EMUSIC COM INC, S-4, 2000-01-12

EMUSIC COM INC
S-4, 2000-01-12
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE>

As filed with the Securities and Exchange Commission on January 12, 2000.
Registration No. 333-

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EMUSIC.COM INC.
(Exact name of registrant as specified in its charter)

3652 94-3290594
Delaware (Primary Standard Industrial (IRS Employer
(State or other Classification Code Number) Identification
jurisdiction of Number)
incorporation or
organization)

1991 Broadway, 2nd Floor, Redwood City, California 94063
(650) 216-0200
(Address, including ZIP Code, and telephone number, including area code,
of registrant's 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, including ZIP Code, and telephone number, including area code,
of agent for service of process)

Copies to:

Andrew D. Zeif Richard R. Dennerline
Lisa A. Mondori Mark L. Heimlich
Gray Cary Ware & Freidenrich LLP Freeborn & Peters
400 Hamilton Avenue 311 South Wacker Drive
Palo Alto, California 94301 Chicago, Illinois 60606
(650) 833-2000 (312) 360-6000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of all other conditions to the merger described in the
Joint Proxy Statement/Prospectus.

If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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(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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Offering Registration
Registered Registered(1) Per Share(4) Price(1)(2) Fee(2)(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share....... 9,097,952 $1.58 $14,383,164 $3,797.16
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) The number of shares to be registered pursuant to this Registration
Statement is based upon the aggregate number of shares of Tunes.com Inc.
common stock expected to be outstanding on the effective date of this
Registration Statement plus the aggregate number of shares of Tunes.com
Inc. common stock issuable upon exercise of warrants to purchase shares of
Tunes.com Inc. common stock expected to be outstanding on such date
multiplied by an estimated exchange ratio of .82 shares of common stock of
the Registrant to be issued in exchange for each share of Tunes.com Inc.
common stock.
(2) The registration fee was computed pursuant to Rule 457(f) under the
Securities Act of 1933, as amended, based on one-third of the principal
amount, par value or stated value of the shares of Tunes.com Inc. common
stock to be surrendered to the Registrant in exchange for the shares of
common stock of the Registrant registered pursuant to this Registration
Statement as of the latest practicable date prior to the filing of this
Registration Statement.
(3) $2,876.63 of the registration fee was previously paid in connection with
the filing by the Registrant of preliminary proxy solicitation materials
under Section 14(g) and Rule 0-11 of the Securities Exchange Act of 1934,
as amended. Such fee has been credited against the registration fee payable
hereunder pursuant to Rule 457(b) under the Securities Act of 1933, as
amended. Accordingly, a registration fee of $920.53 is being paid herewith.
(4) The Proposed Maximum Offering Price Per Share was derived by dividing the
Proposed Maximum Aggregate Offering Price of $14,383,164 by the 9,097,952
shares of the common stock of the Registrant to be registered hereunder.

---------------
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>

[LOGO OF EMUSIC]

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On February 14, 2000

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

TO THE STOCKHOLDERS OF
EMUSIC.COM INC.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of EMusic.com
Inc., a Delaware corporation, will be held on February 14, 2000, at 9:00 a.m.,
local time, at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton
Avenue, Palo Alto, California, for the following purposes:

1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Reorganization, dated as of November 29, 1999, by and among EMusic,
Tunes.com Inc., a Delaware corporation, and GNB Corporation, a Delaware
corporation and a wholly-owned subsidiary of EMusic, that provides for,
among other things:

. The merger of GNB Corporation with and into Tunes that will result in
Tunes becoming a wholly-owned subsidiary of EMusic and Tunes
stockholders becoming EMusic stockholders.

. Tunes stockholders will receive in exchange for each share of Tunes
capital stock that number of shares of EMusic common stock equal to
10,600,000 divided by the number of shares of Tunes capital stock
outstanding on a fully-diluted basis (including all options, warrants or
other rights to acquire shares of Tunes capital stock) as of the
effective time of the merger. While the exact number of shares of EMusic
common stock to be issued in exchange for each share of Tunes capital
stock is subject to adjustment based on the number of outstanding
shares, options and warrants at the closing of the merger, as of January
10, 2000, this formula would have resulted in approximately .82 shares
of EMusic common stock being issued for each share of Tunes capital
stock.

. EMusic will assume all outstanding options and warrants to purchase
Tunes capital stock, and each option and warrant will be converted into
an option or warrant to purchase the number of shares of EMusic common
stock that would have been issued to the holder of the option or warrant
in the merger had the option or warrant been exercised immediately prior
to the merger.

. Ten percent of the shares of EMusic common stock that would otherwise be
issuable in exchange for shares of Tunes capital stock at the closing of
the merger initially will not be distributed to Tunes stockholders but
will be placed in an escrow account to be available to compensate EMusic
for certain losses that EMusic may incur during the one year period
following the completion of the merger. These escrow shares will be
withheld on a pro-rata basis from each Tunes stockholder who would
otherwise be entitled to receive those shares in exchange for their
Tunes shares. Any of the escrow shares remaining in the escrow account
at the end of the one year period that are not required to compensate
EMusic for any losses will be returned to the Tunes stockholders.

2. To consider and vote upon the postponement or adjournment of the special
meeting in order to solicit additional votes to approve the merger agreement
if the secretary of the special meeting determines that there are not
sufficient votes to approve the merger agreement.
<PAGE>

The close of business on January 10, 2000 has been fixed as the record date for
determining those stockholders entitled to vote at the special meeting and any
adjournments or postponements of the special meeting. Therefore, only
stockholders of record on January 10, 2000 are entitled to notice of, and to
vote at, the special meeting and any adjournments or postponements of the
special meeting.

By Order of the Board of
Directors

/s/ Gene Hoffman, Jr.
Gene Hoffman, Jr.
President and Chief
Executive Officer

January 10, 2000

Whether or not you plan to attend the special meeting in person, please
complete, date, sign and return the enclosed proxy card in the enclosed
envelope, which requires no postage if mailed in the United States. If you
attend the special meeting, you may vote in person, even if you have previously
returned your proxy card.

The merger agreement must be approved by the holders of a majority of the
shares of EMusic common stock voted in person or by proxy at the special
meeting. Your vote on this matter is very important. We urge you to review
carefully the enclosed material and to return your proxy card promptly.

Your board of directors unanimously recommends that stockholders vote FOR
adoption of the merger agreement.
<PAGE>

[LOGO OF TUNES.COM]
----------------

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On February 14, 2000

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

TO THE STOCKHOLDERS OF
TUNES.COM INC.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Tunes.com
Inc., a Delaware corporation, will be held on February 14, 2000, at 1:00 p.m.,
local time, at the offices of Freeborn & Peters, 311 South Wacker Drive, Suite
3000, Chicago, Illinois, for the following purposes:

1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Reorganization, dated as of November 29, 1999, by and among Tunes,
EMusic.com Inc., a Delaware corporation, and GNB Corporation, a Delaware
corporation and a wholly-owned subsidiary of EMusic, that provides for,
among other things:

. The merger of GNB Corporation with and into Tunes that will result in
Tunes becoming a wholly-owned subsidiary of EMusic and Tunes
stockholders becoming EMusic stockholders.

2. To consider and vote upon the postponement or adjournment of the special
meeting in order to solicit additional votes to approve the merger
agreement if the secretary of the special meeting determines that there are
not sufficient votes to approve the merger agreement.
<PAGE>

Holders of outstanding shares of Tunes capital stock have the right to dissent
from the merger and, subject to certain conditions, receive payment for their
shares. These rights are described in greater detail in the accompanying joint
proxy statement/prospectus under the caption "Tunes Stockholders' Dissenters'
Rights of Appraisal" and are set forth in full in Appendix F to that document.

By Order of the Board of
Directors

/s/ Howard A. Tullman

Howard A. Tullman
Chairman and Chief Executive
Officer

January 10, 2000

Although Delaware law provides that the merger agreement may be approved by the
holders of a majority of the outstanding shares of Tunes capital stock, it is a
condition to the completion of the merger that the merger agreement be approved
by the holders of at least 95% of the outstanding shares of Tunes capital
stock. Your vote on this matter is very important. We urge you to review
carefully the enclosed material and to return your proxy card promptly.

Your board of directors unanimously recommends that stockholders vote FOR
adoption of the merger agreement.
<PAGE>

EMUSIC.COM INC. AND
TUNES.COM INC.

JOINT PROXY STATEMENT

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

EMUSIC.COM INC.

PROSPECTUS

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

EMusic.com Inc. and Tunes.com Inc. have entered into an agreement and plan of
reorganization that provides for a merger, as a result of which Tunes will
become a wholly-owned subsidiary of EMusic. In the merger, Tunes stockholders
will receive for each share of Tunes capital stock that number of shares of
EMusic common stock equal to 10,600,000 divided by the number of shares of
Tunes capital stock outstanding on a fully-diluted basis (including all
options, warrants or other rights to acquire shares of Tunes capital stock) as
of the effective time of the merger. EMusic expects to issue at least 5.9
million shares of its common stock to holders of Tunes capital stock at the
closing of the merger. EMusic may issue as many as an additional 4.7 million
shares upon the exercise of all outstanding Tunes options and warrants.

Ten percent of the shares of EMusic common stock that would otherwise be
issuable in exchange for shares of Tunes capital stock at the closing of the
merger initially will not be distributed to Tunes stockholders but will be
placed in an escrow account to be available to compensate EMusic for certain
losses that EMusic may incur during the one year period following the
completion of the merger. These escrow shares will be withheld on a pro-rata
basis from each Tunes stockholder who would otherwise be entitled to receive
those shares in exchange for their Tunes shares. Any of the escrow shares
remaining in the escrow account at the end of the one year period that are not
required to compensate EMusic for any losses will be returned to the Tunes
stockholders.

This joint proxy statement/prospectus is being furnished to EMusic stockholders
in connection with the solicitation by EMusic's board of directors of proxies
for use at the special meeting of stockholders to be held at the offices of
Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California,
at 9:00 a.m., local time, on February 14, 2000. At this meeting, EMusic
stockholders will vote on the proposed merger.

This joint proxy statement/prospectus is being furnished to Tunes stockholders
in connection with the solicitation by Tunes' board of directors of proxies for
use at the special meeting of stockholders to be held at the offices of
Freeborn & Peters, 311 South Wacker Drive, Suite 3000, Chicago, Illinois, at
1:00 p.m., local time, on February 14, 2000. At this meeting, Tunes
stockholders will vote on the proposed merger.

This joint proxy statement/prospectus also constitutes the prospectus of EMusic
with respect to the up to 9,097,952 shares of EMusic common stock to be issued
to Tunes stockholders in the merger in exchange for the outstanding shares of
Tunes capital stock.

EMusic common stock is designated for quotation on the Nasdaq National Market
under the symbol "EMUS," and, following the completion of the proposed merger,
EMusic common stock is expected to continue to be traded under that symbol.
EMusic has agreed to apply to have the shares of EMusic common stock issued to
the Tunes stockholders approved for trading on the Nasdaq National Market, and
that approval must be obtained prior to the completion of the proposed merger.

On November 29, 1999, the last full trading day prior to the public
announcement of the proposed merger, the closing price of EMusic common stock
on the Nasdaq National Market was $16.00 per share. On January 10, 2000, the
closing price of EMusic common stock was $10.13 per share.

All information concerning EMusic in this joint proxy statement/prospectus has
been furnished by EMusic, and all information concerning Tunes in this joint
proxy statement/prospectus has been furnished by Tunes. EMusic stockholders and
Tunes stockholders are all encouraged to read this joint proxy
statement/prospectus carefully and understand it before they vote.

See "Risk Factors" beginning on page 13 for a discussion of certain risks that
you should consider in determining how to vote on the proposed merger.

Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued in this transaction or
determined that this joint proxy statement/prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated January 12, 2000, and is first
being mailed to stockholders of
EMusic and Tunes on or about January 18, 2000.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 13
Risk Factors Relating to the Merger...................................... 13
Risk Factors Relating to EMusic.......................................... 15
Risk Factors Relating to Tunes........................................... 25
EMUSIC SPECIAL MEETING.................................................... 39
General.................................................................. 39
Matters to be Considered................................................. 39
Proxies.................................................................. 39
Solicitation of Proxies.................................................. 39
Record Date and Voting Rights............................................ 39
Recommendation of the EMusic Board....................................... 40
TUNES SPECIAL MEETING..................................................... 41
General.................................................................. 41
Matters to be Considered................................................. 41
Proxies.................................................................. 41
Solicitation of Proxies.................................................. 41
Record Date.............................................................. 41
Voting Rights, Conditions and Requirements............................... 41
Recommendation of the Tunes Board........................................ 42
THE MERGER................................................................ 43
Background of the Merger................................................. 43
Recommendation of the EMusic Board of Directors and EMusic's Reasons for
the Merger.............................................................. 44
Opinion of EMusic's Financial Advisor.................................... 46
Recommendation of the Tunes Board of Directors and Tunes' Reasons for the
Merger.................................................................. 50
Opinion of Tunes' Financial Advisor...................................... 52
Interests of Tunes' Management in the Merger and Potential Conflicts of
Interests............................................................... 58
The Merger............................................................... 59
Closing.................................................................. 59
Conversion of Tunes Stock; Treatment of Tunes Stock Options and
Warrants................................................................ 59
Exchange of Certificates; Fractional Shares.............................. 60
Representations and Warranties........................................... 60
Conduct of Business Before the Merger.................................... 61
Conditions to Completing the Merger...................................... 64
Regulatory and Other Approvals Required for the Merger................... 65
Waiver and Amendment of the Merger Agreement............................. 65
Termination of the Merger Agreement...................................... 66
Material Federal Income Tax Consequences................................. 66
Accounting Treatment..................................................... 67
Tunes Stockholders' Dissenters' Rights of Appraisal...................... 68
EMusic Stockholders' Dissenters' Rights of Appraisal..................... 69
Indemnity Escrow Agreement............................................... 69
Tunes Stockholders' Indemnification and Liability Obligations............ 69
Appointment of Representative of Tunes Stockholders...................... 70
Shareholder Voting Agreements............................................ 70
Restrictions on Resales by Affiliates.................................... 72
Restrictions on Transfers by Stockholders................................ 72
Restrictions on Transfers by Option Holders.............................. 72
</TABLE>

i
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
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<S> <C>
MANAGEMENT AFTER THE MERGER.............................................. 73
Board of Directors...................................................... 73
Management.............................................................. 73
EMusic Officers and Directors........................................... 73
Information About Mr. Tullman........................................... 73
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS........ 75
Description of EMusic Capital Stock..................................... 75
Comparison of Rights of EMusic Stockholders and Tunes Stockholders...... 76
PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION..................... 80
INFORMATION ABOUT EMUSIC................................................. 81
Overview................................................................ 81
Industry Background..................................................... 81
Benefits to Consumers................................................... 83
Benefits to Artists and Independent Labels.............................. 84
EMusic Business Strategy................................................ 84
Content Acquisition..................................................... 86
Strategic Partnerships.................................................. 87
IUMA--Internet Underground Music Archive................................ 88
Sales and Marketing..................................................... 88
Operations.............................................................. 89
Competition............................................................. 89
Intellectual Property................................................... 91
Employees............................................................... 91
Legal Proceedings....................................................... 92
Facilities.............................................................. 92
Executive Officers, Directors and Key Employees......................... 92
Board of Directors...................................................... 95
Executive Compensation.................................................. 96
Stock Plans............................................................. 97
Limitation of Liability and Indemnification............................. 98
Certain Transactions and Relationships.................................. 99
Principal Stockholders ................................................. 99
EMUSIC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 101
Results of Operations................................................... 101
Amortization of Trade Names............................................. 104
Liquidity and Capital Resources......................................... 105
Year 2000 Readiness..................................................... 106
Quantitative and Qualitative Disclosures About Market Risk.............. 106
Recent Accounting Pronouncements........................................ 107
INFORMATION ABOUT TUNES.................................................. 108
Industry Background..................................................... 108
Tunes' Websites......................................................... 111
Advertising Sales and Promotion......................................... 114
Marketing............................................................... 115
Strategic Relationships................................................. 116
Infrastructure, Operations And Technology............................... 117
</TABLE>

ii
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
----
<S> <C>
Competition............................................................. 117
Intellectual Property................................................... 118
Government Regulation................................................... 119
Employees............................................................... 120
Properties.............................................................. 120
Legal Proceedings....................................................... 120
Principal Stockholders.................................................. 121
TUNES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 123
Overview................................................................ 123
Results of Operations................................................... 125
Nine Months Ended September 30, 1998 and 1999........................... 125
Inception Period and Years Ended December 31, 1997 and 1998............. 127
Selected Quarterly Operating Results.................................... 129
Liquidity and Capital Resources......................................... 129
Year 2000 Readiness Disclosure.......................................... 131
Interest Rate Risk...................................................... 132
LEGAL MATTERS............................................................ 133
EXPERTS.................................................................. 133
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.............................................................. 133
STOCKHOLDER PROPOSALS.................................................... 134
OTHER MATTERS............................................................ 134
WHERE YOU CAN FIND MORE INFORMATION...................................... 134
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>

APPENDICES
Appendix A -- Agreement and Plan of Reorganization
Appendix B -- Indemnity Escrow Agreement
Appendix C -- Form of Shareholder Voting Agreement
Appendix D -- Opinion of CIBC World Markets Corp.
Appendix E -- Opinion of SG Cowen Securities Corporation
Appendix F -- Section 262 of the Delaware General Corporation Law
Appendix G -- Form of EMusic Proxy Card
Appendix H -- Form of Tunes Proxy Card

iii
<PAGE>

Summary

This brief summary highlights selected information from the joint proxy
statement/prospectus. It does not contain all of the information that is
important to you. We urge you to carefully read the entire joint proxy
statement/prospectus and the other documents to which this joint proxy
statement/prospectus refers to fully understand our proposed merger. See "Where
You Can Find More Information."

The Merger (page 44)

We have attached the merger agreement to this document as Appendix A. Please
read the merger agreement. It is the legal document that governs the merger.

Parties to the Merger (pages 81 and 108)

EMusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, California 94063
(650) 216-0200

EMusic is a leading provider of downloadable music over the Internet. Through
its website at EMusic.com, EMusic offers a compelling selection of music from
which its 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 EMusic's relationships with a growing roster
of recording artists and independent record labels. EMusic currently has
exclusive, multi-year, digital download licenses, from over 500 record labels
and over 2,500 recording artists, including selected titles from such well
known artists as Bush, Phish, They Might Be Giants, B.B. King and Ella
Fitzgerald. EMusic currently has over 50,000 titles available for download. In
addition, EMusic's IUMA subsidiary offers its customers access to over 7,500
unsigned artists. EMusic believes this represents one of the largest digital
music content archives currently licensed for distribution over the Internet.

Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
(312) 642-7560

Tunes is an online music network, providing music fans with extensive and
exclusive music content, community features and e-commerce services. Tunes'
network of websites ranked among the top five music content websites as
measured by unique visitors in October 1999. Tunes' hub website, Tunes.com, is
a "one-stop shop" designed to appeal to a broad spectrum of music fans by
covering a wide range of genres, from urban to rock to classical. The Tunes.com
website is supported by and integrated with Tunes' genre-specific websites
Rollingstone.com--rock and pop and Downbeatjazz.com--jazz and blues. Tunes has
built these websites through its exclusive relationships with leading music
industry magazines, Rolling Stone and Down Beat. Tunes' websites provide
advertisers and retailers with an attractive channel to reach consumers across
both broad and targeted demographic groups. Tunes generates revenue from a
number of sources, including advertising, sponsorships, promotions, e-commerce
and content syndication.

Effect and Timing of the Merger

We propose that EMusic and Tunes combine by way of a merger as a result of
which Tunes stockholders will become EMusic stockholders. We expect to complete
the merger no later than February 15, 2000, or as soon as practicable
thereafter, although the agreement does not expire until March 28, 2000.

1
<PAGE>

Exchange of Shares (page 60)

All of the Tunes stockholders will have to surrender their Tunes stock
certificates to receive new certificates representing EMusic common stock.
Tunes stockholders should not do this, however, until they receive written
instructions after we have completed the merger.

Tunes Stock Options and Warrants (page 59)

In the merger, each stock option to buy Tunes common stock will become an
option to buy EMusic common stock. However, each option will continue to be
governed by the terms of the Tunes stock option plan or other agreement under
which it was issued. The number of shares of EMusic common stock subject to
each new stock option, as well as the exercise price of that stock option, will
be adjusted to reflect the merger exchange ratio.

Each outstanding warrant to buy shares of Tunes common stock outstanding at the
time of completion of the merger will be converted into a warrant to buy shares
of EMusic common stock. However, each warrant will continue to be governed by
the terms of the agreement under which it was issued. The number of shares of
EMusic common stock subject to each new warrant, as well as the purchase price
of that warrant, will be adjusted to reflect the merger exchange ratio.

Management after the Merger (page 73)

The composition of EMusic's current executive management is not expected to
change as a result of the merger. It is, however, anticipated that Howard A.
Tullman, the current Chairman and Chief Executive Officer of Tunes, will become
a member of the board of directors of EMusic following the completion of the
merger.

Several members of Tunes' current management have signed employment letters
providing for them to be employed by EMusic after the merger.

The Tunes Stockholders Meeting (page 41)

At the Tunes stockholders meeting, Tunes stockholders will be asked to:

1. approve an agreement that provides for, among other things, a merger in
which Tunes will become a wholly-owned subsidiary of EMusic; and

2. vote on the postponement or adjournment of the meeting to solicit
additional votes to approve the merger agreement, if the secretary of the
meeting decides that there are not enough votes to approve the merger
agreement.

2
<PAGE>

The EMusic Stockholders Meeting (page 39)

At the EMusic stockholders meeting, EMusic stockholders will be asked to:

1. approve an agreement that provides for, among other things, a merger in
which Tunes will become a wholly-owned subsidiary of EMusic; and

2. vote on the postponement or adjournment of the meeting to solicit additional
votes to approve the merger agreement, if the secretary of the meeting
decides that there are not enough votes to approve the merger agreement.

Record Date and Vote Required for Tunes Stockholders (page 41)

Tunes stockholders can vote at the Tunes special meeting if they owned of
record Tunes common stock or Tunes convertible preferred stock at the close of
business on January 10, 2000, the record date for the special meeting. Holders
of shares of Tunes common stock may cast one vote for each share of Tunes
common stock owned at that time. Holders of shares of Tunes convertible
preferred stock may cast one vote for each share of Tunes common stock that
would have been issued had the shares of convertible preferred stock been
converted immediately prior to the record date for the Tunes special meeting.
Delaware law provides that the merger agreement may be approved by the
affirmative vote of the holders of at least a majority of the shares of Tunes
capital stock entitled to vote at the meeting. It is, however, a condition to
the completion of the merger that the holders of at least 95% of the shares of
Tunes capital stock entitled to vote at the meeting must vote in favor of it.
As of the record date, Tunes' directors and executive officers and their
affiliates beneficially owned about 73,600 shares of Tunes common stock and
2,684,123 shares of Tunes convertible preferred stock entitling them to
exercise about 38.5% of the voting power of the Tunes capital stock entitled to
vote at the special meeting. In addition, other affiliates of Tunes holding
approximately 21.0% of the voting power, of the Tunes capital stock entitled to
vote at the special meeting have signed shareholder voting agreements pursuant
to which they have agreed to vote in favor of the merger. See "The Merger--
Shareholder Voting Agreements."

Tunes stockholders may vote their shares in person by attending the special
meeting or by sending us their proxies if they are unable or do not wish to
attend the meeting. Tunes stockholders may revoke their proxies at any time
before a vote is taken at the meeting by sending a written notice revoking the
proxy or a later-dated proxy to the secretary of Tunes, or by attending the
Tunes special meeting and voting in person.

Record Date and Vote Required for EMusic Stockholders (page 39)

EMusic stockholders can vote at the EMusic special meeting if they owned EMusic
common stock at the close of business on January 10, 2000, the record date for
the meeting. EMusic stockholders may cast one vote for each share of EMusic
common stock they owned at that time. To adopt the merger agreement, the
holders of a majority of the shares of EMusic common stock present in person or
by proxy at the meeting must vote in favor of it. As of the record date,
EMusic's directors and executive officers and their affiliates beneficially
owned about 7,293,000 shares of EMusic common stock entitling them to exercise
about 19.6% of the voting power of the EMusic common stock entitled to vote at
the special meeting.

EMusic stockholders may vote their shares in person by attending the meeting or
by mailing us their proxies if they are unable or do not wish to attend. EMusic
stockholders may revoke their proxies at any time before we take a vote at the
meeting by sending a written notice revoking the proxy or a later-dated proxy
to the secretary of EMusic, or by attending the EMusic special meeting and
voting in person.

Our Reasons for the Merger (pages 44 and 50)

EMusic and Tunes are proposing to merge because they believe that the merger
will significantly benefit their respective stockholders, customers and
employees.

3
<PAGE>

Specifically, EMusic believes that a combination with Tunes will benefit
EMusic's stockholders, customers and employees for the following reasons:

. EMusic will be able to provide its customers with a combination of the
EMusic catalog of music for sale as well as the extensive music
information available from Tunes and its various websites;

. EMusic will be able to market its downloadable music to the larger
audience of music consumers that utilize the services of Tunes.com,
Rollingstone.com, and Downbeatjazz.com; and

. the merger will allow EMusic to offer a broader combination of
downloadable music and music information to distribution portals such as
America Online and Yahoo!.

Tunes believes that the merger with EMusic will benefit Tunes' stockholders,
customers and employees for the following reasons:

. the complementary characteristics of the respective business and
management philosophies and corporate cultures of Tunes and Emusic;

. the potential for reduced stockholder risk after the merger as a result
of the diversification of product and service offerings and revenue
bases; and

. the fairness to Tunes of the terms and conditions of the merger
agreement, which were the product of extensive arm's length
negotiations.

The discussion of our reasons for the merger includes forward-looking
statements about possible or assumed future results of our operations and the
performance of the combined company after the merger. Future results and
performance are subject to risks and uncertainties, which could cause such
results and performance to differ significantly from those expressed in these
statements. For a discussion of factors that could affect these future results,
see "Forward-Looking Statements May Prove Inaccurate" on page 7 and "Risk
Factors" on page 13.

