (deficit):
  Common Stock..........      156,555    1,105,168   (1,105,168)(E)      156,555
                                                          4,480 (D)
  Notes receivable from
   shareholders.........                    (8,655)       8,655 (D)           --
  Deferred
   compensation.........                  (528,971)     528,971 (D)           --
  Additional paid-in
   capital..............   40,938,469           --    7,766,793 (D)   48,705,262
  Notes receivable from
   employees............       (6,000)          --           --           (6,000)
  Deficit accumulated
   during the
   development stage....  (37,238,542)  (1,478,534)   1,478,534 (E)  (37,238,542)
                         ------------  -----------  -----------     ------------
   Total stockholders'
    equity (deficit)....    3,850,482     (910,992)   8,682,265       11,621,755
                         ------------  -----------  -----------     ------------
    Total liabilities,
     redeemable
     convertible
     preferred stock and
     stockholders'
     equity (deficit)... $ 38,800,350  $   176,694  $ 8,990,048     $ 47,967,092
                         ============  ===========  ===========     ============
</TABLE>

                            See accompanying notes.

                                      F-26
<PAGE>

         NOTES TO UNAUDITED PROFORMA CONDENSED COMBINING FINANCIAL 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
      periods presented.

  (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 $12,500 made by the Company to
      Emusic 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 each period presented. Amortization is over the
      estimated useful lives of the assets acquired of three years.

  Adjustments reflecting the acquisition of IUMA:

  (D) Reflects the allocation of the purchase price of approximately
      $8,940,048, which consisted of the issuance of 448,000 shares of Common
      Stock valued at $17.35 per share, net liabilities assumed of
      approximately $1,118,775 and direct acquisition related expenses of
      approximately $100,000.

  (E) Reflects the elimination of IUMA's equity accounts.

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

                                      F-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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 4,307,480 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-38
<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-39
<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...................   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).......   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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<PAGE>

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

                                     [Logo]

                                EMusic.com Inc.

                                5,340,000 Shares

                                  Common Stock

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

                                  July  , 1999


                               CIBC World Markets

                                  ING Barings

                             Prudential Securities

                          Volpe Brown Whelan & Company

--------------------------------------------------------------------------------
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 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 24. 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 intends to enter 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.

The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.

Item 25. 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 registration fee and
the NASD filing fee.

<TABLE>
<S>                                                                     <C>
SEC registration fee................................................... $35,532
NASD filing fee........................................................
Nasdaq National Market listing fee.....................................
Blue Sky fees and expenses.............................................
Printing and engraving expenses........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Director and Officer liability insurance...............................
Transfer Agent and Registrar fees......................................
Federal taxes and state taxes and fees.................................
Miscellaneous expenses.................................................
                                                                        -------
  Total................................................................ $
                                                                        =======
</TABLE>
------------------
*  estimated

Item 26. 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

                                      II-1
<PAGE>

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.

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 27. Exhibits and Financial Statement Schedules

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  1.1(c) Underwriting Agreement
  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    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) Form of Amended and Restated Certificate of Incorporation
  3.2    Amended and Restated Bylaws
  5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
 10.1    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    1998 Nonstatutory Stock Option Plan
 10.5    1999 Employee Stock Purchase Plan
 10.6    Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21      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) To be filed by amendment.

Item 28. Undertakings

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.

                                      II-3
<PAGE>

 (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 23rd day of July, 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. and
Joseph H. Howell, and 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     July 23, 1999
______________________________________  Secretary
            Robert H. Kohn

      /s/ Gene Hoffman, Jr.            President, Chief Executive    July 23, 1999
______________________________________  Officer and Director
          Gene Hoffman, Jr.             (Principal Executive
                                        Officer)

       /s/ Joseph H. Howell            Executive Vice President      July 23, 1999
______________________________________  and Chief Financial
           Joseph H. Howell             Officer (Principal
                                        Financial and Accounting
                                        Officer)

        /s/ Ralph Peer, II             Director                      July 23, 1999
______________________________________
            Ralph Peer, II

          /s/ Tor Braham               Director                      July 23, 1999
______________________________________
              Tor Braham

                                       Director
______________________________________
            Ed Rosenblatt
</TABLE>

                                      II-5
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  1.1(c) Underwriting Agreement
  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    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) Form of Amended and Restated Certificate of Incorporation
  3.2    Amended and Restated Bylaws
  5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
 10.1    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    1998 Nonstatutory Stock Option Plan
 10.5    1999 Employee Stock Purchase Plan
 10.6    Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21      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) To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 388234}]
{"company-data": {"conformed-name": "EMUSIC COM INC", "cik": "0001065013", "assigned-sic": "3669", "irs-number": "650207877", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-83685", "film-number": "99669660"}, "business-address": {"street1": "1919 BROADWAY", "street2": "SUITE 200", "city": "REDWOOD CITY", "state": "CA", "zip": "94063", "phone": "6505569733"}, "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 July 23, 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
            (Primary Standard Industrial Classification Code Number)
                                                            (I.R.S. Employer
      (State or                                           Identification No.)
   jurisdiction of
   incorporation or
    organization)

                            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:
          Bruce Schaeffer, Esq                    Warren Lazarow, Esq.
           Andrew Zeif, Esq.                      Armando Castro, Esq.
           Craig Malina, Esq.                   Vahe H. Sarrafian, Esq.
    Gray Cary Ware & Freidenrich LLP              Andrew R. Hull, Esq.
          400 Hamilton Avenue               Brobeck, Phleger & Harrison LLP
    Palo Alto, California 94301-1825             Two Embarcadero Place
             (650) 833-2000                          2200 Geng Road
                                              Palo Alto, California 94303
                                                     (650) 424-0160

                                ---------------
  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. [_]
  If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
  If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                ---------------
                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Proposed Maximum
          Title of Each Class of               Aggregate          Amount of
      Securities to be Registered(a)       Offering Price(b) Registration Fee(b)
--------------------------------------------------------------------------------
Common Stock ($0.001 par value)..........    $127,809,563          $35,532
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(a) This Registration Statement covers the sale of shares of common stock, par
    value $0.001 per share, by the Registrant and by selling stockholders.
(b) Estimated solely for the purpose of determining the registration fee
    pursuant to Rule 457(o) promulgated under the Securities Act.
                                ---------------
  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 July 23, 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
preliminary prospectus is not an offer to sell and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.

                                5,340,000 Shares

                             [EMUSIC.COM INC. LOGO]

                                  Common Stock
                                 $   Per Share

--------------------------------------------------------------------------------
EMusic.com Inc. is offering 5,000,000 shares and the selling stockholders
identified in this prospectus are offering 340,000 shares. This is a firm
commitment underwriting.

The common stock is listed on the Nasdaq National Market under the symbol
"EMUS." On July 22, 1999, the last reported sale price of the common stock on
the Nasdaq National Market was $21.38 per share.

Investing in the common stock involves risks. See "Risk Factors" beginning on
page 8 .
Per Share Total
                                                                 --------- -----
Price to the public........................................    $      $
     Underwriting discounts.....................................
     Proceeds to EMusic.........................................
     Proceeds to the selling stockholders.......................
EMusic has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 801,000 additional
shares from EMusic within 30 days following the date of this prospectus to
cover over-allotments.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

CIBC World Markets

         ING Barings

                  Prudential Securities

                                                    Volpe Brown Whelan & Company

                  The date of this prospectus is       , 1999
[Yellow background with the following text centered on the top portion of the
page:

                             "The way to download.

    So, there's this new way of listening to music. EMusic.com. A
    new site with thousands of MP3 downloadable music choices.
    Where you can sample and download alternative, rock, hip hop,
    jazz, blues and more. By the song or the album. Artists you've
    heard of, the coolest indie lables, new things to discover. All
    for less than the cost of a CD. EMusic.com is downloadable
    music. Created by people who know and love music as much as you
    do."

The bottom center of the page contains a picture of the back of a man's head
with headphones with our logo displayed on his head.

                                The bottom right-hand corner displays our logo.]

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN OUR COMMON STOCK ON NASDAQ IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."

                                       2
Table Of Contents
Page
                                                                           ----
Prospectus Summary.......................................................    4
Risk Factors.............................................................    8
Use of Proceeds..........................................................   19
Dividend Policy..........................................................   19
Capitalization...........................................................   20
Dilution.................................................................   21
Selected Financial Data..................................................   22
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................   23
Business.................................................................   29
Management...............................................................   41
Certain Transactions and Relationships...................................   48
Principal and Selling Stockholders.......................................   49
Description of Capital Stock.............................................   51
Shares Eligible for Future Sale..........................................   55
Price Range of Common Stock..............................................   56
Changes in and Disagreements with Accountants on Accounting and Financial
 Disclosure..............................................................   56
Underwriting.............................................................   57
Legal Matters............................................................   58
Experts..................................................................   59
Where You Can Find More Information About Us.............................   59
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.

Unless we indicate otherwise, all information in this prospectus assumes the
conversion of our preferred stock into shares of common stock and that the
underwriters do not exercise their over-allotment option.

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.

The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.

Until     , 1999, 25 days after commencement of this offering, all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

                                       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 75 record
labels and over 1,200 recording artists, including such well known artists as
The Offspring, They Might be Giants, Jimi Hendrix and Ella Fitzgerald. We
currently have over 13,000 titles available for download on our EMusic.com
website. In addition, our IUMA subsidiary offers our customers access to over
3,700 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 $88.0 million in 1998 to $6.7
billion in 2003. Of this amount, Forrester further estimates that $1.1 billion
will represent sales of downloadable music.

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 EMusic........
                                         5,000,000 shares

Common stock offered by the selling
stockholders..........................
                                           340,000 shares

Common stock to be outstanding after    33,561,237 shares
this offering.........................

Use of proceeds.......................  We intend to use the net proceeds for
                                        the acquisition of additional content,
                                        corporate branding, expansion of our
                                        sales and marketing activities and
                                        general corporate purposes, including
                                        working capital and capital
                                        expenditures.