Tunes Board's Recommendation to Tunes Stockholders (page 50)

The Tunes board of directors believes that the merger is advisable, fair to
Tunes stockholders and in their best interests, and unanimously recommends that
Tunes stockholders vote "FOR" approval of the merger agreement.

EMusic Board's Recommendation to EMusic Stockholders (page 44)

The EMusic board of directors believes that the merger is advisable, fair to
EMusic stockholders and in their best interests, and unanimously recommends
that EMusic stockholders vote "FOR" approval of the merger agreement.

Opinion of EMusic's Financial Advisor (page 46)

The EMusic board of directors has received an opinion of its financial advisor,
CIBC World Markets Corp., as to the fairness, from a financial point of view,
to EMusic of the exchange ratio provided for in the merger. The full text of
CIBC World Markets' written opinion dated November 29, 1999 is attached to the
back of this joint proxy statement/prospectus as Appendix D. We encourage you
to read this opinion carefully in its entirety for a description of the
assumptions made, matters considered and limitations on the review undertaken.
CIBC World Markets' opinion is directed to the EMusic board of directors and
does not constitute a recommendation to any stockholder as to any matters
relating to the proposed merger.

Opinion of Tunes' Financial Advisor (page 52)

Tunes' financial advisor, SG Cowen Securities Corporation, has delivered a
written opinion to the Tunes board of directors as to the fairness, from a
financial point of view, of the exchange ratio provided for in the merger to

4
<PAGE>

the holders of Tunes common stock. The full text of SG Cowen's written opinion
is attached to this joint proxy statement/prospectus as Appendix E. We
encourage you to read this opinion carefully in its entirety for a description
of the procedures followed, assumptions made, matters considered and
limitations on the review undertaken. SG Cowen's opinion is directed to the
Tunes board of directors and does not constitute a recommendation to any
stockholder as to any matter relating to the merger.

Conditions to Completing the Merger (page 64)

Whether we complete the merger depends on a number of conditions being
satisfied in addition to Tunes stockholders' and EMusic stockholders' approval
of the merger agreement. However, either EMusic or Tunes may choose to complete
the merger even though one or more of these conditions has not been satisfied,
as long as the law allows them to do so. We cannot be certain when, or if, the
conditions to the merger will be satisfied or waived, or that the merger will
be completed.

Indemnity Escrow Agreement (page 69)

As contemplated by the merger agreement, we have also entered into an indemnity
escrow agreement that provides that EMusic will retain in escrow ten percent of
the shares of EMusic common stock to be issued at the closing of the merger on
a pro-rata per stockholder basis. The escrowed shares of EMusic common stock
are reserved for the purpose of satisfying the indemnification obligations owed
to EMusic by the Tunes stockholders. See "Tunes Stockholders' Indemnification
and Liability Obligations."

We have attached the indemnity escrow agreement to this joint proxy
statement/prospectus as Appendix B.

Tunes Stockholders' Indemnification and Liability Obligations (page 69)

Pursuant to the terms of the merger agreement and the indemnity escrow
agreement, the Tunes stockholders must indemnify EMusic against breaches of
representations, warranties, covenants or obligations by Tunes that are
discovered during the one year period following the completion of the merger.
The Tunes stockholders will not, however, have liability for indemnification
unless and until the total amount of all damages with respect to such matters,
taken together, exceeds $250,000, in which case EMusic will be entitled to
indemnification for the entire amount of its damages subject to the limitations
set forth in the merger agreement.

Except with respect to breaches of Tunes' confidentiality obligations under the
merger agreement or claims for fraud or intentional misrepresentation, the
indemnification provisions of the merger agreement are the exclusive remedy of
EMusic for claims following the completion of the merger.

Appointment of Representative of Tunes Stockholders (page 70)

By voting in favor of the merger, each holder of shares of Tunes capital stock
will have agreed to the appointment of Howard A. Tullman, Chairman and Chief
Executive Officer of Tunes, as the representative of the Tunes stockholders in
connection with the indemnity escrow agreement. As the stockholder
representative, Mr. Tullman will have the right to act on behalf of all Tunes
stockholders with respect to the escrow, including the right to waive the terms
and conditions of the escrow agreement, to authorize the release of shares of
EMusic common stock from the escrow to satisfy any claims by EMusic, and to
negotiate, enter into settlements and demand arbitration of claims by EMusic.

Shareholder Voting Agreements (page 70)

We have entered into shareholder voting agreements with certain Tunes
stockholders who are officers, directors or other affiliates of Tunes. These
stockholders, who together beneficially own and have voting control over

5
<PAGE>

approximately 59.5% of the shares of Tunes capital stock, have agreed to vote
for adoption of the merger agreement and the transactions contemplated by the
merger agreement.

A form of the shareholder voting agreement is attached to this joint proxy
statement/prospectus as Appendix C.

Restrictions on Transfers by Tunes Stockholders, Option Holders and Affiliates
(page 72)

Pursuant to the terms of the merger agreement, Tunes stockholders may not,
during the six month period following the merger, sell, dispose of, loan,
pledge or grant any rights relating to the shares of EMusic common stock
received in the merger, except for qualified transfers by gift or bequest or to
a family trust. In addition, although EMusic has agreed to file a Registration
Statement on Form S-8 registering the shares of EMusic common stock to be
issued upon exercise of assumed Tunes stock options, the holders of those
shares will be subject to similar restrictions during the six month period
following the merger. Shares of EMusic common stock received by affiliates of
Tunes will also be subject to restrictions on transfer of their shares imposed
by Rule 145 under the Securities Act.

Waiver and Amendment (page 65)

We may jointly amend the merger agreement, and each of us may waive our right
to require the other to adhere to the terms and conditions of the merger
agreement. However, we may not do so after the Tunes stockholders approve the
merger, if the amendment or waiver reduces or changes the consideration that
they will receive, unless the Tunes stockholders approve the amendment or
waiver.

Termination of the Merger Agreement (page 66)

We can agree at any time prior to completing the merger to terminate the merger
agreement. Also, either of us can decide, without the other's consent, to
terminate the merger agreement if the merger has not been completed on or
before March 28, 2000, if the other company has breached the merger agreement
or for other reasons.

Interests of Tunes' Management in the Merger and Potential Conflicts of
Interest (page 58)

Some of Tunes' officers have interests in the merger that differ from, or are
in addition to, their interests as stockholders of Tunes. These additional
interests exist because of employment and related agreements that these
officers have entered into with Tunes and EMusic, and rights that these
officers have or will have under some of the benefit plans maintained by Tunes
and EMusic. These agreements and plans will provide the Tunes officers with
severance benefits if their employment with Tunes is terminated after the
merger occurs or after Tunes is acquired by anyone else.

In addition, after the merger, EMusic will continue the indemnification
arrangements for directors and officers of Tunes in effect prior to the merger.

Details about the interests of some of Tunes' directors and executive officers
are described under "The Merger--Interests of Tunes' Management in the Merger
and Potential Conflicts of Interests."

The members of Tunes' board of directors knew about these interests, and
considered them when they approved the merger agreement.

Dissenters' Appraisal Rights (pages 68 and 69)

Tunes stockholders have certain dissenters' rights of appraisal under Delaware
law in connection with the proposed merger. EMusic stockholders, however, do
not have any appraisal rights in connection with the merger.

6
<PAGE>

Material Federal Income Tax Consequences to Tunes Stockholders (page 66)

We expect that, for United States federal income tax purposes, the Tunes
stockholders' exchange of shares of Tunes common stock for shares of EMusic
common stock generally will not cause them to recognize any gain or loss. The
Tunes stockholders may, however, recognize gain or loss in connection with any
cash they receive instead of a fractional share of EMusic common stock. A Tunes
stockholder who exercises dissenters' rights of appraisal with respect to the
stockholder's shares of Tunes capital stock and receives a cash payment for
those shares will generally recognize gain or loss on those shares.

This tax treatment may not apply to every Tunes stockholder. Determining the
actual tax consequences of the merger to individual stockholders may be
complicated. They will depend on each stockholder's specific situation and on
variables not within our control. Each Tunes stockholder should consult its own
tax advisor for a full understanding of the merger's tax consequences.

Accounting Treatment (page 67)

We will account for the merger using the purchase accounting method. This means
that, for accounting and financial reporting purposes, EMusic will make a
determination of the fair value of Tunes' assets and liabilities in order to
allocate the purchase price to the assets and acquired and the liabilities
assumed.

Material Differences in the Rights of Stockholders (page 76)

The rights of EMusic stockholders are governed by Delaware law and EMusic's
certificate of incorporation and bylaws. The rights of Tunes' stockholders are
also governed by Delaware law and Tunes' certificate of incorporation and
bylaws. If we complete the merger, the Tunes stockholders will become
stockholders of EMusic, and the Tunes stockholders' rights will be governed by
Delaware law and by EMusic's charter documents.

Forward-Looking Statements May Prove Inaccurate

We have each made forward-looking statements in this joint proxy
statement/prospectus and in other documents to which we refer you that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of our operations or the
performance of EMusic and Tunes after the merger is completed. When we use any
of the words "believes," "expects," "anticipates," "intends," "estimates" or
similar expressions, we are making forward-looking statements. These statements
are only predictions. Many possible events or factors could affect the actual
financial results and performance of each of our companies after the merger,
and these factors or events could cause those results or performance to differ
significantly from those expressed in our forward-looking statements. 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.

7
<PAGE>

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following selected historical financial information of EMusic as of June
30, 1999 and 1998 has been derived from audited historical consolidated
financial statements included elsewhere in this document and should be read in
conjunction with such financial statements and the notes referenced. The
selected historical financial information of Tunes as of and for the two years
ended December 31, 1998 and the period from July 2, 1996 (Inception) to
December 31, 1996 has been derived from the audited financial statements of
Tunes included elsewhere in this document. The selected financial information
of EMusic as of and for the three months ended September 30, 1999 and 1998 and
the selected financial information of Tunes as of and for the nine months ended
September 30, 1999 and 1998 has been derived from unaudited financial
statements of EMusic and Tunes, which are included elsewhere in this document.
The results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire year. The
selected pro forma combined financial information of Emusic and Tunes.com is
derived from the unaudited pro forma combined condensed consolidated financial
statements and should be read in conjunction with such pro forma statements and
notes thereto included elsewhere in this proxy statement/prospectus. For
further information regarding the pro forma combined operating results of the
two companies, see "Unaudited Pro Forma Condensed Combining Consolidated
Financial Statements" on page F-21.

The pro forma financial information does not purport to represent what
EMusic's financial position or results of operations would actually have been
had the merger occurred at the beginning of the earliest period presented or to
project EMusic's financial position or results of operations for any future
date or period. In addition, it does not incorporate any benefits from cost
savings or synergies of operations of the combined company.

8
<PAGE>

SELECTED HISTORICAL FINANCIAL DATA

EMUSIC.COM INC.

(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Three Months
Ended
Period from January Year ended September 30,
8, 1998 (Inception) June 30, ---------------
to June 30, 1998 1999 1998 1999
------------------- ---------- ------ -------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues..................... $ -- $ 92 $ 12 $ 180
Gross profit................. -- 65 12 155
Operating loss............... (1,180) 15,462 (852) (13,722)
Net loss..................... (1,180) 15,140 (849) (13,519)
Net loss applicable to common
shares...................... $(1,180) $(47,677) (849) (14,236)
======= ======== ====== =======
Net loss per common share--
basic and diluted........... $ (0.12) $ (3.52) $(0.06) $ (1.09)
======= ======== ====== =======
Shares used in basic earnings
per share calculations...... 10,234 13,564 14,591 13,058
</TABLE>

<TABLE>
<CAPTION>
As of June 30, September 30,
---------------- -------------
1998 1999 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments........ $510 $19,002 $78,904
Working capital............................... 396 16,593 84,877
Total assets.................................. 582 54,221 125,165
Deficit accumulated during the development
stage........................................ (1,180) (48,857) (63,093)
Total stockholders' equity.................... 447 18,987 121,439
Redeemable convertible preferred stock........ -- 32,550 --

</TABLE>

9
<PAGE>

SELECTED HISTORICAL FINANCIAL DATA

TUNES.COM INC.

(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
Period from July 1, December 31, September 30,
1996 (Inception) to ----------------- -----------------
December 31, 1996 1997 1998 1998 1999
------------------- ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data:
Revenues................ $ -- $ 565 $ 2,485 $ 1,715 $ 3,303
Gross margin (deficit).. -- (703) (1,560) (1,148) 195
Operating loss.......... (224) (3,637) (13,617) (7,799) (20,143)
Net loss................ (217) (3,522) (13,190) (7,459) (19,971)
Net loss applicable to
common shares.......... $(217) $(3,855) $(14,759) $(7,459) $(22,544)
===== ======= ======== ======= ========
</TABLE>

<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1997 1998 1999
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
marketable securities...................... $2,674 $ 4,251 $ 7,528
Working capital............................. 3,379 3,240 7,444
Total assets................................ 5,602 11,413 16,299
Redeemable preferred stock.................. 8,430 22,116 43,135
Accumulated deficit......................... (4,102) (18,861) (41,404)
Total stockholders' deficit................. (3,342) (13,618) (30,662)
</TABLE>

10
<PAGE>

EMUSIC AND TUNES

UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA

(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Year ended
June 30, Three months ended
1999 September 30, 1999
---------- ------------------
<S> <C> <C>
Pro Forma Combined Condensed Statements of
Operations Data:
Revenues....................................... $ 3,900 $ 1,507
Gross profit................................... 6,804 684
Operating loss................................. (85,725) (33,344)
Net loss....................................... (85,137) (33,021)
Net loss applicable to common shareholders..... $(117,674) $(33,738)
========= ========
Net loss per share, basic and diluted.......... $ (5.26) $ (1.60)
========= ========
Weighted average common shares outstanding,
basic and diluted............................. 22,370 21,086
========= ========
<CAPTION>
As of
September 30,
1999
------------------
<S> <C> <C>
Pro Forma Combined Condensed Balance Sheet
Data:
Cash, cash equivalents and investments......... $ 87,320
Working capital(1)............................. 88,772
Total assets................................... 314,656
Deficit accumulated during the development
stage......................................... (63,093)
Total stockholders' equity..................... 293,156
</TABLE>
- ------------------
(1) Net of estimated expenses of $3.9 million expected to be incurred by the
combined company in connection with direct costs associated with the
Merger.

11
<PAGE>

COMPARATIVE PER SHARE DATA

The following table sets forth certain historical per share data of EMusic
and Tunes and combined per share data on an unaudited pro forma and equivalent
pro forma basis, based on the assumption that the merger occurred at the
beginning of the earliest period presented and was accounted for as a purchase
business combination. The pro forma combined per share data gives effect to the
merger at the assumed exchange ratio and is based on the number of shares of
Tunes common stock and options to purchase shares of Tunes common stock
outstanding as of September 30, 1999. In addition the pro-forma combined
information gives effect to the merger with Group K Inc. d/b/a Cductive which
was completed on December 10, 1999. The pro forma combined per share data does
not purport to represent what EMusic's financial position or results of
operations would actually have been had the merger occurred at the beginning of
the earliest period presented or to project EMusic's financial position or
results of operations for any future date or period. This data should be read
in conjunction with the pro forma combined condensed financial statements
included elsewhere herein and the separate historical financial statements and
notes thereto of EMusic and Tunes included elsewhere herein. Neither EMusic nor
Tunes declared any cash dividends during the periods presented.

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
June 30, September 30,
---------- --------------
1999 1998 1999
---------- ------ ------
<S> <C> <C> <C>
HISTORICAL -- EMUSIC
Basic and diluted loss per share.................... $(3.52) $(0.06) $(1.09)
Book value per share(1)............................. $ 1.13 $(0.00) $ 3.57
</TABLE>

<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------ ---------------
1998 1998 1999
------------ ------ -------
<S> <C> <C> <C>
HISTORICAL -- TUNES
Net loss per share -- basic and diluted.......... $(12.48) $(7.40) $(16.34)
Book value per share(1).......................... $(10.16) $(6.33) $(20.86)
</TABLE>

<TABLE>
<CAPTION>
Year Ended
June 30, Three Months Ended
1999 September 30, 1999
---------- ------------------
<S> <C> <C>
PRO FORMA COMBINED PER EMUSIC SHARE
Net loss per share -- basic and diluted per
share.......................................... $(5.26) $(1.60)
Book value per share(1)......................... $ 9.15 $ 6.97
</TABLE>

<TABLE>
<CAPTION>
Year Ended
June 30, Three Months Ended
1999 September 30, 1999
---------- ------------------
<S> <C> <C>
PRO FORMA COMBINED PER TUNES SHARE
Net loss per share -- basic and diluted(2)....... $(4.32) $(1.32)
Book value per share(1).......................... $(7.52) $ 5.73
</TABLE>
- ------------------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
the period.
(2) The pro forma combined per Tunes share amounts are calculated by
multiplying the pro forma combined per EMusic share amounts by the exchange
ratio of 0.822 shares of EMusic common stock for each share of Tunes common
stock.

12
<PAGE>

RISK FACTORS

You should carefully consider the following risk factors, together with the
other information included and incorporated by reference in this joint proxy
statement/prospectus, in deciding whether to vote to approve the merger.

Risk Factors Relating to the Merger

Changes in the market value of EMusic common stock could adversely affect the
value of the consideration that Tunes stockholders will receive for their Tunes
capital stock.

When the merger occurs, each share of Tunes capital stock will automatically
become the right to receive from EMusic that number of shares of EMusic common
stock equal to 10,600,000 divided by the number of shares of Tunes capital
stock outstanding on a fully-diluted basis (including all options, warrants or
other rights to acquire shares of Tunes capital stock) as of the effective time
of the merger. There will be no adjustment to the number of shares of EMusic
common stock that Tunes stockholders will receive for each of their shares of
Tunes capital stock as a result of any changes in the market price of EMusic
common stock, and Tunes is not permitted to "walk away" from the merger or
resolicit the vote of its stockholders solely because of changes in the market
price of EMusic common stock. Accordingly, the specific dollar value of EMusic
common stock to be received by the Tunes stockholders upon completion of the
merger will depend on the market value of EMusic common stock at the time of
the merger. Consequently, if there is a decline in the market value of EMusic
common stock prior to the completion of the merger, the value of the shares of
EMusic common stock that Tunes stockholders will receive in exchange for their
shares of Tunes capital stock will be lower.

Issuances of additional shares of Tunes capital stock and grants of additional
options, warrants or other rights to purchase Tunes capital stock could
adversely affect the value of the consideration that Tunes stockholders will
receive for their Tunes capital stock.

At the time of completion of the merger, the number of shares of EMusic common
stock that Tunes stockholders will receive for each of their shares of Tunes
capital stock will be calculated based on the number of outstanding shares of
Tunes capital stock and the number of Tunes shares subject to outstanding
options, warrants or other rights to acquire Tunes capital stock. This actual
exchange ratio will not be determined until the closing. Accordingly, the
actual exchange ratio for the merger will be affected by any issuances of
additional shares of Tunes capital stock and any grants of additional Tunes
options or warrants prior to the closing of the merger. Consequently, issuances
of additional shares of Tunes capital stock and grants of additional Tunes
options and warrants will reduce the number of shares that the Tunes
stockholders will receive in exchange for their shares of Tunes capital stock.

Claims against the escrow created under the indemnity escrow agreement to
compensate EMusic for losses incurred following the completion of the merger
could reduce the value of the consideration that Tunes stockholders will
receive for their Tunes capital stock.

Ten percent of the shares of EMusic common stock that would otherwise be
issuable in exchange for shares of Tunes capital stock at the closing initially
will not be distributed to Tunes stockholders but will be placed in an escrow
account to be available to compensate EMusic for certain losses that may be
incurred during the one year period following the completion of the merger.
There will be no additional shares of EMusic common stock or other
consideration distributed to Tunes stockholders after the closing if shares are
released from the escrow account to compensate EMusic for any of those losses.
Accordingly, the specific dollar value of EMusic common stock to be received by
the Tunes stockholders in exchange for their shares of Tunes capital stock will
depend on the number of shares released from the escrow account. Consequently,
if shares are released from the escrow account, the dollar value of the shares
of EMusic common stock that the Tunes stockholders will receive in exchange for
their shares of Tunes capital stock will be lower.

13
<PAGE>

The voting power of EMusic stockholders' shares of EMusic common stock will be
diluted in the merger.

Immediately following the merger, the former Tunes stockholders option holders
and warrant holders will own or have the right to purchase up to approximately
22% of the outstanding shares of EMusic common stock. This will result in the
dilution of the EMusic stockholders' current ownership of 100% of the
outstanding shares of EMusic common stock.

The IRS may challenge the tax-free nature of the merger, and if this challenge
were successful Tunes stockholders could be required to pay income tax on any
gain realized in the merger.

EMusic and Tunes will not seek a ruling from the Internal Revenue Service that
the merger generally will be tax-free to Tunes stockholders. Therefore, there
is a risk that the Internal Revenue Service may later challenge the tax-free
nature of the merger. If it does, Tunes stockholders may be required to pay tax
on any gain realized in the merger. See "The Merger--Material Federal Income
Tax Consequences."

Some of Tunes' directors and officers have conflicts of interest that could
have influenced their decision to recommend the merger to Tunes stockholders.

In considering the recommendation of the Tunes board of directors to approve
the merger, Tunes stockholders should recognize that several of Tunes'
directors and officers have conflicts of interest because of employment
arrangements, potential severance benefits and other reasons. These reasons are
described under the heading "The Merger--Interests of Tunes' Management in the
Merger and Potential Conflicts of Interests."

We may not successfully integrate our business operations, or our management
may be distracted by the integration process.

After the merger has been completed, EMusic may integrate, among other things,
the computer systems which support the various EMusic and Tunes websites.

Integrating the operations of Tunes with those of EMusic after the merger may
be difficult, costly and time consuming. The integration of our combined
operations may temporarily distract management from the day-to-day business of
the combined company after the merger. EMusic and Tunes may fail to manage this
integration effectively or to achieve any of the anticipated benefits that both
companies hope will result from the merger. If this occurs, EMusic's business
could be harmed.

EMusic expects to incur potentially significant transaction costs in connection
with the merger, which could negatively affect EMusic's earnings.

EMusic expects to incur potentially significant transaction costs in connection
with the merger. Although we cannot determine the amount of these costs at this
time for sure, we estimate that the transaction costs associated with the
merger will be approximately $3.9 million. EMusic expects to charge these costs
to operations in the quarter in which the merger is completed and in subsequent
quarters as decisions are made and costs are incurred. This will increase
EMusic's operating costs and expenses and decrease EMusic's operating income
for those quarters.

EMusic could lose key Tunes personnel who are necessary to achieve the benefits
that EMusic and Tunes expect to realize from the merger.

The merger could lead to the loss of key Tunes personnel even though some of
them have signed employment and related agreements providing for them to remain
with Tunes after the merger. Tunes' contribution to the combined company's
success will depend in part on the continued service of key groups of Tunes
personnel. If one or more of Tunes' senior management or key sales, technical
or administrative personnel leaves after we complete the merger, Tunes'
business could be seriously harmed, and EMusic may not be able to achieve the
benefits that it expects to realize from the merger.

14
<PAGE>

Acceleration of vesting of options upon completion of the merger may reduce the
commitment of employees and key individuals.

Most of the stock options that Tunes has granted to employees will become
exercisable upon completion of the merger. As a result, the financial incentive
of employees and key individuals to continue to work for Tunes may be
diminished. Consequently, EMusic may be unable to retain these employees after
the merger. Although EMusic has agreed to grant Tunes' employees options to
purchase an aggregate of 500,000 shares of EMusic common stock upon the
completion of the merger, EMusic may still be required to grant additional
options or provide other financial incentives to retain those employees.

Risk Factors Relating to EMusic

EMusic has a new and unproven business model and it may not generate sufficient
revenue for EMusic's business to survive or be successful.

EMusic's model for conducting business and generating revenues is new and
unproven and if it fails to develop as planned, EMusic's business may not
succeed. EMusic's business model depends upon EMusic's ability to generate
revenue streams from multiple sources through its 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 EMusic's, 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 EMusic's business grows.

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

EMusic is competing in a new market that may not develop sufficiently to
support EMusic's business.

The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for EMusic's products and
services are subject to a high degree of uncertainty and risk. EMusic is
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 if EMusic's products and services do not achieve or sustain
market acceptance, EMusic may not generate sufficient revenues to become
profitable.

The future popularity of downloadable music will depend on consumer acceptance
of downloading music generally. EMusic believes 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,
EMusic's potential market, and thus EMusic's ability to increase its revenues,
may be reduced.

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EMusic has a limited operating history that makes an evaluation of its business
difficult.

EMusic was incorporated in January 1998. During 1998, its operating activities
consisted largely of developing the infrastructure necessary to download music
on the Internet. EMusic's limited operating history makes it difficult to
evaluate its current business and prospects. As a result of EMusic's limited
operating history, EMusic does not have meaningful historical financial data
upon which to forecast quarterly revenues and results of operations. Before
voting on the merger, Tunes stockholders should evaluate the risks, expenses
and problems frequently encountered by companies such as EMusic that are in the
early stages of development.

EMusic has incurred substantial losses to date and expects to incur substantial
net losses in the future.

From inception through September 30, 1999, EMusic had a deficit accumulated
during the development stage of approximately $63.1 million. EMusic expects
substantial net losses and negative cash flow for the foreseeable future.
EMusic believes it is critical to its long-term success that it continue to
develop "EMusic" brand awareness and loyalty through marketing and promotion,
expand its artist and consumer networks, develop its online content and expand
its other services. EMusic expects that its operating expenses will increase
significantly during the next several years, especially in sales and marketing.
With increased expenses, EMusic will need to generate significant additional
revenues to achieve profitability. As a result, EMusic may never achieve
profitability and, if EMusic does achieve profitability in any period, EMusic
may not be able to sustain or increase profitability.

EMusic's quarterly revenues and operating results are subject to fluctuation
which may result in volatility or a decline in the price of its stock.