                                        We will not receive any proceeds from
                                        the sale of shares of common stock by
                                        the selling stockholders. See "Use of
                                        Proceeds" and "Management's Discussion
                                        and Analysis of Financial Condition and
                                        Results of Operations--Liquidity and
                                        Capital Resources."
Nasdaq National Market symbol.................. EMUS
------------------

These share numbers are based on shares outstanding as of July 15, 1999 and
exclude:

 . 6,297,750 shares of common stock issuable upon exercise of outstanding
   options at an average exercise price of $7.12;

 . 1,707,800 shares of common stock issuable upon exercise of outstanding
   warrants at an average exercise price of $13.31; and

 . 4,656,850 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  Nine months   January 8, 1998  Three months
                               (inception) to      ended      (inception) to      ended
                                June 30, 1998  March 31, 1999 March 31, 1998  March 31, 1999
                               --------------- -------------- --------------- --------------
                                                (unaudited)                    (unaudited)
Statement of Operations Data:
Revenues.....................             --    $     41,527            --     $     21,062
Gross profit.................             --          27,687            --           11,938
Loss from operations.........    $(1,180,104)     (4,267,921)   $  (88,927)      (2,289,781)
Net loss.....................    $(1,180,104)   $ (4,264,105)   $  (88,927)    $ (2,288,867)
                                 ===========    ============    ==========     ============
Net loss applicable to common
 shares......................    $(1,180,104)   $(36,058,438)   $  (88,927)    $(33,914,153)
                                 ===========    ============    ==========     ============
Net loss per common share-
 basic and diluted...........    $     (0.12)   $      (2.48)   $    (0.01)    $      (2.31)
                                 ===========    ============    ==========     ============
Weighted average common
 shares outstanding-basic and
 diluted.....................     10,234,055      14,560,552     6,607,357       14,674,372
Pro forma basic and diluted
 net loss per share..........                   $      (2.43)                  $      (2.18)
                                                ============                   ============
Pro forma weighted average
 common shares outstanding-
 basic and diluted...........                     14,865,363                     15,588,805
Quarters Ended
                                         ------------------------------------------------------------
                                         March 31,   June 30,    Sept. 30,   Dec. 31,     March 31,
                                           1998        1998        1998        1998          1999
                                         ---------  -----------  ---------  -----------  ------------
                                                      (all quarterly data unaudited)
Quarterly Statement of Operations Data:
Net revenue............................        --            --  $  12,452  $     8,013  $     21,062
Gross profit...........................        --            --     12,175        3,574        11,938
Net loss...............................  $(88,927)  $(1,091,177)  (849,483)  (1,125,755)   (2,288,867)
Net loss applicable to common shares...   (88,927)   (1,091,177)  (849,483)  (1,294,802)  (33,914,153)
As of  March 31, 1999
                                                         -----------------------
                                                           Actual    As Adjusted
                                                         ----------- -----------
                                                         (unaudited)
Balance Sheet Data:
Cash and cash equivalents............................... $32,618,240  $
Working capital.........................................  29,719,397
Total assets............................................  38,800,350
Total long-term debt....................................          --
Total debt..............................................          --
Redeemable convertible preferred stock..................  31,767,593
Total stockholders' equity..............................   3,850,482
------------------
The pro forma weighted average common shares outstanding include preferred
stock on an as converted basis as well as common stock. The as adjusted balance
sheet data presented below reflect the receipt of the net proceeds from the
sale of the 5,000,000 shares of common stock offered by us at an offering price
of    and after deducting underwriting discounts, commissions and estimated
offering expenses as well as the effect of preferred stock on an as converted
basis.

                                       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.

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.

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

                                       8
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 March 31, 1999, we had net losses of $37.2 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 July 15, 1999, there were approximately 28,561,237 shares of common stock
outstanding, of which approximately 4,045,400 were tradable without restriction
under the Securities Act and 11,015,300 were tradable under Rule 144. Upon the
effectiveness of this registration statement, substantially all of our
remaining outstanding stock will be tradable under Rule 144.

                                       9
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." Our stock is held by a limited number of investors and
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, Inc. 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

  . incurrence of amortization expenses if an acquisition is accounted for as
    a purchase, resulting in significant goodwill and other charges.

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. For
additional information regarding competition, see "Business--Competition."

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 together with the net proceeds
to us from this offering 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 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 or defamatory.

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

                                       15
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 will control approximately 21.7% of our
common stock and will have power to influence significant corporate matters,
which may delay, deter or prevent transactions that could benefit investors in
this offering.

Assuming the conversion of all our outstanding preferred stock, upon completion
of this offering, executive officers and directors will, in the aggregate,
beneficially own approximately 21.7% of our outstanding common stock. These
stockholders would be 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.

                                       17
Investors will experience immediate and substantial dilution.

The public offering price is expected to be substantially higher than the net
tangible book value of each outstanding share of common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of approximately $    per share in the net tangible book
value of the common stock from the public offering price. Investors will incur
additional dilution upon the exercise of outstanding stock options and
warrants.

Our management has broad discretion as to the net proceeds we receive from this
offering and, if we do not allocate these proceeds wisely, your investment
could suffer.

The net proceeds we receive from this offering will be used for acquisitions of
additional content, corporate branding, expansion of our sales and marketing
activities and working capital and general corporate purposes. There is no
specific allocation of these net proceeds, and our management retains the right
to utilize net proceeds as they determine. Our management may not use the
proceeds effectively.

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
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
Use Of Proceeds

We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $  . If the underwriters fully exercise
the over-allotment option, the net proceeds of the shares sold by us will be
$  . "Net Proceeds" is what we expect to receive after paying the underwriting
discount and other expenses of this offering. For the purpose of estimating net
proceeds, we are assuming that the public offering price will be $   per share.
We will not receive any proceeds from the sale of shares by the selling
stockholders.

We will use the net proceeds for:

  .  the acquisition of additional content;

  .  corporate branding; and

  .  the expansion of our sales and marketing activities.

 We will use the balance of the net proceeds for general corporate purposes,
including working capital.

The timing and amount of our actual expenditures will be based on many factors,
including:

  .  the extent to which we have opportunities to acquire new content;

  .  the extent to which corporate branding opportunities present themselves;
     and

  .  the rate at which we expand our sales and marketing efforts.

Until we use the net proceeds of this offering, we will invest the funds in
short-term investment grade interest-bearing securities.

                                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.

                                       19
Capitalization

The following table shows:

  . the capitalization of EMusic on March 31, 1999;

  . the capitalization of EMusic on March 31, 1999, pro forma to give effect
    to the conversion of Series B preferred stock and the issuance of shares
    in connection with the completion of the content acquisition agreement
    with Nordic Entertainment and the acquisition of Internet Underground
    Music Archive; and

  . the capitalization of EMusic on March 31, 1999, assuming completion of
    this offering at an assumed offering price of $  per share and the use of
    the net proceeds as described under "Use of Proceeds."
March 31, 1999
                                           ------------------------------------
                                                                         Pro
                                                                        Forma
                                                                          as
                                              Actual      Pro Forma    Adjusted
                                           ------------  ------------  --------
Redeemable convertible preferred stock:
  Series B, $0.01 par value;
   120,000 shares authorized; 117,570
   shares issued and outstanding actual;
   no shares issued and outstanding, pro
   forma and as adjusted.................. $ 31,767,593  $         --   $
  Undesignated, $0.01 par value;
   380,000 shares authorized; no shares
   issued and outstanding actual, pro
   forma and pro forma as
   adjusted ..............................           --            --
Stockholders' equity:
  Common stock, $0.01 par value;
   200,000,000 shares authorized;
   15,655,479 shares issued and
   outstanding, actual; 28,561,237 shares
   issued and outstanding, pro forma; and
   33,561,237 shares issued and
   outstanding, as adjusted...............      156,555       285,612
  Additional paid-in capital..............   40,938,469    91,433,533
  Note receivable from employee...........       (6,000)       (6,000)
  Accumulated deficit.....................  (37,238,542)  (37,238,542)
                                           ------------  ------------   -----
   Total stockholders' equity.............    3,850,482    54,474,603
                                           ------------  ------------   -----
    Total capitalization.................. $ 35,618,075  $ 54,474,603   $
                                           ============  ============   =====
------------------
The number of outstanding shares in the preceeding table excludes 1,707,800
shares of common stock issuable upon the exercise of outstanding warrants with
a weighted average exercise price of $13.31 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.

                                       20
Dilution

Our pro forma consolidated net tangible book value as of March 31, 1999 was
approximately $28,664,000 or $1.00 per share. "Net tangible book value" is
total assets minus the sum of liabilities and intangible assets. "Net tangible
book value per share" is net tangible book value divided by the total number of
shares outstanding before this offering.

After giving effect to adjustments relating to this offering, our pro forma net
tangible book value on March 31, 1999 would have been $   or $   per share. The
adjustments made to determine pro forma net tangible book value per share are
the following:

  . an increase in total assets to reflect the net proceeds of this offering
    as described under "Use of Proceeds" assuming that the public offering
    price will be $   per share; and

  . the addition of the number of shares offered by us to the number of
    shares outstanding.

The following table illustrates the pro forma increase in net tangible book
value of $   per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:
Assumed public offering price per share.........................       $
   Pro forma net tangible book value per share as of March 31,
    1999........................................................... $
   Increase in net tangible book value attributable to new public
    investors......................................................
                                                                    -----
   Pro forma as adjusted net tangible book value per share as of
    March 31, 1999 after giving effect to this offering............
                                                                          -----
   Dilution per share to new investors in this offering............       $
                                                                          =====
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the public offering price will be $   per share. The following table does not
give effect to sales of shares by the selling stockholders.
Shares         Total      Average
                                             Purchased    Consideration   Price
                                           -------------- --------------   Per
                                           Number Percent Amount Percent  Share
                                           ------ ------- ------ ------- -------
Existing stockholders..................              % $            % $
   New investors..........................
                                           -----   -----  ------  -----
     Total................................         100.0% $       100.0%
                                           =====   =====  ======  =====
21
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 period from our inception on January
8, 1998 to June 30, 1998, and the balance sheet data at June 30, 1998, are
derived from our audited financial statements, which are included elsewhere in
this prospectus. The statement of operations data for the period from inception
to March 31, 1998 are derived from audited financial statements that are not
included in this prospectus. The statement of operations data for the nine
months ended March 31, 1999 and the period from inception through March 31,
1999 are derived from our unaudited financial statements included elsewhere in
this prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, that are necessary for the
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of future results. We have paid no cash
dividends on our common stock.
Combined
                                                                         Consolidated
                          January 8, 1998  Nine months   January 8, 1998 Nine Months
                          (inception) to      ended      (inception) to  ended March
                           June 30, 1998  March 31, 1999 March 31, 1999    31, 1999
                          --------------- -------------- --------------- ------------
Statement of Operation
 Data:
Revenues................    $        --    $     41,527   $     41,527   $    392,885
Cost of revenues........             --          13,840         13,840         45,410
                            -----------    ------------   ------------   ------------
Gross profit............             --          27,687         27,687        347,475
                            -----------    ------------   ------------   ------------
Operating expenses:
  Product development...    $   961,349       3,580,014      4,541,363      3,723,661
  Selling general and
   administrative.......        218,755         715,594        934,349      5,585,286
  Amortization of
   deferred
   compensation.........             --              --             --        130,870
                            -----------    ------------   ------------   ------------
                              1,180,104       4,295,608      5,475,712      9,439,817
                            -----------    ------------   ------------   ------------
Operating loss..........     (1,180,104)     (4,267,921)    (5,448,025)    (9,092,342)
Interest income.........             --          39,365         39,365         39,471
Interest expense........             --         (35,549)       (35,549)       (35,549)
                            -----------    ------------   ------------   ------------
Net loss................    $(1,180,104)   $ (4,264,105)  $ (5,444,209)  $ (9,088,420)
                            -----------    ------------   ------------   ------------
Accretion of Series A
 and B preferred to
 redemption value.......             --        (177,255)      (177,255)      (177,255)
Beneficial conversion
 charge, Series B
 preferred stock........             --     (31,577,078)   (31,577,078)   (31,577,078)
Dividend on Series B
 preferred stock (Note
 3).....................             --         (40,000)       (40,000)       (40,000)
                            -----------    ------------   ------------   ------------
Net loss applicable to
 common shares..........    $(1,180,104)   $(36,058,438)  $(37,238,542)  $(40,882,753)
                            ===========    ============   ============   ============
Net loss per common
 share--basic and
 diluted................    $     (0.12)   $      (2.48)  $      (2.89)  $      (2.64)
                            ===========    ============   ============   ============
Weighted average common
 shares outstanding--
 basic and diluted......     10,234,055      14,560,552     12,889,520     15,498,691
Pro forma net loss per
 common share...........    $     (0.12)   $      (2.43)  $      (2.85)  $      (2.59)
                            ===========    ============   ============   ============
Weighted average common
 shares outstanding used
 in computing pro forma
 basic and diluted net
 loss per share.........     10,234,055      14,865,363     13,078,713     15,803,502
Combined
                                                                 Consolidated
                                   June 30, 1998 March 31, 1999 March 31, 1999
                                   ------------- -------------- --------------
Balance Sheet Data:
Cash and cash equivalents.........   $509,751     $32,618,240    $32,651,777
Working capital...................    395,913      29,719,397     28,691,105
Total assets......................    581,860      38,800,350     47,967,092
Total long-term debt..............         --              --        309,550
Total debt........................         --              --        493,188
Redeemable convertible preferred
 stock............................         --      31,767,593     31,767,593
Total stockholders' equity........    446,660       3,850,482     11,621,755
22
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 March 31, 1999, we have incurred costs to organize and develop an
Internet website to conduct our business. We began selling musical recordings
over the Internet in July 1998. 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.