We believe that period-to-period comparisons of EMusic's operating results are
not meaningful and should not be relied upon as indicators of future
performance. EMusic's 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 EMusic's control, including:

. the demand for downloadable music content and Internet advertising;

. the addition or loss of advertisers;

. the impact of special promotions;

. the level of traffic on EMusic's Internet sites;

. the amount and timing of capital expenditures and other costs relating
to the expansion of EMusic's operations;

. the introduction of new sites and services by EMusic or its 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 EMusic's revenues may vary significantly, a portion of
EMusic's expenses are fixed. As a result, any decrease in revenues will not be
accompanied by a decrease in EMusic's fixed operating expenses and EMusic's
operating results will suffer. EMusic's quarterly results may also be
significantly impacted by the accounting treatment of acquisitions, financing
transactions or other matters. Particularly at EMusic's 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
EMusic's operating results will fall below expectations in some future quarter
and the trading price of its stock may drop.

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Shares eligible for future sale in the open market may depress EMusic's stock
price.

As of December 31, 1999, there were approximately 36,600,000 shares of EMusic
common stock outstanding, of which approximately 34,000,000 were tradable
without restriction under the Securities Act or tradable under Rule 144 or
currently effective registration statements.

EMusic's stock price has been and may continue to be volatile.

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

. development of the downloadable music market;

. technological innovations;

. new products;

. acquisitions or strategic alliances entered into by EMusic or its
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 EMusic's brand name is not accepted, EMusic's ability to attract content and
customers to its website will be harmed.

During the quarter ended June 30, 1999, EMusic began to operate under the name
EMusic.com Inc. and launched a marketing campaign to establish the brand name
"EMusic." EMusic believes that establishing and maintaining the EMusic brand is
a critical aspect of its efforts to attract and expand its 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. EMusic intends to incur
significant expenses in these brand building efforts. If these efforts do not
generate increased revenues, EMusic's operating results will suffer. If EMusic
is unable to provide high quality content or otherwise fails to promote and
maintain the EMusic brand, its business will be harmed.

If we are unable to maintain or expand EMusic's contracts for music content, or
if the content that EMusic licenses does not sell, EMusic's popularity and
business may suffer.

EMusic believes that a primary draw to its website is the ability to access
music from known artists and independent record labels. Currently, EMusic has
exclusive multi-year contracts for much of its 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, EMusic's website may fail to
attract new, or retain existing, customers which would harm our business.

For much of the content EMusic licenses, EMusic pays advances against future
royalties which will be owed on sale of the content. If the content EMusic
licenses does not sell in sufficient quantities, EMusic may not be able to
recover all or part of the advances EMusic has paid and its business could be
harmed.

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EMusic relies on a third party for the hosting of its website and, if this
hosting service becomes unavailable, EMusic's customers will not be able to
access its website.

EMusic currently relies on a third party which hosts its website at a single
location in Sunnyvale, California. EMusic currently does not maintain a
redundant website. If for any reason EMusic's current website hosting services
become unavailable or if EMusic's hosting service experiences technical
problems, customers will not be able to access EMusic's website until these
services are restored or until EMusic is able to make arrangements with an
alternate provider.

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

We expect the scope of EMusic's operations and the number of its employees to
grow rapidly. In particular, EMusic intends to hire additional engineering,
sales, marketing, content acquisition and administrative personnel. The
integration of EMusic and Tunes after the merger will also result in a
significant increase in the scope of EMusic's operations. Additionally, future
acquisitions could further increase EMusic's employee headcount and business
activity. We expect EMusic's rapid growth to continue to place significant
stress on its technology, operations, management and employee base. Any failure
to successfully address the needs of EMusic's growing enterprise would harm our
business.

EMusic's technology systems must be expanded and enhanced for its business to
grow.

In order to support its growing business, EMusic will need to continue to
enhance and expand the technology infrastructure which supports its business.
EMusic has recently converted its central database to a new database based upon
technology licensed from Oracle Corporation, and EMusic expects to implement a
new accounting system in the first half of calendar year 2000. As EMusic's
business continues to grow, EMusic 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,
EMusic's operations could be disrupted, we may become less competitive,
EMusic's revenues could be reduced and we may need to incur additional costs to
address these issues.

EMusic may have difficulty executing acquisitions and integrating the acquired
companies into its business.

EMusic's business strategy includes entering into strategic alliances and
acquiring complementary businesses, technologies, content or products. In
January 1999, EMusic completed the acquisition of Creative Fulfillment, Inc.
and, in June 1999, EMusic completed the acquisition of Internet Underground
Music Archive. Most recently, in December 1999, EMusic completed the
acquisition of Group K Inc. d/b/a Cductive. These acquisitions, the proposed
merger with Tunes 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 was
anticipated;

. the occurrence of fluctuations in 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 EMusic's ongoing business and diversion of EMusic's
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;

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

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

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

In addition, EMusic's stockholders may be diluted if the consideration for
future acquisitions consists of equity securities. EMusic may not be able to
overcome these risks or any other problems encountered in connection with
future acquisitions. If EMusic is unsuccessful in doing so, EMusic's business
could be harmed.

We expect competition to increase significantly in the future, and EMusic 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. EMusic faces competitive
pressures from numerous actual and potential competitors.

Certain companies have agreed to work together to offer music over the
Internet, and EMusic 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, Inc. In May 1999, Microsoft Corporation and Sony
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 EMusic's current
and potential competitors in the Internet and music entertainment businesses
may have substantial competitive advantages relative to EMusic, 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
EMusic can. Websites maintained by EMusic's existing and potential competitors
may be perceived by consumers, artists, talent management companies and other
music-related vendors or advertisers as being superior to EMusic's. In
addition, EMusic may not be able to maintain or increase its website traffic
levels, purchase inquiries and number of click-throughs on its online
advertisement. Further, EMusic's competitors may experience greater growth in
these areas than EMusic does. Increased competition could result in advertising
price reduction, reduced margins or loss of market share, any of which could
harm EMusic's business.

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EMusic may need to obtain additional funds to execute its business plan and, if
it is unable to obtain such funds, EMusic will not be able to expand its
business as planned.

EMusic believes that its existing capital resources will be sufficient to fund
its planned level of operating activities, capital expenditures and other
obligations through the next 12 months. However, EMusic may need to raise
additional funds in order to:

. finance unanticipated working capital requirements, including additional
working capital required as a result of acquisitions;

. 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.

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

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

The success of EMusic's 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 EMusic's 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. EMusic's
business will depend on the ability of EMusic's 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 EMusic's website. EMusic's 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 number 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

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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 EMusic offers.

EMusic must maintain and establish strategic alliances to increase its customer
base and enhance its business.

In an attempt to increase EMusic's customer base and traffic on its website,
build brand recognition, attract paid advertising and enhance content,
distribution and commerce opportunities, EMusic has entered into agreements
with various media, hardware device and Internet-related companies such as:
America Online, Yahoo!, Creative Labs and RealNetworks. EMusic's failure to
maintain or renew these existing strategic alliances or to establish and
capitalize on new strategic alliances could harm its business. EMusic's future
success depends to a significant extent upon the success of such alliances.
Moreover, EMusic is substantially dependent on its ability to advertise on
other Internet sites and the willingness of the owners of other sites to direct
users to its Internet sites through hypertext links. EMusic may not achieve the
strategic objectives of these alliances, and parties to strategic alliance
agreements with EMusic may not perform their obligations as agreed upon. Such
agreements also may not be specifically enforceable by EMusic. In addition,
some of EMusic's 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 EMusic's ability to attract new
customers.

EMusic's success depends on its retention of key personnel.

EMusic's performance is substantially dependent on the services of Robert H.
Kohn, its chairman, and Gene Hoffman, Jr., its chief executive officer, as well
as on its 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 EMusic's
officers or senior managers could harm EMusic's business.

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

EMusic's future success will depend on its 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 EMusic may be
unable to successfully attract sufficiently qualified personnel. A large
percentage of EMusic's employees joined the company in 1999, and EMusic expects
that its rate of hiring will continue at a very rapid pace. To manage the
expected growth of its operations, EMusic will need to integrate these
employees into its business. EMusic's inability to hire, integrate and retain
qualified personnel in sufficient numbers may reduce the quality of its
programs, products and services, and could harm its 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. EMusic may be subject to claims in the future as it
seeks to hire qualified personnel, and those claims may result in material
litigation involving EMusic. Even if unsuccessful, these claims could harm
EMusic's business by damaging EMusic's reputation, requiring EMusic to incur
legal costs and diverting management's attention away from EMusic's business.

Security concerns regarding credit card or other confidential information
transmitted over the web could limit EMusic's growth and subject EMusic 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 EMusic expects unless
some of these concerns are adequately addressed and found acceptable by the
market.

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Internet usage could also decline if any well publicized compromise of security
occurred. EMusic 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 EMusic's security measures and
misappropriate its users' personal information, it may cause interruptions to
EMusic's retail website operation, damage EMusic's reputation or subject EMusic
to claims by users. Any compromise of confidential data during transmission
over the Internet may harm EMusic's business.

Any failure of EMusic's internal security measures could cause EMusic to lose
customers and subject EMusic to liability.

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

EMusic's intellectual property protection may be inadequate, and any loss or
reduction in intellectual property protection may harm EMusic's business.

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

Government regulation may require EMusic to change the way it does 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 EMusic's transmissions originate in California,
the governments of other states or foreign countries might attempt to regulate
those transmissions or levy sales or other taxes relating to EMusic's
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

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investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. Evolving areas of law that are relevant to
EMusic's business include privacy law, proposed encryption laws, content
regulation and sales and use tax. For example, changes in copyright law could
require EMusic to change the manner in which it conducts business or increase
EMusic's cost of doing business. Because of this rapidly evolving and uncertain
regulatory environment, EMusic cannot predict how these laws and regulations
might affect its 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 EMusic by subjecting it to liability or
forcing it to change how EMusic does business. In the event the Federal Trade
Commission or other governmental authorities adopt or modify laws or
regulations applicable to EMusic's business, including those relating to the
Internet and copyright matters, EMusic's business could be harmed.

EMusic may have liability for content on its website and liability for other
materials which it distributes.

EMusic may be liable to third parties for content on its website and any other
materials it distributes if:

. the music, text, graphics or other content on EMusic's website violates
any of those parties' copyrights trademarks or other intellectual
property rights;

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

. the content EMusic distributes is deemed obscene, defamatory or
excessively violent.

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

Liability or alleged liability for content or other materials could harm
EMusic's business by damaging EMusic's reputation, requiring EMusic to incur
legal costs in defense, exposing EMusic to significant awards of damages, fines
and costs and could divert management's attention away from EMusic's 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
EMusic's ability to derive financial benefits from e-commerce.

Except for sales of tangible merchandise into certain states, EMusic does not
collect sales or other taxes on sales of its products through its websites.
Although the Internet Tax Freedom Act precludes, for a period of three years
ending October 2001, 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 EMusic, 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 EMusic's
opportunity to derive financial benefit from electronic commerce. Moreover, if
any state or foreign country were to successfully assert that EMusic should
collect sales or other taxes on the exchange of merchandise on its system, it
could affect EMusic's cost of doing business.

EMusic may have difficulty expanding into international markets which could
limit the growth of EMusic's business.

EMusic's future growth and success will depend in part on its ability to
generate international sales. There can be no assurance, however, that we will
be successful in generating international sales of EMusic's 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

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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 EMusic's 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 EMusic's offerings and
intellectual property rights to the same extent as the laws of the United
States. If EMusic fails to compete successfully or to expand the distribution
of its offerings in international markets, the growth of EMusic's business
could be limited.

Development of new standards for the electronic delivery of music may threaten
EMusic's business.

EMusic currently relies 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. EMusic does not own or
control mp3 technology and is 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 EMusic operates its business as well as the public's perception of EMusic
as a company. For example, in December 1998, the major recording studios
announced a plan to develop a universal standard for the electronic delivery of
music, called the Secured Digital Music Initiative. If new standards are
developed and adopted by consumers, EMusic may not be able to obtain a license
to such technology on favorable terms or at all and EMusic's business could be
harmed. Even if new standards are not developed, delays with respect to
proposed standards, such as those which have occurred with respect to SDMI, can
cause confusion in the marketplace and slow the development of the market for
downloadable music.

Mp3 technology is controversial within certain segments of the traditional
music industry and EMusic may face continued opposition to its use of mp3 which
may slow market development and harm EMusic's 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 EMusic's success
is largely dependent upon the ease with which customers can download and play
music. EMusic 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 cost of doing business which could harm EMusic's business.

If EMusic, or third parties on which EMusic relies, fails to achieve year 2000
compliance, EMusic's business could be harmed.

EMusic may discover year 2000 compliance problems in its systems that will
require substantial revision. EMusic has not conducted a formal year 2000 audit
and has relied only on its internal assessments of its year 2000 needs. If
EMusic unexpectedly experiences failures related to the year 2000 problem or if
EMusic fails to fix or replace any affected systems on a timely basis, its
business could be harmed. In addition, governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of EMusic's 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 EMusic
from publishing its content, generating sales or collecting revenue, decrease
the use of the Internet or prevent users from accessing EMusic's websites for a
substantial period of time which could harm EMusic's business. For more
information on EMusic's 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."

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EMusic's executive officers and directors will control approximately 16% of
EMusic's common stock after the completion of the merger and, as a result, have
power to influence significant corporate matters, which may delay, deter or
prevent transactions that could benefit EMusic stockholders.

EMusic's executive officers and directors, in the aggregate, beneficially own
approximately 19% of EMusic's outstanding common stock, representing
approximately 16% of EMusic common stock after completion of the merger. These
stockholders are able to significantly influence all matters requiring approval
by EMusic 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 EMusic's charter documents could negatively impact
its stockholders.

EMusic's 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 EMusic's 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 EMusic. This might
discourage bids for EMusic's common stock as a premium over the market price of
EMusic's common stock and adversely affect the trading price of EMusic's common
stock. EMusic has no current plans to issue shares of preferred stock. In
addition, other provisions in EMusic's charter documents could make it more
difficult for a third party to acquire EMusic, even if doing so would be
beneficial to EMusic's stockholders.

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

Since EMusic's data warehousing, web server and network facilities are all
located in California, an earthquake or other natural disaster could affect all
of EMusic's facilities simultaneously. An unexpected event such as a power or
telecommunications failure, fire, flood or earthquake at EMusic's on-site data
warehousing facility or at EMusic's Internet service providers' facilities
could cause the loss of critical data and prevent EMusic from offering its
services to artists and consumers. EMusic's business interruption insurance may
not adequately compensate EMusic for losses that may occur. In addition, EMusic
relies on third parties to securely store its archived data, house its web
server and network systems, and connect it to the Internet. A failure by any of
these third parties to provide these services satisfactorily could harm
EMusic's business.

Risk Factors Relating to Tunes

Tunes has a limited operating history so it is difficult to evaluate its
business and prospects.

Tunes began its business in July 1996 and started operating its websites in
March 1997--JAMtv.com, March 1998--Rollingstone.com, July 1998--Tunes.com and
February 1999--Downbeatjazz.com. As a result, Tunes has only a limited
operating history on which you can evaluate its business and prospects. You
should consider Tunes' prospects in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving Internet-based
markets such as online advertising, e-commerce and provision of online content.
See "Tunes' Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Information About Tunes" for more detailed
information on Tunes' limited operating history.

The market for online music content is new and unproven and if it does not
develop Tunes may not be able to generate significant revenue.

Tunes seeks to attract and retain visitors to its websites by offering a
variety of music content. The market for music content on the Internet is new
and rapidly evolving, so there is uncertainty whether demand for Tunes'

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services will develop, be sustained and generate significant revenue. If the
market for online music content or products fails to develop or develops more
slowly than expected, or if Tunes' services do not achieve or sustain market
acceptance, Tunes may not be able to generate significant revenue. Tunes cannot
assure you that it will be able to attract and retain a significant number of
visitors to its websites.

Tunes depends on its exclusive relationships with the publishers of Rolling
Stone and Down Beat magazines for content and their brand name recognition and
may not be able to attract visitors to its websites if these relationships
terminate or become nonexclusive

Rolling Stone. Tunes depends significantly upon its relationship with Straight
Arrow Publishers Company, L.P., the publisher and owner of Rolling Stone
magazine, for editorial content, access to the archives of Rolling Stone and
Tunes' use of the brand name "Rolling Stone," as well as for press coverage,
business and marketing opportunities, strategic relationships and potential
acquisitions. If Tunes is unable to continue its relationship with Straight
Arrow and to utilize its content and the Rolling Stone brand name on its
websites, or if Straight Arrow provides its content or makes its Rolling Stone
brand name accessible to Tunes' competitors, Tunes may generate less traffic
which would reduce its revenue. In addition, if Straight Arrow is not able to
continue to obtain license rights for online distribution of its magazine
content from third-party contributors, Tunes would not be able to make this
content available on its websites which could reduce the number of visitors to
Tunes' websites. Tunes' agreement with Straight Arrow will terminate in
February 2011 unless, assuming the consummation of the merger, EMusic has a
market capitalization of at least $2 billion at that time, in which case it
will terminate in February 2016. Straight Arrow may terminate the agreement
earlier if Tunes fails to maintain the technical reliability reasonably
required to keep the Rollingstone.com website available, other than due to
regularly scheduled maintenance and network and other outages that are not due
to Tunes' actions or that are not Tunes' fault. This right to terminate also
applies if the website is unavailable for more than a total of 24 hours in any
60-day period or 12 consecutive hours. Straight Arrow also may terminate the
agreement earlier if Tunes fails to comply with its other obligations under the
agreement, including its obligations to pay annual license fees, royalty
payments or other amounts due to Straight Arrow, or if is Tunes acquired by a
competitor of Rolling Stone or another company that is unacceptable to Straight
Arrow.

Under Tunes' agreement with Straight Arrow, Tunes obtained the right to use the
"Rolling Stone," "RollingStone Online" and "RollingStone.com" trademarks and
their derivatives in connection with the Internet and the right to use the
Rollingstone.com domain name. If Tunes' agreement with Straight Arrow
terminates, Tunes will not be entitled to use these trademarks or the
Rollingstone.com domain. During the three months ended September 30, 1999,
revenue generated from the Rollingstone.com website accounted for approximately
69% of Tunes total revenue and Rollingstone.com generated approximately 65% of
the total number of page views on all of Tunes' sites. As a result, the loss of
Tunes' right to use the Rolling Stone trademarks, domain or content would
damage Tunes' reputation and severely limit Tunes' ability to generate
advertising, e-commerce and other revenue. See "Information about Tunes--
Strategic Relationships."

Down Beat. Tunes also depends upon its relationships with Maher Publications,
Inc., the publisher and owner of Down Beat magazine, for editorial content,
access to the archives of those magazines and Tunes' use of their brand names
and domain names. If Tunes is unable to continue this relationship and to
exclusively utilize the content, brand names and domain names of this magazine,
Tunes may generate reduced website traffic and revenue. Tunes' agreement with
Maher Publications will terminate in February 2001. Maher Publications may
terminate its agreement earlier if Tunes fails to comply with its obligations
under those agreements, including Tunes' obligations to pay fees, royalties or
other amounts due. See "Information about Tunes--Strategic Relationships."

Tunes needs to continue to develop compelling content and features to attract
visitors to its websites.

Tunes' future success depends on its ability to continue to offer compelling
music content and website features. If Tunes does not deliver compelling music
content and features that attract and engage its visitors, Tunes may

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<PAGE>

be unable to attract and retain a significant number of visitors to its
websites, which would reduce Tunes' advertising and e-commerce revenue. Tunes
ability to deliver compelling music content and features depends upon the
quality of its editorial and design staff and the editorial and design staffs
of its magazine content providers, its ability to anticipate and capitalize
upon trends in music and the Web and its access to content owned or controlled
by others, including videos, audio previews of songs or song clips and artwork.

Tunes depends on the music industry and others for content and may not be able
to attract visitors to its websites if it cannot obtain that content.

In addition to the content that Tunes develops on its own or that it licenses
from the publishers of Rolling Stone and Down Beat, Tunes relies upon record
labels, artists and other content owners for a significant amount of the
content it offers on its websites. This third-party content includes music
videos, album art, CD audio previews, photographs, artist biographies, artist
interviews, tour information, live performances and other content. Tunes'
licensed content is provided to it in many cases under nonexclusive licenses,
which may be revoked by the content providers at any time or upon short notice.
In addition, in many instances Tunes does not have express license agreements
to use content. For example, Tunes has received a significant portion of the
music videos on its websites from record labels without written license
agreements to display these videos. Universal Music Group notified Tunes, as
well as other music website operators, in February 1999 that Tunes is no longer
authorized to use its music videos on Tunes' websites and Tunes has since
removed those videos from its websites.

In addition, because some of Tunes' content providers directly and indirectly
compete with Tunes, these content providers may seek competitive advantage by
limiting or denying Tunes access to their content. For example, Sony Music
Entertainment has a significant interest in Launch Media and EMI Group has made
a significant investment in and entered into an exclusive five-year licensing
arrangement with musicmaker.com, Inc. In addition, BMG Entertainment and
Universal Music Group jointly operate a music-oriented website named
Getmusic.com and also recently announced their intent to jointly develop an
Internet music delivery system named Electronic Media Distribution.

Tunes does not have licenses for a substantial amount of music and associated
artwork available on its websites, which may subject Tunes to infringement
damages and significant license fees or loss of access to that content

Tunes places CD audio previews, associated album art and music videos on its
websites to attract users and to promote the sale of music. Tunes does not have
license agreements to digitally perform, copy or display a substantial portion
of that content. Tunes could, therefore, be required to remove this content
from Tunes' websites, pay substantial royalties, pay substantial infringement
damages and penalties to the content copyright owners, incur substantial legal
fees and other costs and indemnify its content providers for infringement costs
and damages under Tunes' agreements with them. It is also possible that the
content copyright owners could successfully seek to shut down Tunes' websites
until any possible infringement claims are resolved. Any of these actions could
seriously damage Tunes' business.

For example, on Tunes' websites, Tunes places album art and approximately 60-
second audio previews of CD tracks of classical, jazz and country albums and
approximately 30-second audio previews of CD tracks of albums of other genres
of music. Tunes believes that at least one-half of its collection of audio
previews and album art is not covered by license agreements. The Recording
Industry Association of America, representing the interests of record labels,
in an open letter to all Webcasters, notified Tunes that Tunes is responsible
for the payment of license fees for the digital performance of sound recordings
on its websites. To date, Tunes has not paid any license fees for this content,
and Tunes does not have an agreement with the RIAA. Tunes may be subject to
substantial penalties if it is found to have knowingly violated the copyrights
of others.

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<PAGE>

Tunes will be required to pay additional royalties for the broadcast of music
on the Web which may significantly increase its operating costs.

Tunes has entered into a license agreement with the American Society of
Composers, Authors and Publishers and is currently negotiating a license with
Broadcast Music, Inc. for the performance of musical compositions on the Web
which will obligate Tunes to pay royalties. Tunes believes that the highest
royalty rate for 1999 payable under the ASCAP license agreement is 1.6% of the
higher of gross revenue generated by Tunes' websites or Tunes' operating
expenses relating to the operation of its websites. In addition, Tunes believes
that the highest royalty rate for 1999 payable under the BMI license is 1.75%
of gross revenue generated by Tunes' websites. The royalties that Tunes must
pay, and the terms and conditions of the license agreements, may change and
those changes may materially harm Tunes' business. In addition, these license
agreements do not grant Tunes performance rights outside the United States.
Accordingly, Tunes could be subject to royalties, damages for infringement or
denied access to content because Tunes' Web broadcasts or other content may be
available outside the United States.

Tunes also broadcasts songs in a continuous stream over the Web on its Rolling
Stone Radio and Tunes Radio. The Digital Millennium Copyright Act, which was
adopted in October 1998, imposed new performance fees and royalties governed by
this Act on digital performances of sound recording such as those on Rolling
Stone Radio, Tunes Radio and any other continuous streaming broadcasts that
Tunes may make available in the future. In a June 1998 letter widely
distributed to Webcasters, the Recording Industry Association of America
notified Tunes that it intends to form a clearing house for performance
licenses for sound recordings. In addition, the RIAA notified Tunes in this
letter of its need to obtain licenses for digital performances of sound
recordings on Rolling Stone Radio. The statutory royalty rates for these
compulsory licenses have been the subject of protracted negotiations between
the RIAA and the Digital Media Association, an organization representing the
interests of Webcasters, beginning in December 1998, and, to date, a schedule
of statutory royalties has not been determined. The amount of royalties that
Tunes may be required to pay for compulsory licenses for digital performances
of sound recordings may be substantial and may damage Tunes business. Tunes
plans to continue to digitally perform a number of sound recordings on its
websites without paying royalties to the record labels until an industry-wide
solution has been reached.

Tunes may have to pay higher fees for content which could hurt its business.

Tunes' licensed content is provided to it in many cases by record labels,
artists and other content owners for minimal or no charge. If these content
owners begin charging Tunes significant license fees for their content, Tunes
either will be required to make significant payments or lose access to their
content, which may reduce the number of visitors to Tunes' websites.

Tunes will continue to lose money unless Tunes significantly increases
advertising revenue from its websites.

Tunes expects that its revenue and operating results for the foreseeable future
will depend significantly on advertising revenue generated from selling
sponsorships or other advertising on its websites. Tunes' advertising revenue
was $970,000 in 1998 and $2.5 million for the nine months ended September 30,
1999. Tunes' losses were $3.5 million in 1997, $13.2 million in 1998 and $20.0
million for the nine months ended September 30, 1999. If Tunes does not
significantly increase advertising revenue, Tunes' business will continue to
lose money. Increasing advertising revenue will depend on the Internet becoming
an effective advertising medium and many other factors, including Tunes:

. conducting effective marketing and selling efforts aimed at advertisers;

. increasing the size of Tunes' audience and the time they spend at Tunes'
websites,

. attracting demographically desirable audiences to Tunes' websites;

. accurately measuring the size and demographic characteristics of Tunes'
audience;

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. being able to collect information about visitors to Tunes' websites; and

. maintaining and developing Tunes' relationships with Web portal sites to
attract additional visitors.