                                       23
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
                         -------------------------------------------------------------
                         March 31,   June 30,     Sept 30,     Dec 31,     March 31,
                           1998        1998         1998        1998          1999
                         ---------  -----------  ----------  -----------  ------------
Net revenue.............        --           --  $   12,452  $     8,013  $     21,062
Cost of revenue.........        --           --         277        4,439         9,124
                         ---------  -----------  ----------  -----------  ------------
Gross profit............        --           --      12,175        3,574        11,938
                         ---------  -----------  ----------  -----------  ------------
Operating expenses:
 Product development.... $  42,182  $   919,167     666,712      925,249     1,988,053
 Selling, general and
  administrative........    46,745      172,010     197,256      204,672       313,666
                         ---------  -----------  ----------  -----------  ------------
  Total operating
   expenses.............    88,927    1,091,177     863,968    1,129,921     2,301,719
                         ---------  -----------  ----------  -----------  ------------
Loss from operations....   (88,927)  (1,091,177)   (851,793)  (1,126,347)   (2,289,781)
Interest income.........        --           --       2,310          592        36,463
Interest expense........        --           --          --           --       (35,549)
                         ---------  -----------  ----------  -----------  ------------
Net loss................ $ (88,927) $(1,091,177) $ (849,483) $(1,125,755) $ (2,288,867)
                         ---------  -----------  ----------  -----------  ------------
Accretion of Series A
 and B preferred stock
 to redemption value....        --           --          --     (169,047)       (8,208)
Beneficial conversion
 charge, Series B
 preferred stock........        --           --          --           --   (31,577,078)
Dividend on Series B
 preferred stock........        --           --          --           --       (40,000)
                         ---------  -----------  ----------  -----------  ------------
Net loss applicable to
 common shares.......... $ (88,927) $(1,091,177) $ (849,483) $(1,294,802) $(33,914,153)
                         =========  ===========  ==========  ===========  ============
Net loss per common
 share-basic and
 diluted................ $   (0.01) $     (0.08) $    (0.06) $     (0.09) $      (2.31)
                         =========  ===========  ==========  ===========  ============
Weighted average common
 shares outstanding
 basic and diluted...... 6,607,357   12,847,724  14,591,336   14,581,212    14,674,372
Net Revenues

We are a development stage company. We earned no revenue from inception through
June 30, 1998. For the three quarters ended March 31, 1999, our revenues
totaled $41,527. 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 three quarters ended March 31, 1999 totaled $13,840.
These costs consist of the cost of merchandise sold, credit card processing
fees and royalties on downloadable music. 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.

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;

  . certain non-recoverable advances to artists and artist development;

                                       24
. telecommunications charges; and

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

Product development expenses were $1,988,053 for the three months ended March
31, 1999, compared to $42,182 for the period ended March 31, 1998. They were
$3,580,014 for the nine months ended March 31, 1999 and $4,541,363 from
inception through March 31, 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.

Product development expenses included charges of $865,168 and $1,495,608 due to
stock and stock options granted to advisors during the three and nine months
ended March 31, 1999, respectively. Product development expenses included
similar charges of $751,714 from inception through June 30, 1998. Additionally,
we charged approximately $338,000 to product development expense for the
amortization of the intangibles associated with our acquisition of Creative
Fulfillment. Because we plan to continue to aggregate musical recordings and to
develop the software necessary to manage downloads, we expect that product
development expenses will increase in future periods.

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 have begun an extensive sales and marketing campaign.
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 $934,349 from inception
through March 31, 1999, related to general and administrative expenses. Of
these costs, $313,666 and $715,594 were incurred in the three and nine months
ended March 31, 1999, respectively. 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.

Liquidity and Capital Resources

We had a cash balance of $32,618,240 at March 31, 1999. For the period from
inception through March 31, 1999, net cash of $98,122 was used for operating
activities consisting of net losses of $5,444,209, substantially offset by:

  . non-cash expenses of $2,247,322 associated with stock and stock options
    granted to advisors; and

  . increased accrued liabilities of $2,615,422 principally related to
    issuance costs for our Series B preferred stock.

Additionally, we purchased approximately $180,300 in capital equipment from
inception through March 31, 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.

                                       25
During the period from December 1998 through March 1999, we received loans in
the form of convertible notes payable totaling $1,743,500. 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 and Series A
shares, were $31,577,078, net of issuance costs of approximately $2,724,000, of
which approximately $2,500,000 remained in accrued liabilities at March 31,
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
period ended March 31, 1999.

In April 1999, we entered into a five-year lease agreement for 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.

Since inception, we have experienced significant losses and negative cash flows
from operations. We believe that our existing capital resources together with
the proceeds from this offering will be sufficient to fund our planned level of
operating activities, capital expenditures and other obligations through the
next 12 months. However, we may need to raise additional funds in future
periods through public or private financings, or other sources, to fund our
operations and potential acquisitions, if any, until we achieve profitability,
if ever. We may not be able to obtain adequate or favorable financing at that
time. Failure to raise capital when needed could harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.

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 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.

                                       26
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, Inc. 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.

Quantitative and Qualitative Disclosures About Market Risk

We considered the provision 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 March 31, 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........................................... $509,751    $  --    $509,751
   Weighted Average Interest Rate................      4.9%      --
  Total Portfolio................................ $509,751    $  --    $509,751
                                                  ========    =====    ========
27
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.

                                       28
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 75
record labels and over 1,200 recording artists, including such well known
artists as The Offspring, They Might be Giants, Jimi Hendrix, and Ella
Fitzgerald. We currently have over 13,000 titles available for download on our
EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 3,700 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 will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
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.

                                       29
Forrester estimates that total online music revenues in the United States are
expected to grow from $88.0 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. 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. According to Webnoize Inside, an affiliate of Digital Music
Network, Inc., mp3 is the most widely recognized digital music format. 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, 30% 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 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

                                       30
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 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.

                                       31
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.

Compelling Music Selection. We currently have exclusive, multi-year, digital
download licenses to over 300,000 titles, from over 75 record labels and over
1,200 recording artists, including such well known artists as The Offspring,
They Might Be Giants, Jimi Hendrix and Ella Fitzgerald. In addition, IUMA
offers our customers access to over 3,700 unsigned artists. We currently have
over 13,000 titles available for download on our EMusic.com website. 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.

                                       32
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 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 Mp3 Association, Digital Music
Association and Electronic Frontier Foundation, organizations dedicated to
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.

                                       33
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 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 over 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

                                       34
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 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 Bunnyman'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, Inc. aimed at promoting the growth of downloadable music sales
    in the popular mp3 format. Adaptec is the developer

                                       35
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 "back
    to school" and the holiday season.

 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 3,700 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 bios, 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.

                                       36
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.

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. This system
utilizes 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.

                                       37
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 servers. Our servers are 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;

                                       38
. 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;

  . 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,

                                       39
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 July 22, 1999, we had 63 full-time employees, including 30 in content
acquisition and marketing, 12 in engineering and product development, 10 in
finance and operations and 11 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.

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.

                                       40
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 July 15, 1999 are as
follows:
Name                   Age                     Position(s)
----                   ---                     -----------
Robert H. Kohn *......  42 Chairman and Secretary
Gene Hoffman, Jr. *...  23 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........  49 Executive Vice President, Business Affairs
Brian Brinkerhoff.....  36 Vice President, Content Acquisition
Steve Grady...........  33 Vice President, Marketing
Peter Harter..........  30 Vice President, Global Public Policy and Standards
Spencer Leyton........  51 Vice President, Corporate Development, M&A
Marv Su...............  36 Vice President, Interactive Marketing
Brett A. Thomas.......  29 Vice President, Technology
Tor Braham............  41 Director
Ralph Peer, II........  54 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.

                                       41
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 1999 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.

Brian Brinkerhof 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.

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.

                                       42
Spencer Leyton joined EMusic in April 1999 as Vice President, Corporate
Development, M&A. 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.

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. Rosenblat 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.

                                       43
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 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.

                                       44
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   --       --                  --
------------------

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.

                                       45
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;

 . 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 July 15, 1999, six million shares are reserved for issuance under the
1998 option plan, 45,400 shares have been issued upon the exercise of options,
options to purchase of a total of 2,946,750 shares at a weighted average
exercise price of $3.52 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).

                                       46
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 July 15, 1999, five million shares are reserved for issuance under the
nonstatutory plan, no shares have been issued upon the exercise of options,
options to purchase of a total of 3,351,000 shares at a weighted average
exercise price of $10.29 per share were outstanding and 1,649,000 shares were
available for future option grants.

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.

                                       47
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 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 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 its 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 July 15, 1999, 2,618,136 and 2,253,514 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.

                                       48
Principal and Selling Stockholders

The following table sets forth, immediately before this offering and
immediately after this offering, the ownership of our voting stock, including
optioned shares, assuming the conversion of all of the outstanding shares of
our common stock 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;

 . all executive officers and directors as a group; and

 . other stockholders.

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 July 15, 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 July 15, 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.
Before Offering                        After Offering
                          --------------------------           ---------------------------
                           Number of
                           Shares of                 Number of Number of Shares
                          Common Stock                Shares   of Common Stock
  Beneficial Owner(1)        Owned        Percent(2)  Offered       Owned       Percent(2)
  -------------------     ------------    ---------- --------- ---------------- ----------
5% Stockholders
Citiventure 96
 Partnership, L.P.
 c/o Invesco Private
  Capital
 1166 Avenue of the
  Americas, 2700
 New York, NY 10036.....   3,333,400(3)      11.5%                3,333,400         9.8%
VantagePoint Venture
 Partners
 1001 Bayhill Drive,
  Suite 140
 San Bruno, CA 94066....   1,686,500(4)       5.8%                1,686,500         4.9%
Directors and Executive
 Officers
Robert H. Kohn..........   2,981,700         10.3%    100,000     2,881,700         8.5%
Gene Hoffman, Jr........   3,702,000(5)      12.7%    100,000     3,602,000        10.6%
Joseph H. Howell........     278,624(6)       *       100,000       178,624         *
Peter M. Astiz..........     236,000          *        20,000       216,000         *
James R. Chapman........      99,941(7)       *        20,000        79,941         *
Tor Braham..............      46,600(8)       *                      46,600         *
Ralph Peer, II..........     308,900(9)       1.0%                  308,900         *
Ed Rosenblatt...........     100,000(10)      *                     100,000         *
Executive officers and
 directors as a group (8
 persons)...............   7,753,765(11)     26.7%                7,413,765        21.7%
49
------------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
    acquired by such person within 60 days upon the exercise of options.
    Calculations of percentages of beneficial ownership assume the exercise by
    only the respective named shareholders of all options for the purchase of
    common stock held by such shareholder which are exercisable within 60 days
    of July 15, 1999.
(2) Percentage of beneficial ownership excludes up to 5,761,145 shares issuable
    upon exercise of outstanding stock options and warrants.
(3) 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.
(4) 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.
(5) Includes 400,000 shares for which Gene Hoffman has voting rights pursuant
    to a voting agreement. Mr. Hoffman disclaims beneficiary ownership of such
    shares except to the extent of his pecuniary interest therein.
(6) Includes 268,264 shares issuable upon exercise of outstanding options.
(7) Includes 33,341 shares issuable upon exercise of outstanding options.
(8) Includes 35,000 shares issuable upon exercise of outstanding options.
(9) 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.
(10) Represents shares issuable upon exercise of outstanding options.
(11) Includes 536,605 shares issuable upon exercise of outstanding options.

                                       50
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 July 15, 1999, there were approximately 28,561,000 shares of common stock
outstanding held of record by approximately 201 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 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
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 July 15, 1999, we had outstanding warrants to purchase an aggregate of
1,707,800 shares of our common stock. Warrants as to 100,000 shares expire in
October 2003 and have an exercise price equal to $7.91. 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
exercise price of $13.63 and expire in June 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 convertible or exercisable. In accordance with this agreement,
we intend to file a registration statement with the

                                       51
SEC with respect to the resale of up to approximately 13,200,000 shares of our
common stock prior to the completion of this offering. All shares subject to
such filing will be subject to the lock-up restrictions described below. As of
July 15, 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.

                                       52
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. No preferred stock will be designated upon consummation of
this offering. After this offering, we will have outstanding approximately
33,561,000 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

                                       53
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 numbers at this location is
(801) 272-9294.

                                       54
Shares Eligible for Future Sale

Upon completion of this offering, we will have outstanding approximately
33,561,000 shares of common stock, assuming no exercise of options or warrants
after July 15, 1999. Of these shares, the 5,340,000 shares sold in this
offering will be 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 28,221,237 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. We intend to file a registration statement
with the SEC covering the resale of 13,032,367 of such shares. Upon the
effectiveness of such registration statement, such shares will be freely
tradeable without restriction except to the extent that such shares are held by
affiliates of EMusic. Of the remaining shares, approximately 4,045,400 are
freely tradeable, approximately 10,695,300 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. Of
the outstanding shares, approximately           will be subject to "lock-up"
agreements described below on the effective date of the offering.

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   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.

Prior to this offering, there has been only a limited public market for our
common stock, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of our common
stock cannot be predicted. Nevertheless, sales of substantial amounts of these
shares in the public market, or the perception that these sales could occur,
could adversely affect the trading price of our common stock and could impair
our future ability to raise capital through an offering of our equity
securities.

Options

As of July 15, 1999, there were a total of 6,297,750 shares of common stock
subject to outstanding options under our stock option plans, 1,872,259 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.

                                       55
Warrants

As of July 15, 1999, 1,707,800 shares of our common stock were subject to
outstanding warrants. Of such shares, 100,000 are subject to a registration
statement which we intend to file with the SEC prior to the completion of this
offering. 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.

Lock-up Agreements

Our officers, directors and some other stockholders, holding in total
approximately           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 the date of this offering. Other stockholders holding
in total approximately            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 year ending June 30, 1999 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
On July 22, 1999, the last sale price reported on the Nasdaq National Market
for our common stock was $21.38 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.

                                       56
Underwriting

EMusic and the selling stockholders have entered into an underwriting agreement
with the underwriters named below. CIBC World Markets Corp., ING Barings LLC,
Prudential Securities and Volpe Brown Whelan & Company, LLC are acting as
representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of common stock set forth opposite its name
below:
Number of
   Underwriters                                                         Shares
   ------------                                                        ---------
CIBC World Markets Corp............................................
   ING Barings LLC....................................................
   Prudential Securities Incorporated.................................
   Volpe Brown Whelan & Company, LLC..................................
                                                                         ----
       Total..........................................................
                                                                         ====
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.

The representatives have advised EMusic and the selling stockholders that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to certain securities dealers
at such price less a concession of $     per share. The underwriters may also
allow, and such dealers may reallow, a concession not in excess of $     per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.

EMusic has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of      additional shares from
EMusic to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $     million, and the total proceeds to EMusic will be $    .
The underwriters have severally agreed that, to the extent the over-allotment
option is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.

The following table provides information regarding the amount of the discount
to be given to the underwriters by EMusic and the selling stockholders.
Total Without Exercise  Total With Full Exercise
                            Per Share of Over-Allotment Option of Over-Allotment Option
                            --------- ------------------------ ------------------------ ---
EMusic..................    $                $                        $
   Selling stockholders....
   Total...................
57
EMusic estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $    .

EMusic and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.

EMusic, its officers and directors and some other stockholders have agreed to a
90-day "lock up" with respect to approximately    shares of common stock and
certain other EMusic securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that,
subject to certain exceptions, for a period of 90 days following the date of
this prospectus, EMusic and such persons may not directly or indirectly offer,
sell, pledge or otherwise dispose of the EMusic securities without the prior
written consent of CIBC World Markets Corp. 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.

Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:

 . Stabilizing transactions--The representatives may make bids or purchases
   for the purpose of pegging, fixing or maintaining the price of the shares,
   so long as stabilizing bids do not exceed a specified maximum.

 . Over-allotments and syndicate covering transactions--The underwriters may
   create a short position in the shares by selling more shares than are set
   forth on the cover page of this prospectus. If a short position is created
   in connection with the offering, the representatives may engage in
   syndicate covering transactions by purchasing shares in the open market.
   The representatives may also elect to reduce any short position by
   exercising all or part of the over-allotment option.

 . Penalty bids--If the representatives purchase shares in the open market in
   a stabilizing transaction or syndicate covering transaction, they may
   reclaim a selling concession from the underwriters and selling group
   members who sold those shares as part of this offering.

 . Passive market making--Market makers in the shares who are underwriters or
   prospective underwriters may make bids for or purchases of shares, subject
   to certain limitations, until the time, if ever, at which a stabilizing bid
   is made.

Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.

Neither EMusic nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.

                                 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 83 shares of our Series B preferred stock
(convertible into 8,300 shares of common stock). Various legal matters relating
to our common stock will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Palo Alto, California.

                                       58
Experts

The financial statements of EMusic.com Inc. as of June 30, 1998 and for the
period then ended, 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 issued by us and the
selling stockholders. This prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedule filed therewith. For
further information with respect to EMusic and the common stock, reference is
made to the Registration Statement and the exhibits and schedules 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.

                                       59
Index to Financial Statements

                  Index to Financial Statements- June 30, 1998
Page
                                                                            ----
Report Of Independent Accountants.........................................   F2
Balance Sheet.............................................................   F3
Statements of Operations..................................................   F4
Statement of Stockholders' Equity.........................................   F5
Statement Of Cash Flows...................................................   F6
Notes To Financial Statements.............................................   F7

       Index to Unaudited Condensed Financial Statements- March 31, 1999
Page
                                                                            ----
Unaudited Condensed Consolidated Balance Sheets...........................  F14
Condensed Consolidated Statements of Operations...........................  F15
Condensed Consolidated Statements Of Cash Flows...........................  F16
Notes To Condensed Consolidated Financial Statements......................  F17

                    Index to Pro Forma Financial Statements
Page
                                                                            ----
Unaudited Pro Forma Condensed Combining Financial Information.............  F23
Unaudited Pro Forma Condensed Combining Income Statement Data--Nine Months
 Ended
 March 31, 1999...........................................................  F24
Unaudited Pro Forma Condensed Combining Income Statement Data--Twelve
 Months Ended
 June 30, 1998............................................................  F25
Unaudited Pro Forma Condensed Combining Balance Sheet--March 31, 1999.....  F26
Notes to the Unaudited Pro Forma Condensed Combining Financial
 Statements...............................................................  F27

           Index to Financial Statements- Creative Fulfillment, Inc.
Page
                                                                            ----
Report Of Independent Accountants.........................................  F28
Balance Sheets............................................................  F29
Statements of Operations..................................................  F30
Statement of Stockholders' Equity (Deficit)...............................  F31
Statements Of Cash Flows..................................................  F32
Notes To Financial Statements.............................................  F33

                      Index to Financial Statements- IUMA
Page
                                                                            ----
Report Of Independent Accountants.........................................  F37
Balance Sheets............................................................  F38
Statements of Operations..................................................  F39
Statement of Stockholders' Deficit........................................  F40
Statements of Cash Flows..................................................  F41
Notes To Financial Statements.............................................  F42
F-1
Report of Independent Accountants

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

In our opinion, the accompanying balance sheet and the related 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) at June 30, 1998, and
the results of its operations and its cash flows for the period from January 8,
1998 (Inception) to June 30, 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 audit. We conducted our audit 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.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations since
inception and has to obtain additional capital to fund its ongoing operations.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP

San Jose, California
October 28, 1998

                                      F-2
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a Development Stage Enterprise)

                                 BALANCE SHEET

                                 June 30, 1998
ASSETS
Current Assets:
 Cash.............................................................. $  509,751
 Prepaid expenses and other current assets.........................     21,362
                                                                    ----------
  Total current assets.............................................    531,113
Property and equipment, net........................................     34,227
Other assets.......................................................     16,520
                                                                    ----------
    Total assets................................................... $  581,860
                                                                    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Accounts payable.................................................. $  118,218
 Accrued compensation..............................................     16,982
                                                                    ----------
  Total current liabilities........................................    135,200
                                                                    ----------
Commitments (Note 5)
Stockholders' Equity:
 Preferred Stock, $0.01 par value; 500,000 shares authorized; no
  shares issued and outstanding....................................         --
 Common Stock, $0.01 par value; 200,000,000 shares authorized;
  14,715,300 shares issued and outstanding.........................    147,153
 Additional paid-in capital........................................  1,485,611
 Notes receivable from employees...................................     (6,000)
 Deficit accumulated during the development stage.................. (1,180,104)
                                                                    ----------
  Total stockholders' equity.......................................    446,660
                                                                    ----------
    Total liabilities and stockholders' equity..................... $  581,860
                                                                    ==========
The accompanying notes are an integral part of these financial statements.

                                      F-3
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                            STATEMENT OF OPERATIONS
        For the Period from January 8, 1998 (Inception) to June 30, 1998
Revenues.......................................................... $        --
                                                                   -----------
Operating expenses:
  Product development.............................................     961,349
  General and administrative......................................     218,755
                                                                   -----------
                                                                     1,180,104
                                                                   -----------
Net loss.......................................................... $(1,180,104)
                                                                   ===========
Net loss per share--basic and diluted............................. $     (0.12)
                                                                   ===========
Weighted average common shares outstanding--basic and diluted.....  10,234,055
                                                                   ===========
The accompanying note are an integral part of these financial statements.