Tunes' failure to achieve one or more of these goals could significantly impact
Tunes' ability to generate advertising revenue. In addition, even if Tunes
generates increased traffic, there is no assurance that such increased traffic
will result in significant revenue. See "--Tunes has a history of significant
losses and anticipate significant continuing losses" and "Tunes' Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Tunes' agreements with advertisers are short-term so Tunes may not have a
steady flow of advertising revenue.

Tunes' failure to develop long-term relationships with advertisers and
consumers could reduce Tunes' advertising revenue. Tunes' contracts with
advertisers generally are between two weeks and six weeks in duration. As a
result, Tunes cannot depend upon a steady stream of revenue from advertisers.
In addition, the short-term nature of these contracts allows Tunes' advertisers
to move from Tunes' websites to those of Tunes' competitors or to other
advertising media, which may deprive Tunes of the opportunity to build
advertiser or consumer loyalty.

Tunes' advertising revenue may not grow if the Internet does not become an
effective advertising medium.

Advertising on the Internet is relatively new and rapidly evolving and its
effectiveness, compared to traditional media, is uncertain. Forrester Research
estimates that online advertising in North America will increase from $1.3
billion in 1998 to $10.7 billion in 2003. However, if the Internet advertising
market does not develop or develops more slowly than is expected, Tunes may not
generate enough advertising revenue to ever become profitable. Widespread use
of Internet advertising depends upon businesses accepting a new way of
marketing their products. Businesses may find advertising on the Internet to be
undesirable or less effective for promoting their products and services
relative to traditional advertising media.

While commonly accepted standards have been established for measuring the
effectiveness of advertising through traditional media, no recognized standard
has been established to measure the effectiveness of Internet advertising. If a
standard does not develop or develops more slowly than expected, advertising on
the Internet may decrease or increase at a rate less than Tunes currently
projects and/or advertisers may not be willing to pay as much to advertise on
the Internet. In addition, the widespread adoption of technologies that permit
Internet users to block advertisements on websites could adversely affect the
growth of the Internet as an advertising medium.

There is intense Internet advertising competition which may reduce advertising
rates and revenue.

Reduced rates for Internet advertising could reduce Tunes' revenue. There is
intense competition for the sale of advertising on high-traffic websites. As a
result, vendors quote a wide range of rates for advertising services. It is
therefore difficult to project levels of Internet advertising that will be
realized generally or by any specific website. Competition for advertisers
among present and future websites, as well as competition with other
traditional media for advertisers, may result in significant price competition,
which may reduce the advertising rates Tunes charges.

Tunes needs to increase public awareness of its brands or it may not be able to
attract a significant number of visitors to its websites.

Tunes' ability to attract and retain visitors to Tunes' websites significantly
depends on Tunes' ability to develop a brand identity for Tunes.com and
increase public awareness of the Rolling Stone and Down Beat brands on

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the Web. To date, a majority of Tunes' user traffic and revenue has been
generated by Tunes' Rollingstone.com website. Tunes needs to significantly
increase the awareness of Tunes' other websites, including the Tunes.com
website, to significantly increase traffic and revenue.

To increase brand awareness, traffic and revenue, Tunes intends to
substantially increase advertising and promotional efforts and provide high
quality products and services. However, Tunes cannot assure you that Tunes will
be able to achieve these goals or that Tunes' marketing activities will result
in increased or sustainable revenue.

Tunes is currently redirecting traffic from the JAMtv.com website, and, in
accordance with Tunes' agreement with the owner of the JAMtv trademark, Tunes
will cease operating the JAMtv.com website on or before June 30, 2000. During
November 1999, the JAMtv.com website generated 1.0 million page views, or 3.5%
of the 28.0 million total page views on all of Tunes' websites. During the same
period, the JAMtv.com website accounted for approximately 1.0% of Tunes'
revenue. To retain users of the JAMtv.com website within Tunes' network, Tunes
currently does and intends to redirect traffic from the JAMtv.com website to
the Tunes.com website through June 30, 2000. In addition, in accordance with
Tunes' agreement with the publisher of The Source magazine, Tunes intends to
shut down its operation of The Source.com website at the end of 1999. During
November 1999, TheSource.com website generated 2.9 million page views, or 10%
of the 28.0 million total page views on all of Tunes' websites. During the same
period, TheSource.com website accounted for approximately 4.0% of the Tunes'
revenue. There is no assurance that Tunes will be able to retain a significant
amount of traffic currently on the JAMtv.com or TheSource.com websites and
there is no assurance that users of those sites will migrate to the other sites
in Tunes' network.

Tunes depends upon relationships with third party websites to attract visitors
to Tunes' websites and these relationships may terminate or may not produce a
significant number of visitors.

Tunes relies upon contractual relationships with third party websites to
attract a significant portion of the user traffic on Tunes' websites. For
example, during the three month period ended November 30, 1999 user traffic
generated from the top four arrangements accounted for 8% of page views on
Tunes' websites. Tunes has entered into agreements with America Online,
Netscape, Yahoo! and the providers of other third party websites. Tunes'
failure to maintain existing relationships, establish additional relationships
or fully capitalize on such relationships could reduce the number of visitors
to Tunes' websites. In addition, the failure of these third parties to perform
their obligations under Tunes' agreements with them could harm Tunes' business.
See "Information about Tunes--Strategic Relationships--Distribution Network."

Tunes' market is highly competitive which may adversely affect Tunes' revenue
and business.

Tunes currently competes directly and indirectly for advertisers, users,
content providers, CD sales and rights to music events with other music
websites and traditional off-line media, including television. Increased
competition could result in a decline in the number of visitors to Tunes'
websites and reduced advertising and e-commerce revenue. The online content and
entertainment market is new, rapidly evolving and highly competitive. Tunes
anticipates that competition will continue to intensify in the future from both
online competitors and traditional off-line media. Increased competition may
also arise from television networks that offer interactive music content to
their viewers. Barriers to entry are relatively minimal. As a result, current
and new competitors can launch new websites at a relatively low cost. In
addition, many of Tunes' competitors offer, or could offer, content that is
similar to the content Tunes offers, other than content that Tunes exclusively
license from the publishers of Rolling Stone and Down Beat. The availability of
such content on Tunes' competitors' websites or television networks could
reduce the number of visitors to Tunes' websites.

Tunes' management believes Tunes' most significant competitors currently are
websites operated by MTV, Ultimate Band List and Launch Media. Tunes
anticipates that the number of Tunes' competitors will increase in the future.
Tunes believes that the principal competitive factors in the online music
content and entertainment market are and will increasingly be brand recognition
and integrity, size, variety and scope of content, ease of access and use,
quality of the entertainment experience and of the Webcasts and technical
expertise.

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In addition, formidable competition may emerge through mergers and
acquisitions. For example, in the Summer of 1999, America Online acquired
Spinner Networks, Inc., an Internet radio company and Nullsoft Inc., a company
that provides digital audio software. New technologies and the expansion of
existing technologies may also increase the competitive pressures on Tunes.
Many of Tunes' competitors may be able to respond more quickly than Tunes can
to new or emerging technologies and changes in Internet user requirements and
to devote greater resources than Tunes can to the development, promotion and
sale of their services. Tunes cannot assure you that its current or potential
competitors will not develop products and services comparable or superior to
those developed by Tunes or adapt more quickly than Tunes can to new
technologies, evolving industry trends or changing Internet user preferences.
See "Information about Tunes--Competition."

Many competitors have substantial competitive advantages which may make it more
difficult to grow Tunes' business.

Many of Tunes' current and potential competitors may enjoy substantial
competitive advantages, including:

. longer operating histories;

. significantly greater financial, technical and marketing resources;

. significantly greater brand recognition;

. better access to content; and

. substantially larger user and/or membership bases.

Such competitors may therefore have a significantly greater ability to attract
users, advertisers and consumers of commercial goods which could harm Tunes'
business.

A portion of Tunes' revenue is derived from barter transactions that do not
generate cash.

Tunes generates a portion of Tunes' revenue from non-cash barter transactions
in which Tunes exchanges advertising space on Tunes' websites for reciprocal
advertising space on other websites or other promotional services. As a result,
revenue from barter transactions does not generate cash that Tunes can use for
general corporate purposes, such as paying general operating expenses. Revenue
from barter transactions represented approximately 6% of Tunes' revenue in
1998, 20% of Tunes' revenue for the nine months ended September 30, 1999, and
10.4% of Tunes' revenue for the three months ended September 30, 1999. Tunes
expects to continue to enter into barter transactions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Tunes' business is dependent on the continued development and maintenance of
the Internet and development of technologies to present content and facilitate
e-commerce.

Tunes' business will depend on its users being able to access Tunes' content
and conduct e-commerce without significant delays or aggravation associated
with inadequate Internet capacity or bandwidth. This will depend upon the
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. The failure
of the Internet to achieve these goals will reduce Tunes' ability to generate
significant revenue.

If Web usage grows, the Internet infrastructure may not adequately support the
demands placed on it by this growth and its performance and reliability may
decline. In addition, websites have experienced interruptions in their services
as a result of outages and other delays occurring throughout the Internet
infrastructure. If these outages or delays occur frequently in the future, Web
usage, as well as the usage of Tunes' websites, could grow more slowly or
decline.

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The Internet is subject to rapid change which could result in significant
additional costs.

The market for Internet products and services is characterized by rapid change,
evolving industry standards and frequent introductions of new technological
developments. These new standards and developments could make Tunes' existing
or future products or services obsolete. Keeping pace with the introduction of
new standards and technological developments could result in significant
additional costs or prove to be difficult or impossible for Tunes. The failure
to keep pace with these changes and to continue to enhance and improve the
responsiveness, functionality and features of Tunes' websites could harm Tunes'
ability to attract and retain users. Among other things, Tunes will need to
license or develop leading technologies, enhance its existing services and
develop new services and technologies that address the varied needs of its
users.

Tunes' business may be harmed if Tunes is unable to safeguard the security and
privacy of its users' information.

Adverse publicity and consumer concern about theft and the privacy of users on
the Internet may reduce Tunes' user traffic and e-commerce and may cause Tunes'
websites to be less attractive to advertisers. This reduction in user traffic,
e-commerce or interest by advertisers could significantly reduce Tunes'
revenue. In particular, a number of published reports have indicated that a
perceived lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial exploitation of the Internet to date, and
there can be no assurance that new technologies will satisfactorily address
these security concerns. See "--Internet laws and regulations may change which
could adversely affect Tunes' business" and "--Tunes may be subject to
liability for misuse of users' private information."

Tunes has a history of significant losses and anticipates significant
continuing losses.

To date Tunes has not been profitable. Tunes has incurred losses and negative
operating cash flows since Tunes began operations and incurred a net loss of
$13.2 million in 1998 and $20.0 million for the nine months ended September 30,
1999. As of September 30, 1999, Tunes had an accumulated deficit of $41.4
million. Tunes expects to incur significant losses and negative operating cash
flows for the foreseeable future. Tunes plans to continue to significantly
increase its operating expenses to increase Tunes' customer base, enhance
Tunes' brand image, obtain additional content and support Tunes' growing
infrastructure. If Tunes is unable to generate sufficient traffic, Tunes may
never generate significant revenue and Tunes may never earn a profit. Even if
Tunes does achieve profitability in the future, Tunes cannot assure you that
Tunes will be able to sustain or increase profitability in subsequent periods.
See "--Tunes will continue to lose money unless Tunes significantly increases
advertising revenue from Tunes' websites" and "Tunes' Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Tunes may be unable to accurately forecast its revenue and may not be able to
reduce expenses to compensate for revenue shortfalls.

Tunes may be unable to accurately forecast its future revenue because of its
limited operating history and the emerging nature of the markets in which it
competes. Tunes' current and future expense levels are based largely on Tunes'
forecasts concerning future revenue and are to a large extent fixed.
Accordingly, Tunes may be unable to adjust spending in time to compensate for
any unexpected revenue shortfall. A shortfall in Tunes' revenue from the
amounts that Tunes forecast could result in significant losses.

Tunes was dependent on CDnow for 33% of Tunes' revenue during 1998 and 22% of
Tunes' revenue during the first nine months of 1999.

During 1998, CDnow accounted for $826,000, or 33%, of Tunes' total revenue.
During the nine months ended September 30, 1999, CDnow accounted for $738,000,
or 22%, of Tunes' total revenue. Most of the revenue was generated from
advertising and content licensing. In July 1999, Tunes amended its agreement
with CDnow to reduce the percentage of fees that Tunes received under the
agreement, and was subsequently further

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amended to terminate the agreement effective September 30, 1999. As a result of
this termination, Tunes expects no significant amount of future revenue from
CDnow, which could have a material adverse effect on Tunes' revenue if not
offset by increased revenue from other sources.

Because spending on music is dependent on discretionary consumer spending,
Tunes is susceptible to fluctuations in general economic conditions.

Tunes believes that revenue from music sales and paraphernalia and related
advertising is dependent on discretionary consumer spending. Tunes' revenue
will therefore be subject to fluctuations based upon the general economic
conditions of the United States and foreign countries in which Tunes or Tunes'
advertisers do business. If there is a general economic downturn or recession
in the United States or in such foreign countries, general consumer spending in
these markets likely would decline. Tunes' advertising revenue and other online
commercial activity may decrease as a result.