                                      F-4
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                       STATEMENT OF STOCKHOLDERS' EQUITY
          for the Period January 8, 1998 (Inception) to June 30, 1998
Deficit
                                                                         Accumulated
                             Common Stock     Additional      Notes      during the       Total
                          -------------------  Paid-In      Receivable   Development  Stockholders'
                            Shares    Amount   Capital    from Employees    Stage        Equity
                          ---------- -------- ----------  -------------- -----------  -------------
Issuance of common stock
 at inception of the
 Company................   8,378,000 $ 83,780 $  (83,780)    $     --    $        --   $        --
Issuance of common stock
 on March 30, 1998......   1,191,800   11,918     (1,818)     (10,100)            --            --
Issuance of common stock
 in exchange for
 services on March 30,
 1998...................     672,600    6,726     (1,026)          --             --         5,700
Issuance of common stock
 in exchange for
 services on April 12,
 1998...................     271,400    2,714      4,186           --             --         6,900
Conversion of notes
 payable into common
 stock on May 1, 1998...     501,500    5,015    164,985           --             --       170,000
Payment on note
 receivable.............          --       --         --        4,100             --         4,100
Issuance of shares in
 connection with merger
 (Note 1)...............   3,700,000   37,000    651,350           --             --       688,350
Issuance of options to
 advisors...............          --       --    751,714           --             --       751,714
Net loss for the period
 from January 8, 1998
 (inception) through
 June 30, 1998..........          --       --         --           --     (1,180,104)   (1,180,104)
                          ---------- -------- ----------     --------    -----------   -----------
Balance at June 30,
 1998...................  14,715,300 $147,153 $1,485,611     $ (6,000)   $(1,180,104)  $   446,660
                          ========== ======== ==========     ========    ===========   ===========
The accompanying notes are an integral part of these financial statements.

                                      F-5
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (A Development Stage Enterprise)

                            STATEMENT OF CASH FLOWS
        for the Period from January 8, 1998 (Inception) to June 30, 1998
Cash flows from operating activities:
Net loss......................................................... $(1,180,104)
Adjustments to reconcile net loss to net cash used in operating
 activities:
 Depreciation....................................................       3,157
 Common stock issued for services................................      12,600
 Options issued to advisors......................................     751,714
 Changes in assets and liabilities, net of effects of merger:
 Prepaid expenses and other current assets.......................     (21,362)
 Accounts payable................................................     116,568
 Accrued compensation............................................      16,982
 Other assets....................................................     (16,520)
                                                                  -----------
Net cash used in operating activities............................    (316,965)
                                                                  -----------
Cash flows from investing activities:
Purchase of property and equipment...............................     (37,384)
Cash flows from financing activities:
Proceeds from repayment of notes receivable from employees.......       4,100
Issuance of common stock in connection with merger (Note 1)......     690,000
Proceeds from issuance of notes payable..........................     170,000
                                                                  -----------
Net cash provided by financing activities........................     864,100
                                                                  -----------
Cash at end of period............................................ $   509,751
                                                                  ===========
Supplemental cash flow disclosures:
Non cash transactions:
Conversion of notes payable into common stock.................... $   170,000
Issuance of common stock for notes receivable.................... $    10,100
The accompanying notes are an integral part of these financial statements.

                                      F-6
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                         Notes to Financial Statements

                                 June 30, 1998

1. The Company and Summary of Significant Accounting Policies

The Company, its Recapitalization and Liquidity

EMusic.com (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 has been presented
as a recapitalization of the Company. Atlantis is 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 of $690,000,
liabilities of $1,650 and an accumulated deficit of $1,650. Following the
recapitalization, Atlantis changed its name to GoodNoise Corporation. The
accompanying financial statements reflect all share amounts after giving effect
to the recapitalization.

The Company has incurred losses from operations since inception and has to
obtain additional capital to fund its ongoing operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management is in the process of pursuing additional equity financing although
there can be no assurance that they will be successful in their efforts. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.

 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.

 Fair Value of Financial Instruments

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

 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.

 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

                                      F-7
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998

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 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." The Company accounts for stock
issued to non employees in accordance with provisions of SFAS 123.

 Net Loss Per Share

The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. The weighted average shares used to
compute basic net loss per share include outstanding shares of common stock
from the date of issuance and excludes, for the period from January 8, 1998
(inception) through June 30, 1998, 508,056 shares of common stock subject to
repurchase rights. In addition, the calculation of diluted net loss per share
excludes common stock issuable upon exercise of employee stock options and
shares subject to repurchase as their effect is antidilutive. At June 30, 1998
potentially dilutive seurities arising from options outstanding amounted to
908,297 common stock equivalents.

 Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. There are no differences between the net loss for the
period from January 8, 1998 (inception) to June 30, 1998 and comprehensive
income (loss) for the same period.

 Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 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 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 FASB 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 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-8
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998

2.  Property and Equipment
June 30,
                                                                         1998
                                                                       --------
Software........................................................... $ 5,215
   Computer equipment.................................................  27,169
   Furniture and fixtures.............................................   5,000
                                                                       -------
                                                                        37,384
   Less: Accumulated depreciation.....................................  (3,157)
                                                                       -------
                                                                       $34,227
                                                                       =======
3. Borrowings

During the period ended June 30, 1998, the Company entered into agreements to
borrow $170,000, through the issuance of promissory notes which bore interest
at 10.0% per annum, of which $110,000 were issued to two of the Company's
directors and one member of its advisory board. All outstanding principal and
interest related to these notes was to be converted at the closing of the
Company's initial sale of Series A Preferred Stock. The Company did not issue
the Series A Preferred Stock and, on May 1, 1998, these notes were converted
into 501,500 shares of Common Stock.

4. Related Party Transactions

At June 30, 1998, the Company had notes receivable related to stock purchases
by certain employees of the Company totaling $6,000. The notes are non-interest
bearing and are payable on demand.

See Note 3 for additional related party transactions.

5. Commitments

The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $12,934 for the period from January 8,
1998 (inception) to June 30, 1998.

Future minimum lease payments under this noncancelable operating lease are as
follows:
Year Ending June 30,
1999................................................................ $ 46,425
   2000................................................................   51,892
   2001................................................................   32,590
                                                                        --------
                                                                        $130,907
                                                                        ========
6. Stockholders' Equity

 Restricted stock

A total of 8,378,000 shares of Common Stock were issued to founders of which
1,062,000 shares were issued under a Restricted Stock Purchase Agreement (the
"Agreement") to one of the founders. The Agreement

                                      F-9
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)
                   Notes to Financial Statements--(Continued)
                                 June 30, 1998

provides the Company with the right to repurchase 590,000 of these shares at
$0.01, subject to ratable vesting over three years. As of June 30, 1998, a
total of 508,056 shares were subject to repurchase by the Company.

 Stock Option Plan

On March 30, 1998, the Company adopted the 1998 Stock Option Plan ("1998 Plan")
that provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock and
for stock-based awards to officers, directors and key employees of the Company
and to non-employee consultants and independent contractors. Options granted to
employees under the 1998 Plan generally vest ratably over three years.

Option activity under the 1998 plan for the period January 8, 1998 (inception)
to June 30, 1998 was as follows:
Outstanding Options
                                                           ----------------------
                                                                       Weighted
                                                Options                 Average
                                               Available               Exercise
                                               for Grant     Shares      Price
                                               ----------  ----------- ----------
Authorized.................................  2,360,000           --  $    --
   Granted.................................... (2,437,550)   2,437,550     0.85
   Authorized.................................    640,000           --       --
                                               ----------  -----------
   As of June 30, 1998........................    562,450    2,437,550     0.85
                                               ==========  ===========
The following table summarizes information with respect to stock options
outstanding at June 30, 1998:
Options Outstanding                Options Exercisable
             ----------------------------------------  -------------------------
               Average                      Weighted                   Weighted
  Range       Remaining        Number       Average       Number       Average
 Exercise    Contractual     Outstanding    Exercise    Exercisable    Exercise
  Price      Life (Years)   June 30, 1998    Price     June 30, 1998    Price
 --------    ------------   -------------   --------   -------------   --------
$0.01-0.03       4.83         2,032,550      $0.03        416,606       $0.02
      5.00       4.92           405,000       5.00        380,694        5.00
                              ---------                   -------
                              2,437,550       0.85        797,300        2.40
                              =========                   =======
Fair Value Disclosures

Had compensation cost for the Company's Stock Option Plan been determined based
on the fair value at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share for
the period from January 8, 1998 (inception) through June 30, 1998 would have
been as follows:
Period
                                                                      Ended
                                                                    June 30,
                                                                      1998
                                                                   -----------
Net loss--as reported.......................................... $(1,180,104)
   Net loss--pro forma............................................  (1,458,199)
   Net loss per share basic and diluted--as reported..............       (0.12)
   Net loss per share basic and diluted--pro forma................       (0.14)
F-10
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)

                   Notes to Financial Statements--(Continued)

                                 June 30, 1998

The above pro forma disclosures are not necessarily representative of the
effects on reported net income for future years.

The aggregate fair value and weighted average fair value per share of options
granted to employees and advisors in fiscal 1998 were $1,121,000 and $0.46 per
share, respectively. Of this amount, $751,714 was recorded as product
development expense representing the fair value of 280,000 options issued to
various advisors of the Company which vested upon issuance. 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:
Expected volatility..................................................     55%
   Risk-free interest...................................................   5.73%
   Expected life........................................................ 5 years
   Expected dividend yield..............................................   0.00%
Warrants

As a result of the merger described in Note 1, the Company has 1,500,000
warrants outstanding to purchase an aggregate of 300,000 shares of common stock
as five warrants entitle the holder to purchase one common share for $1.00. The
warrants remained outstanding at June 30, 1998 and were exercised in August
1998. See Note 8.

7. Income Taxes

There is no provision for income taxes for the period from January 8, 1998
(inception) through June 30, 1998 as the Company incurred a net loss. The
Company's deferred tax assets at June 30, 1998 principally relate to its net
operating loss and approximated $170,000. Due to the uncertainty surrounding
recoverability, a full valuation allowance has been established against this
amount.

  Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating loss and tax credit carryforwards that can be utilized in the future
may be impaired or limited in certain circumstances, including changes in
ownership, as defined.

8. Subsequent Events

On July 30, 1998, the Company commenced selling musical recordings over the
Internet.

On August 10, 1998, the 1,500,000 warrants described in Note 6 were exercised
to purchase 300,000 shares of common stock for cash proceeds of $300,000.

On October 8, 1998, the Company entered into agreements to acquire certain
assets from online music company, Nordic Entertainment Worldwide, a privately
held provider of downloadable music on the Internet and to acquire Creative
Fulfillment Inc., a privately held entertainment and Internet marketing
company, for stock and cash. Under the terms of the transactions, the Company
will issue up to 2,100,000 shares of common stock subject to certain closing
conditions. Among other conditions, the closing of these transactions is
dependant upon satisfactory due diligence and the Company obtaining $3,000,000
of additional financing.

On October 28, 1998, the Company issued 500 shares of Series A Preferred Stock
("Series A") and warrants to purchase 100,000 shares of the Company's common
stock for gross proceeds of $500,000 to one accredited

                                      F-11
EMusic.com Inc.
                        (formerly Goodnoise Corporation)
                        (a Development Stage Enterprise)
                   Notes to Financial Statements--(Continued)
                                 June 30, 1998

investor. The agreements, subject to various conditions, provide for the
issuance of an additional 500 shares of Series A and warrants to purchase
100,000 shares of common stock under the same terms as the initial issuance
except that the warrant price will be based upon the current market price of
the common stock.

The Series A Shares are not entitled to any preference with respect to dividend
payments and have no voting rights except as required by law. Upon any
liquidation, dissolution or winding up of the affairs of the Company, the
holder of each Series A Share shall be entitled to be paid $1,000 per share
(the amount initially paid for such shares) plus an amount calculated at the
rate of six percent per annum of such price per share. If the assets of the
Company upon such event are insufficient to make such payment in full, then the
holders of Series A Shares shall be entitled to pro rata distribution of all
assets of the Company. After payment in full of the liquidation preference to
the holders of Series A Shares, such holders are entitled to no further
distributions.

The Series A Shares are convertible into shares of common stock at the election
of the holder at a price (the "Conversion Rate") equal to the lower of (i)
$7.91, (ii) 110% the closing price on the day 180 days following October 28,
1998 or (iii) the market price when a holder of Series A Shares delivers notice
of his election to convert such shares. "Market price" is generally determined
by the average of the four lowest closing prices for the 20 trading days prior
to the applicable date. Any Series A Shares outstanding three years after the
date such shares were initially issued automatically convert into shares of the
Company's common stock at the then applicable Conversion Rate. The Conversion
Rate is initially based on a conversion price equal to the lower of 85% of the
average of the four lowest closing prices of the Company's common stock during
the twenty trading days before the conversion date or $7.91. 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 the then applicable Conversion Rate. Under certain
circumstances, the Company has the right to redeem the Series A Shares. Under
certain other circumstances, the holder has the right to require the Company to
redeem the Series A Shares. As a result, the Series A Shares will be reflected
as redeemable stock and the Company will record a charge for the "in the money"
conversion feature of such shares.

The warrants have a four year term and an exercise price equal to the lower of
(i) the closing price the day prior to the date of issuance of such warrant or
(ii) the closing price on the day six months following the original date of
issuance of such warrant. The initial exercise price of the warrants is $7.10
per share. The exercise price of the warrants is subject to adjustments on
stock splits, stock dividends, any merger or acquisition involving the Company
and similar transactions, such as to permit the investors to receive upon
exercise of the warrants that which they would have received had they exercised
the warrants immediately prior to any such transaction. The exercise price of
the warrants is also subject to certain other adjustments upon future issuances
of common stock or rights to acquire common stock at a price less than the then
applicable exercise price.

The Company is obligated to promptly file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to cover the resale of the Company's common stock issuable upon the
conversion of the Series A Shares and exercise of the Warrants as well as
subsequently issuable Series A Shares and Warrants. The Company is obligated to
use its reasonable best efforts to have the Registration Statement declared
effective by the SEC and remain effective until the Company's common stock
subject to the registration statement may otherwise be freely traded without
registration. The Company is also obligated to list such shares on the OTC
Bulletin Board and to take certain actions to comply with applicable state
securities laws and regulations.

                                      F-12
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                                      F-13
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                     CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,     June 30,
                                                          1999         1998
                                                      ------------  -----------
                                                      (Unaudited)
Assets
Current Assets:
 Cash...............................................  $ 32,618,240  $   509,751
 Accounts receivable................................         6,892           --
 Prepaid expenses and other assets..................       276,540       21,362
                                                      ------------  -----------
  Total current assets..............................    32,901,672      531,113
Property and equipment, net.........................       156,317       34,227
Intangible assets, net..............................     5,725,841           --
Other assets........................................        16,520       16,520
                                                      ------------  -----------
   Total assets.....................................  $ 38,800,350  $   581,860
                                                      ============  ===========
Liabilities, Redeemable Convertible Preferred Stock
and
Stockholders' Equity
Current Liabilities:
 Accounts payable...................................  $    338,780  $    67,041
 Accrued liabilities................................     2,773,910       51,177
 Acquisition related liabilities....................        31,512           --
 Accrued payroll and related benefits...............        38,073       16,982
                                                      ------------  -----------
  Total current liabilities.........................     3,182,275      135,200
                                                      ------------  -----------
Redeemable Convertible Preferred Stock                  31,767,593           --
Stockholders' Equity:
 Preferred Stock, $0.01 par value...................            --           --
 Common Stock, $0.01 par value......................       156,555      147,153
 Additional paid-in capital.........................    40,938,469    1,485,611
 Notes receivable from employees....................        (6,000)      (6,000)
 Deficit accumulated during the development stage...   (37,238,542)  (1,180,104)
                                                      ------------  -----------
  Total stockholders' equity........................     3,850,482      446,660
                                                      ------------  -----------
   Total liabilities, redeemable convertible
    preferred
    stock and stockholders' equity..................  $ 38,800,350  $   581,860
                                                      ============  ===========
The accompanying notes are an integral part of these financial statements.

                                      F-14
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
Nine months   January 8, 1998 January 8, 1998
                                     ended      (Inception) to  (Inception) to
                                 March 31, 1999 March 31, 1998  March 31, 1999
                                 -------------- --------------- ---------------
Revenues.......................   $     41,527     $      --     $     41,527
Cost of revenues...............         13,840            --           13,840
                                  ------------     ---------     ------------
Gross profit...................         27,687            --           27,687
                                  ------------     ---------     ------------
Operating expenses:
 Product development...........      3,580,014        42,182        4,541,363
 General and administrative....        715,594        46,745          934,349
                                  ------------     ---------     ------------
                                     4,295,608        88,927        5,475,712
                                  ------------     ---------     ------------
Operating loss.................     (4,267,921)      (88,927)      (5,448,025)
Interest income................         39,365            --           39,365
Interest expense...............        (35,549)           --          (35,549)
                                  ------------     ---------     ------------
Net loss.......................   $ (4,264,105)    $ (88,927)    $ (5,444,209)
                                  ------------     ---------     ------------
Accretion of Series A and B
 Preferred to redemption
 value.........................       (177,255)           --         (177,255)
Beneficial conversion charge,
 Series B Preferred Stock (Note
 3)............................    (31,577,078)           --      (31,577,078)
Dividend on Series B Preferred
 Stock (Note 3)................        (40,000)           --          (40,000)
                                  ------------     ---------     ------------
Net loss applicable to common
 shares........................   $(36,058,438)    $ (88,927)    $(37,238,542)
                                  ============     =========     ============
Net loss per Common share--
 basic and diluted.............   $      (2.48)    $   (0.01)    $      (2.89)
                                  ============     =========     ============
Weighted average common shares
 outstanding--basic and
 diluted.......................     14,560,552     6,607,357       12,889,520
                                  ============     =========     ============
The accompanying notes are an integral part of these financial statements.

                                      F-15
EMusic.com Inc.
                        (formerly GOODNOISE CORPORATION)
                        (a development stage enterprise)

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
Nine months   January 8, 1998 January 8, 1998
                                      ended      (Inception) to  (Inception) to
                                  March 31, 1999 March 31, 1998  March 31, 1999
                                  -------------- --------------- ---------------
Cash flows from operating
 activities:
 Net loss.......................   $(4,264,105)    $   (88,927)    $(5,444,209)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities:
  Depreciation..................        27,618             380          30,775
  Amortization of intangible
   assets.......................       338,134              --         338,134
  Issuance of common stock for
   services.....................            --              --          12,600
  Fair value of options issued
   to advisors..................     1,495,608           5,700       2,247,322
  Interest expense converted
   into Series B Preferred......        33,750              --          33,750
  Changes in assets and
   liabilities, net of effects
   of merger:
  Accounts receivable...........        (3,830)             --          (3,830)
  Prepaid acquisition costs.....      (105,191)             --        (105,191)
  Prepaid expenses and other
   assets.......................      (149,987)         (2,576)       (171,349)
  Other assets..................            --         (14,020)        (16,520)
  Accounts payable..............       261,510          25,458         326,901
  Accrued liabilities...........     2,564,245              --       2,615,422
  Accrued payroll and related
   benefits.....................        21,091              --          38,073
                                   -----------     -----------     -----------
   Net cash provided by (used
    in) operating activities....       218,843         (73,985)        (98,122)
                                   -----------     -----------     -----------
Cash flows from investing
 activities:
 Purchase of property and
  equipment.....................      (142,934)        (10,794)       (180,318)
 Cash paid for acquisition net
  of cash received..............      (311,148)             --        (311,148)
                                   -----------     -----------     -----------
   Net cash used in investing
    activities..................      (454,082)        (10,794)       (491,466)
                                   -----------     -----------     -----------
Cash flows from financing
 activities:
 Proceeds from issuance of
  common stock..................       300,400              --         300,400
 Common stock issued in
  connection with merger........            --              --         690,000
 Proceeds from issuance of
  Series A Preferred Stock and
  warrants......................       500,000              --         500,000
 Proceeds from issuance of
  Series B Preferred Stock......    29,799,828              --      29,799,828
 Proceeds from issuance of
  convertible notes.............     1,743,500         110,000       1,913,500
 Proceeds from repayment of
  employee notes receivable.....            --              --           4,100
                                   -----------     -----------     -----------
   Net cash provided by
    financing activities........    32,343,728         110,000      33,207,828
                                   -----------     -----------     -----------
Net increase in cash............    32,108,489          25,221      32,618,240
Cash at beginning of period.....       509,751              --              --
                                   -----------     -----------     -----------
Cash at end of period...........   $32,618,240     $    25,221     $32,618,240
                                   ===========     ===========     ===========
Supplemental disclosure of non-
 cash transactions:
 Conversion of notes payable
  into common stock.............   $        --     $    25,221     $   170,000
 Issuance of common stock for
  notes receivable..............   $        --     $    10,100     $    10,100
 Accretion of Series A Preferred
  to redemption value...........   $   169,047     $        --     $   169,047
 Accretion of Series B Preferred
  to redemption value...........   $     8,208     $        --     $     8,208
 Beneficial conversion charge,
  Series B Preferred Stock......   $31,577,078     $31,577,078     $31,577,078
 Issuance of common stock
  options for intangible
  assets........................   $    44,885     $        --     $    44,885
The accompanying notes are an integral part of these statements.
                                      F-16
Notes to Unaudited Condensed 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") 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, aggregating
musical content, acquiring operating assets and raising capital. The Company
operates within one industry segment, primarily in the United States.

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 organized in August 1989 and had
no revenues or operations prior to the merger with the Company. As of May 11,
1998, Atlantis Common stock was traded on the NASD OTC bulletin board. Atlantis
had cash balances of $690,000, liabilities of $1,650 and an accumulated deficit
of $1,650. Following the recapitalization, Atlantis changed its name to
GoodNoise Corporation.

The Company has incurred losses from operations since inception and has had to
obtain additional capital to fund its ongoing operations. On March 23, 1999,
the Company completed a private placement of 117,570 shares of Series B
Convertible Preferred Stock ("Series B") for aggregate net proceeds of
approximately $31 million. See Note 3 below.

Basis of Presentation

In the opinion of management, the unaudited consolidated condensed financial
statements included herein have been prepared on a consistent basis with prior
periods reported consolidated financial statements and include all material
adjustments, consisting of normal recurring adjustments, necessary to fairly
present the information set forth therein.

The unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.

Certain information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the unaudited interim financial statements are adequate to
ensure that the information presented is not misleading. The results of
operations for the interim reporting periods presented herein are not
necessarily indicative of any future operating results.

The financial information as of June 30, 1998 is derived from the Company's
Form 10-SB/A as filed with the Securities Exchange Commission on December 24,
1998 (the "Form 10"). The interim financial statements presented herin should
be read in conjunction with the financial statements and the notes thereto
included in the Form 10SB.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.

                                      F-17
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

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. Consequently, the
Company is considered to be a development stage enterprise.

Net Loss per Common Share

The weighted average shares used to compute basic net loss per share includes
outstanding shares of common stock from the date of issuance and excludes
shares of common stock subject to repurchase by the Company. The calculation of
diluted net loss per share excludes common stock issuable upon exercise of
employee stock options and common stock issuable upon the conversion of Series
B preferred shares, as their effect is antidilutive. Therefore, the 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:
Nine months   January 8, 1998 January 8, 1998
                                    ended      (Inception) to  (Inception) to
                                March 31, 1999 March 31, 1998  March 31, 1999
                                -------------- --------------- ---------------
Net loss.......................  $ (4,264,105)   $  (88,927)    $ (5,444,209)
Accretion of Series A and B
 Preferred to redemption
 value.........................      (177,255)           --         (177,255)
Beneficial conversion charge,
 Series B Preferred Stock......   (31,577,078)           --      (31,577,078)
Dividend on Series B Preferred
 Stock.........................       (40,000)           --          (40,000)
                                 ------------    ----------     ------------
Net loss applicable to common
 shares........................  $(36,058,438)   $  (88,927)    $(37,238,542)
                                 ============    ==========     ============
Weighted average common shares
 outstanding...................    15,119,317     7,118,513       13,441,088
Common Shares subject to
 repurchase....................      (558,765)     (511,156)        (551,568)
                                 ------------    ----------     ------------
Weighted average common shares
 outstanding-- basic and
 diluted.......................    14,560,552     6,607,357       12,889,520
                                 ============    ==========     ============
Net loss per share--basic and
 diluted.......................  $      (2.48)   $    (0.01)    $      (2.89)
                                 ============    ==========     ============
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.

Reclassifications

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

Recent Accounting Pronouncements

In June of 1998 the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging activities" (SFAS 133)
which establishes accounting and reporting

                                      F-18
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has evaluated the effects of this standard and believes there will
be no material impact on the company's financial position or results of
operations. The Company will adopt SFAS 133 as required for its first quarterly
filing of the year 2000.

In April 1998, the American Institute of Certified Public Accountants issued
statement of position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use. The Company has not yet determined the impact, if
any, of adopting this statement. The disclosure prescribed by SOP 98-1 will be
effective for the year ending December 31, 1999.

Note 2--Notes Payable

During the period from December 1998 through March 1999, the Company obtained
loans in the form of convertible notes payable totaling $1,743,500. 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 $33,750 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 3 below.

Note 3--Mandatorily Redeemable Convertible Preferred Stock

Convertible Preferred Stock at March 31, 1999 was composed of the following:
Shares
                                  ---------------------- Liquidation Redemption
                                  Authorized Outstanding   Amount      Amount
                                  ---------- ----------- ----------- -----------
Series B......................  120,000     117,570   $35,271,000 $34,800,000
   Undesignated..................  380,000          --            --          --
                                   -------     -------   ----------- -----------
                                   500,000     117,570   $35,271,000 $34,800,000
                                   =======     =======   =========== ===========
Series A

On October 28, 1998, the Company raised proceeds of approximately $500,000
through the sale of 500 shares of Series A Preferred Stock ("Series A") and
warrants to purchase 100,000 shares of the Company's common stock to one
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. In accordance with the accounting rules, as defined by SEC staff
announcement topic D-60 "Accounting for the Issuance of Convertible, Preferred
Stock and Debt Securities with Nondetachable Conversion Features," the
difference between the conversion price and the market value is deemed to be a
"beneficial conversion feature." Consequently, the Company recorded a preferred
dividend charge to deficit accumulated during the development stage in the
amount of $143,740 during the three months ended December 31, 1998. 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 March 31, 1999 and which have a term
of four years with an initial exercise price of $7.31 per share, have been
valued and recorded as additional paid-in capital for financial statement
purposes at $343,000.

                                      F-19
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

 Series B

On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of approximately 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 and Series A shares, were $31,577,078, net of
issuance costs of approximately $2,724,000, of which approximately $2,500,000
remained in accrued liabilities at March 31, 1999.

Under the terms of the Series B Stock Purchase Agreement, each share of Series
B stock 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 share by the conversion price per common share of $3.00.

In accordance with the accounting rules, as defined by SEC staff announcement
topic D-60 "Accounting for the Issuance of Convertible, Preferred Stock and
Debt Securities with Nondetachable Conversion Features," the difference between
the conversion price and the market value is deemed to be a "beneficial
conversion feature." On the Issuance Date, the Company's common stock price
closed at $22.63. Accordingly, the Series B shares were deemed to contain a
beneficial conversion feature. Consequently, during the three months ended
March 31, 1999, the Company was required to record a charge to accumulated
deficit for the difference between the conversion price and the market value.
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, using the
effective interest rate method, as a charge to deficit accumulated during the
development stage.

During the three months ended March 31, 1999, the Company recorded a $40,000
charge to accumulated deficit related to dividends accrued on the Series B
Preferred Stock. The key terms of the Series B Preferred Stock Purchase
Agreement include:

Voting Rights. The holders of the Series B Shares are entitled to a number of
votes equal to the number of shares of Common Stock issuable upon conversion of
the Series B preferred Shares. The holders of the Series B Shares 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 Shareholders 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 underwriten
public offering, is sold or until March 31, 2004.

Conversion. Each Series B Share is initially convertible into 100 shares of
Common Stock at the election of the holder thereof. All Series B Shares 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 Shares.

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.

                                      F-20
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

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

Registration Rights. The Company is obligated to promptly (and in any event
within 120 days of the first sale of the Series B Shares) file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") to cover the resale of the Company's Common Stock
issuable upon the conversion of the Series B Shares.

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 4--Creative Fulfillment Acquisition

On January 31, 1999, the Company completed the acquisition of Creative
Fulfillment, Inc. ("Creative") for a combination of cash and stock, at which
time Creative became a wholly owned subsidiary of the Company. The acquisition
has been accounted for using the purchase method of accounting. At the date of
acquisition Creative had nominal net assets and accordingly, the Company has
allocated substantially all of the total purchase price of approximately $6.0
million to the domain name and trademark "EMusic" which, the Company will
amortize over its estimated life of three years using the straight-line method.

The total purchase price of approximately $6,020,000 consisted of 630,179
shares of the Company's Common Stock (valued at $8.82 per share, the average
trading price during the several days before and after the transaction
announcement date), cash consideration of $312,500 and other acquisition
related expenses of approximately $150,000, consisting primarily of
professional fees. The acquisition has been structured as a tax free exchange
of stock, therefore, the difference between the recognized fair values of the
acquired assets and their historical tax bases are not deductible for tax
purposes.

The following unaudited pro forma consolidated financial information reflects
the results of operations for the nine months ended March 31, 1999 and the
period from January 8, 1998 (inception) through March 31, 1999 as if the
acquisition had occurred on July 1, 1998 and January 8, 1998, respectively, and
after giving effect to the acquisition accounting adjustments. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what operating results would have been had the acquisition
actually taken place on July 1, 1998 or January 8, 1998, nor is it an
indication of future operating results.
Nine months   January 8, 1998 January 8, 1998
                                    ended      (Inception) to  (Inception) to
                                March 31, 1999 March 31, 1998  March 31, 1999
                                -------------- --------------- ---------------
Revenues....................  $     94,214    $   206,943    $    824,347
   Loss from operations........    (5,781,479)    (3,264,534)     (8,144,164)
   Net loss....................    (5,817,556)    (3,265,590)     (8,184,629)
   Net loss applicable to
    common stockholders........   (37,571,889)    (3,265,590)    (39,928,962)
   Net loss per share:
    Basic and diluted..........  $      (2.48)   $     (0.30)   $      (2.96)
    Weighted average shares....    15,179,494     10,864,234      13,512,811
F-21
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)

Note 5--Subsequent Events

 Asset Purchase

On April 27, 1999, the Company completed a content acquisition agreement with
Nordic Entertainment and certain other parties (collectively "Nordic"). Under
the terms of the transaction, the Company has purchased from Nordic certain
digital music distribution rights, and other intangible assets related to the
EMusic domain name. In connection with the transaction, the Company issued
665,000 shares of common stock in addition to a cash payment of approximately
$375,000. These shares of common stock are not available for resale under the
Securities Act and are restricted pursuant to Rule 144(k) therein. The Company
plans to engage an independent valuations consultant to determine an
appropriate allocation of the purchase price and the estimated useful life over
which any intangibles should be amortized.

 Lease

In April, 1999, the Company entered into a five year lease agreement for office
facilities. Under the terms of the agreement, the Company shall make minimum
monthly lease payments of approximately $67,000 for a period of 60 months
commencing in April of 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.

                                      F-22
Unaudited Pro Forma Condensed Combining Financial Information

The following unaudited Pro Forma Combined Condensed Financial Statements
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 Financial Statements are based on
the historical financial statements and the notes thereto of the Company
included in the Annual Report on Form 10-SB/A filed with the Securities and
Exchange Commission on December 24, 1998 and the Quarterly Report on Form 10-
QSB for the quarter ended March 31, 1999, the historical financial statements
and notes thereto of Creative Fulfillment included on the Form 8K/A filed with
the Securities and Exchange Commission on April 13, 1999 and the historical
financial statements and the notes thereto of IUMA included herein.

The Pro Forma Combined Condensed Balance Sheet combines the Company's March 31,
1999 balance sheet with IUMA's balance sheet dated April 30, 1999, giving
effect to the Merger as if it had occurred on March 31, 1999.

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

  . the nine months ended March 31, 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 period from January 8, 1998 (date of inception) through June 30,
    1998, the condensed consolidated statement of operations of Creative
    Fulfillment for the year ended July 31, 1998 and the IUMA condensed
    statement of operations for the year ended July 31, 1998.

The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position 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 Financial Statements should be read in
conjunction with the historical financial statements and the related notes
thereto of the Company included in the Form 10-SB/A and Form 10-QSB filed with
the Securities and Exchange Commission, and the financial statements and the
notes thereto of the Company included herein.

                                      F-23
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
Creative
                        GoodNoise      Fulfillment                                       IUMA
                      -------------- ----------------                               --------------
                       Nine Months      Six Months           Pro Forma               Nine Months          Pro Forma
                          Ended           Ended       ----------------------------      Ended      ----------------------------
                      March 31, 1999 January 31, 1999 Adjustments       Combined    April 30, 1999 Adjustments       Combined
                      -------------- ---------------- -----------     ------------  -------------- -----------     ------------
Revenues............   $     41,527      $102,688     $   (50,000)(B) $     94,215   $   298,670            --     $    392,885
Cost of revenues....         13,840        31,570                           45,410            --            --           45,410
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
  Gross profit......         27,687        71,118         (50,000)          48,805       298,670            --          347,475
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Operating expenses:
  Product
   development......      3,580,014        57,490         (37,500)(B)    3,600,004       123,657            --        3,723,661
  Selling, general
   and
   administrative...        715,594        13,038       1,501,648 (C)    2,230,280     1,119,994     2,235,012 (F)    5,585,286
  Amortization of
   deferred
   compensation.....             --            --              --               --       130,870            --          130,870
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
    Total operating
     expenses.......      4,295,608        70,528       1,464,148        5,830,284     1,374,521     2,235,012        9,439,817
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Income (loss) from
 operations.........     (4,267,921)          590      (1,514,148)      (5,781,479)   (1,075,851)   (2,235,012)      (9,092,342)
Interest and other
 (expense) income,
 net................          3,816           106              --            3,922            --            --            3,922
                       ------------      --------     -----------     ------------   -----------   -----------     ------------
Net income (loss)...   $ (4,264,105)     $    696     $(1,514,148)    $ (5,777,557)  $(1,075,851)  $(2,235,012)    $ (9,088,420)
                                         ========     ===========                    ===========   ===========
Accretion of Series
 A Preferred to
 redemption value...       (177,255)                                      (177,255)                                    (177,255)
Beneficial
 conversion charge,
 Series B
 Preferred..........    (31,577,078)                                   (31,577,078)                                 (31,577,078)
Dividend on Series B
 Preferred..........        (40,000)                                       (40,000)                                     (40,000)
                       ------------                                   ------------                                 ------------
Net loss applicable
 to common
 stockholders.......   $(36,058,438)                                  $(37,571,890)                                $(40,882,753)
                       ============                                   ============                                 ============
Net loss per share,
 basic and diluted..   $      (2.48)                                  $      (2.50)                                $      (2.64)
                       ============                                   ============                                 ============
Weighted average
 common shares
 outstanding, basic
 and diluted........     14,560,552                       490,139 (A)   15,050,691                     448,000 (D)   15,498,691
                       ============                   ===========     ============                 ===========     ============
See accompanying notes

                                      F-24
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
Creative
                         GoodNoise     Fulfillment                                     IUMA
                      January 8, 1998 Twelve Months         Pro Forma             Twelve Months         Pro Forma
                      (Inception) to  Ended July 31, ---------------------------  Ended July 31, ---------------------------
                       June 30, 1998       1998      Adjustments      Combined         1998      Adjustments      Combined
                      --------------- -------------- -----------     -----------  -------------- -----------     -----------
Revenues.............   $        --      $206,943    $        --     $   206,943    $ 224,347    $        --     $   431,290
Cost of revenues.....            --       153,035             --         153,035                          --         153,035
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
    Gross profit.....            --        53,908             --          53,908      224,347             --         278,255
Operating expenses:
  Product
   development.......       961,349        74,385             --       1,035,734       99,616             --       1,135,350
  Selling, general
   and
   administrative....       218,755        61,756      2,002,197 (C)   2,282,708      340,493      2,980,016 (F)   5,603,217
  Amortization of
   deferred
   compensation......            --            --             --              --       13,662             --          13,662
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
    Total operating
     expenses........     1,180,104       136,141      2,002,197       3,318,442      453,771      2,980,016       6,752,229
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Income (loss) from
 operations..........    (1,180,104)      (82,233)    (2,002,197)     (3,264,534)    (229,424)    (2,980,016)     (6,473,974)
Interest and other
 expense, net........            --        (1,056)            --          (1,056)      (1,011)            --          (2,067)
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Net income (loss)
 before income
 taxes...............    (1,180,104)      (83,289)    (2,002,197)     (3,265,590)    (230,435)    (2,980,016)     (6,476,041)
Income tax benefit...            --            --             --              --       10,542             --          10,542
                        -----------      --------    -----------     -----------    ---------    -----------     -----------
Net income (loss)....   $(1,180,104)     $(83,289)   $(2,002,197)    $(3,265,590)   $(219,893)   $(2,980,016)    $(6,465,499)
                        ===========      ========    ===========     ===========    =========    ===========     ===========
Net loss per share,
 basic and diluted...   $     (0.12)                                 $     (0.30)                                $     (0.57)
                        ===========                                  ===========                                 ===========
Weighted average
 common shares
 outstanding, basic
 and diluted.........    10,234,055                      630,179 (A)  10,864,234                     448,000 (D)  11,312,234
                        ===========                  ===========     ===========                 ===========     ===========
See accompanying notes.

                                      F-25
UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA
GoodNoise
                         Corporation      IUMA
                         ------------  -----------
                          March 31,     April 30,
                             1999         1999      Adjustments       Combined
                         ------------  -----------  -----------     ------------
Assets
Current Assets:
  Cash.................. $ 32,618,240  $    33,537  $        --     $ 32,651,777
  Accounts receivable...        6,892       21,797           --           28,689
  Prepaid expenses and
   other assets.........      276,540        2,293           --          278,833
                         ------------  -----------  -----------     ------------
    Total current
     assets.............   32,901,672       57,627           --       32,959,299
                         ------------  -----------  -----------     ------------
Property and equipment,
 net....................      156,317       41,613           --          197,930
Intangible assets.......    5,725,841       12,884    8,990,048 (D)   14,728,773
Other assets............       16,520       64,570           --           81,090
                         ------------  -----------  -----------     ------------
    Total assets........ $ 38,800,350  $   176,694  $ 8,990,048     $ 47,967,092
                         ============  ===========  ===========     ============
Liabilities and
 stockholders' equity
Current Liabilities:
  Accounts payable...... $    338,780  $   391,471  $   307,783 (D) $  1,038,034
  Accrued Liabilities...    2,773,910           --           --        2,773,910
  Acquisition related
   liabilities..........       31,512           --           --           31,512
  Accrued payroll and
   related benefits.....       38,073      203,027           --          241,100
  Current portion of
   notes payable........           --      183,638           --          183,638
                         ------------  -----------  -----------     ------------
    Total current
     liabilities........    3,182,275      778,136      307,783        4,268,194
                         ------------  -----------  -----------     ------------
Notes payable, less
 current portion........           --      309,550           --          309,550
Redeemable Convertible
 Preferred
 Stock--Series B........   31,767,593           --           --       31,767,593

Stockholders' Equity
 (deficit):
  Common Stock..........      156,555    1,105,168   (1,105,168)(E)      156,555
                                                          4,480 (D)
  Notes receivable from
   shareholders.........                    (8,655)       8,655 (D)           --
  Deferred
   compensation.........                  (528,971)     528,971 (D)           --
  Additional paid-in
   capital..............   40,938,469           --    7,766,793 (D)   48,705,262
  Notes receivable from
   employees............       (6,000)          --           --           (6,000)
  Deficit accumulated
   during the
   development stage....  (37,238,542)  (1,478,534)   1,478,534 (E)  (37,238,542)
                         ------------  -----------  -----------     ------------
   Total stockholders'
    equity (deficit)....    3,850,482     (910,992)   8,682,265       11,621,755
                         ------------  -----------  -----------     ------------
    Total liabilities,
     redeemable
     convertible
     preferred stock and
     stockholders'
     equity (deficit)... $ 38,800,350  $   176,694  $ 8,990,048     $ 47,967,092
                         ============  ===========  ===========     ============
See accompanying notes.

                                      F-26
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINING FINANCIAL 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
      periods presented.

  (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 $12,500 made by the Company to
      Emusic 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 each period presented. Amortization is over the
      estimated useful lives of the assets acquired of three years.

  Adjustments reflecting the acquisition of IUMA:

  (D) Reflects the allocation of the purchase price of approximately
      $8,940,048, which consisted of the issuance of 448,000 shares of Common
      Stock valued at $17.35 per share, net liabilities assumed of
      approximately $1,118,775 and direct acquisition related expenses of
      approximately $100,000.

  (E) Reflects the elimination of IUMA's equity accounts.

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

                                      F-27
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-28
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-29
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-30
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-31
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-32
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-33
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-34
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-35
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-36
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-37
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 4,307,480 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-38
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-39
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...................   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).......   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-40
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-41
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-42
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-43
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-44
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-45
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-46
----------------------------------------------------------------

                                     [Logo]

                                EMusic.com Inc.

                                5,340,000 Shares

                                  Common Stock

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

                                  July  , 1999

                               CIBC World Markets

                                  ING Barings

                             Prudential Securities

                          Volpe Brown Whelan & Company

--------------------------------------------------------------------------------
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 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 24. 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 intends to enter 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.

The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.

Item 25. 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 registration fee and
the NASD filing fee.
SEC registration fee................................................... $35,532
NASD filing fee........................................................
Nasdaq National Market listing fee.....................................
Blue Sky fees and expenses.............................................
Printing and engraving expenses........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Director and Officer liability insurance...............................
Transfer Agent and Registrar fees......................................
Federal taxes and state taxes and fees.................................
Miscellaneous expenses.................................................
                                                                        -------
  Total................................................................ $
                                                                        =======
------------------
*  estimated

Item 26. 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

                                      II-1
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.

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 27. Exhibits and Financial Statement Schedules
Exhibit
 Number                          Description of Document
 -------                         -----------------------
1.1(c) Underwriting Agreement
  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    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) Form of Amended and Restated Certificate of Incorporation
  3.2    Amended and Restated Bylaws
  5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
 10.1    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    1998 Nonstatutory Stock Option Plan
 10.5    1999 Employee Stock Purchase Plan
 10.6    Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21      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) To be filed by amendment.

Item 28. Undertakings

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.

                                      II-3
(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 23rd day of July, 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. and
Joseph H. Howell, and 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     July 23, 1999
______________________________________  Secretary
            Robert H. Kohn

      /s/ Gene Hoffman, Jr.            President, Chief Executive    July 23, 1999
______________________________________  Officer and Director
          Gene Hoffman, Jr.             (Principal Executive
                                        Officer)

       /s/ Joseph H. Howell            Executive Vice President      July 23, 1999
______________________________________  and Chief Financial
           Joseph H. Howell             Officer (Principal
                                        Financial and Accounting
                                        Officer)

        /s/ Ralph Peer, II             Director                      July 23, 1999
______________________________________
            Ralph Peer, II

          /s/ Tor Braham               Director                      July 23, 1999
______________________________________
              Tor Braham

                                       Director
______________________________________
            Ed Rosenblatt
II-5
Exhibit
 Number                          Description of Document
 -------                         -----------------------
1.1(c) Underwriting Agreement
  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    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) Form of Amended and Restated Certificate of Incorporation
  3.2    Amended and Restated Bylaws
  5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
 10.1    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    1998 Nonstatutory Stock Option Plan
 10.5    1999 Employee Stock Purchase Plan
 10.6    Form of Amendment to Investor Rights Agreement dated July 19, 1999
 21      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) To be filed by amendment.