If Tunes does not manage its growth, Tunes may not be able to effectively
operate its business.

Since Tunes' inception in July 1996, Tunes has rapidly and significantly
expanded its operations. Tunes anticipates that it will continue to expand its
operations to compete effectively and to exploit potential market
opportunities. This expansion has placed, and is expected to continue to place,
a significant strain on Tunes' management, operations, systems and financial
resources. Failure to manage Tunes' growth effectively could adversely affect
Tunes' business. From September 1, 1996 to November 30, 1999, Tunes grew from
five to 98 full-time employees. Tunes' recently hired employees also include
several key managerial, technical and operations personnel, and Tunes expects
to add additional key personnel in the near future. To manage Tunes' recent
growth and any future growth of Tunes' operations and personnel, Tunes must
improve and effectively utilize its existing operational, management, marketing
and financial systems and successfully train and manage Tunes' employees. In
addition, Tunes may also need to increase the capacity of its software,
hardware and telecommunications systems on short notice. Tunes also will need
to manage an increasing number of complex relationships with users, strategic
affiliates, advertisers and other third parties.

Tunes relies on third parties for its website operations, and Tunes may be
subject to system disruptions, which could reduce its revenue.

Tunes' ability to attract users to its websites and maintain relationships with
advertisers depends on the performance, reliability and availability of Tunes'
websites and network infrastructure. The maintenance and operation of
substantially all of Tunes' Internet communications hardware and servers have
been outsourced to the facilities of Exodus Communications, Inc. in Jersey
City, New Jersey and in El Segundo, California. Fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events could
damage these systems and interrupt Tunes' services. Computer viruses,
electronic break-ins or other similar disruptive events also could disrupt
Tunes' services. System disruptions could result in the unavailability or
slower response times of Tunes' websites and that would reduce the number of
advertisements delivered, the quality of Tunes' users' experience and the
attractiveness of Tunes' websites to users and advertisers, which could reduce
Tunes' revenue. Tunes' insurance policies may not adequately compensate Tunes
for losses Tunes may incur because of any disruptions in Tunes' systems. In
addition, under Tunes' agreement with Exodus, it is not liable to Tunes for any
damage or loss it may cause to Tunes' business and, accordingly, Tunes may be
unable to seek reimbursement from Exodus for losses caused by it.

Service disruptions could adversely affect Tunes' revenue and, if they were
prolonged, would seriously harm Tunes' business and reputation. In addition,
service disruptions could result in the termination of Tunes' rights under
Tunes' agreement with the publisher of Rolling Stone magazine, which would
seriously harm Tunes' business. See "--Tunes depends on Tunes' exclusive
relationships with the publishers of Rolling Stone and Down Beat magazines for
content and their brand name recognition and may not be able to attract
visitors to Tunes' websites if these relationships terminate or become
nonexclusive."

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Tunes may have capacity constraints which could reduce its revenue.

Tunes' ability to attract users to its websites and maintain relationships with
advertisers also depends on Tunes' ability to have sufficient system capacity
and reliability to accommodate the demands of its user traffic. If Tunes is
unable to increase the data storage and processing capacity of its systems as
fast as demand for its websites grows, Tunes' websites could operate with
slower response times or could fail to operate for unknown periods of time.
Slower response times or unscheduled down-time would reduce the number of
advertisements delivered, the quality of Tunes' users' experience and the
attractiveness of Tunes' websites to users and advertisers, which could reduce
Tunes' revenue.

Since launching Tunes' first website in March 1997, Tunes has from time to time
experienced slower response times and unscheduled down-time of its systems due
to capacity constraints. Tunes believes that those interruptions will continue
to occur from time to time in the future. Tunes does not carry business
interruption insurance to compensate Tunes for losses that may occur as a
result of these interruptions. These service interruptions could adversely
affect Tunes' revenue and, if they were prolonged, would seriously harm Tunes'
business and reputation. In addition, capacity constraints which result in
unscheduled down-time of Tunes' services could result in the termination of
Tunes' rights under its agreement with the publisher of Rolling Stone magazine,
which would seriously harm Tunes' business. See "--Tunes depends on its
exclusive relationships with the publishers of Rolling Stone and Down Beat
magazines for content and their brand name recognition and may not be able to
attract visitors to Tunes' websites if these relationships terminate or become
nonexclusive."

Tunes depends upon timely installations of lines, feeds and downloads, and
their failures may result in disruptions in Tunes' services.

Tunes depends upon receipt of timely installations of lines, feeds and content
downloads from content providers, such as Tunes' magazine content providers and
third-party Webcast venues. Any failure or delay in the transmission or receipt
of such feeds and downloads, whether on account of Tunes' system failure,
Tunes' content providers, telecommunications providers, Internet service
providers or otherwise, could disrupt the delivery of content and delay its
availability on Tunes' websites or disrupt Tunes' live Internet concerts, or
Webcasts, which could adversely affect Tunes' performance and business. Tunes
relies on third-party services to provide Tunes with access to the Internet. In
addition, Tunes depends upon Web browsers, Internet service providers and
online service providers to provide Internet users with access to Tunes'
websites. See "Information about Tunes--Infrastructure, Operations and
Technology."

Tunes' infrastructure is vulnerable to unauthorized access which may result in
misappropriation of proprietary information and cause disruptions in Tunes'
services.

Tunes' infrastructure is vulnerable to unauthorized access, physical or
electronic computer break-ins, computer viruses and other disruptive problems.
Internet service providers have experienced, and may continue to experience,
interruptions in service as a result of the accidental or intentional actions
of Internet users, current and former employees and others. Anyone who is able
to circumvent Tunes' security measures could misappropriate proprietary
information or cause interruptions in Tunes' operations. Security breaches
relating to Tunes' activities or the activities of third-party contractors that
involve the storage and transmission of proprietary information could damage
Tunes' reputation and Tunes' relationships with Tunes' content providers and
advertisers. Tunes also could be liable to Tunes' content providers,
advertisers and other parties for the damages caused by such breaches or Tunes
could incur substantial costs as a result of defending claims for those
damages. Tunes may need to expend significant capital and other resources to
protect against such security breaches or to address problems caused by such
breaches. Tunes cannot assure you that Tunes' security measures will prevent
disruptions or security breaches.

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The loss of Tunes' chief executive officer or other key employees could
adversely affect Tunes' business.

Tunes' success depends to a significant extent on the continued contributions
of Tunes' senior management team, especially Howard A. Tullman, Tunes' Chairman
and Chief Executive Officer. Tunes is not the beneficiary of any life insurance
covering any of Tunes' executives or employees. The loss of Mr. Tullman or
other key employees would likely have a material adverse effect on Tunes'
business.

Tunes needs to retain and attract creative, technical, sales, marketing and
financial personnel to effectively operate its business.

Tunes believes that its performance will depend in large part upon its ability
to attract and retain additional highly skilled creative, technical, sales,
marketing and financial personnel, especially those with experience in the
music and Internet industries. If Tunes does not succeed in attracting new
personnel or retaining and motivating Tunes' current personnel, Tunes' business
could be adversely affected. Competition for such personnel, especially
creative and technical talent, is intense. Tunes has in the past experienced,
and Tunes expects to continue to experience, difficulty in hiring and retaining
highly skilled employees with appropriate qualifications. Tunes' employee
turnover rate was approximately 28% for the nine-month period ended September
30, 1999, excluding terminations due to the consolidation of the operations of
Tunes Network.

Year 2000 problems for us, Tunes' suppliers or Tunes' customers could increase
Tunes' liabilities or expenses and impact Tunes' profitability.

The Year 2000 problem could harm Tunes' business and financial results. Tunes
may discover Year 2000 problems in its systems that may require Tunes to
upgrade systems at a substantial cost. In addition, software and hardware from
third parties that have been integrated into Tunes' systems may need to be
updated or replaced, which may be time-consuming and expensive. In addition,
Tunes relies on third parties such as Exodus to support and operate Tunes'
systems. Failures or interruptions of Tunes' systems or those of third parties
because of Year 2000 problems could seriously damage Tunes' business and Tunes'
relationships with its content, distribution and technology providers,
advertisers and users. For example, if Tunes' Rollingstone.com website is
unavailable for 12 or more consecutive hours, Tunes' agreement with the
publisher of Rolling Stone could be terminated. In addition, failures,
interruptions or other service problems due to Year 2000 could result in lost
revenue, increased operating costs and loss of significant user traffic.
Governmental agencies, public utilities, Internet service providers and others
that Tunes relies on or that Tunes' customers rely on and which Tunes does not
control may not be Year 2000 compliant. This could result in systemic failures
beyond Tunes' control, such as a prolonged Internet, telecommunications or
electrical failure, and prevent Tunes from providing its content or reduce user
traffic. See "Tunes' Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure."

Tunes may be unable to protect its trademarks and copyrights which could result
in the loss of its rights or increased costs.

Tunes' financial performance and ability to compete depends to a significant
degree on the protection of Tunes' content and of the goodwill associated with
Tunes' trademarks. Tunes also depends on its magazine content providers,
including the publishers of Rolling Stone, and Tunes' other content licensors
to protect rights in the content Tunes licenses from them, including their
copyrights and trademarks. Tunes relies on copyright laws to protect the
original content Tunes develops for placement on its websites, including Tunes'
feature articles and artist databases. In addition, Tunes relies on trademark
laws to protect its brands and to provide additional protection for the unique
appearance of its websites. A substantial amount of uncertainty exists
concerning the scope of protection copyright and trademark laws afford on the
Internet, and Tunes cannot be assured that copyright and trademark laws will
adequately protect Tunes' content, trademarks and other proprietary rights. In
addition, policing unauthorized use of Tunes' content, trademarks and other
proprietary rights could be very expensive, difficult or impossible,
particularly given the global nature of the Internet.

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Tunes does not have registrations for "Tunes.com," "Mytunes" and the Tunes.com
logo as trademarks and may not be able to prevent others from using those
trademarks. Tunes is also aware of a number of uses by third parties of the
word "tunes" in connection with music and Internet services. The prior use of
the word "tunes" and the possible descriptive nature of that word of music-
related services may further limit Tunes' ability to prevent others from using
"tunes," "tunes.com" or similar derivative terms to identify goods or services
related to music or otherwise. Use of Tunes' brand name or its derivatives by
others could dilute Tunes' brand identity and divert users from Tunes' products
and services. Effective protection of Tunes' copyrights and trademarks may be
unenforceable or limited in foreign countries. Given the global nature of the
Internet, Tunes cannot control the ultimate destination of Tunes' services. In
addition, other than pending applications for registration of the "Tunes.com"
and "Tunes" brands and the Tunes.com logo in Canada, Tunes has not applied for
registration of its trademarks, copyrights or other proprietary rights in
foreign countries and Tunes may not be able to use its proprietary brands in
those foreign countries. As a result, any competitive advantage Tunes may
establish domestically through its goodwill and brand image would be eroded and
could diminish Tunes' ability to compete in foreign markets.

Third-party developers may be able to prevent Tunes from using or charge Tunes
royalties for some of Tunes' proprietary technology.

Some of Tunes' proprietary software and technology was developed by third-party
consultants. In some cases, Tunes does not have assignments of ownership rights
for consultant-developed software and technology. As a result, those third-
party consultants may claim ownership interests in part of Tunes' proprietary
technology and, accordingly, may force Tunes to stop using this technology or
to pay royalties for it in the future.

Tunes may not be able to prevent third parties from using Tunes' domain names
which could decrease the value of these domain names.

Tunes' trademark rights may not be sufficient to prevent third parties from
acquiring or using domain names that infringe or otherwise decrease the value
of Tunes' trademarks and domain names. Tunes currently holds the Internet
domain name "Tunes.com," as well as various other related domain names. Tunes
does not hold the domain names "tunes.net" or "tunes.org." Tunes uses the
following domain names under license: Rollingstone.com and Downbeatjazz.com.
Domain names generally have been regulated by the Commerce Department through a
contract with Network Solutions, Inc., a company that has exclusively
administered the so-called top-level domain names ending in ".com," ".net" and
".org." Tunes expects that the regulation of domain names in the United States
and in foreign countries will continue to evolve and change. For example, the
Commerce Department recently appointed the nonprofit Internet Corporation for
Assigned Names and Numbers to further privatize the administration of domain
names and to address regulatory issues, including the appointment of additional
domain name registrars and the adoption of new domain name dispute policies.
The ICANN recently has appointed several new domain name registrars who will
sell and administer domain names and the effect this will have on the
regulation of domain names is uncertain. Internet regulatory bodies also could
establish additional top-level domains or modify the rights of current holders
of domain names. As a result, the value of the ".com" domain could be diluted
and decrease the number of visitors to Tunes' websites, and Tunes may not
acquire or maintain the "Tunes.com" domain name in all of the countries in
which Tunes intend to conduct business. In addition, Tunes may not be able to
continue licensing Rollingstone.com and Downbeatjazz.com in the future or these
names may not be available for Tunes' use in other countries into which Tunes
may expand. See "Information about Tunes--Strategic Relationships-- Content
Providers" and "--Intellectual Property."

Internet laws and regulations may change which could adversely affect Tunes'
business.

Tunes is subject to various laws and regulations relating to its business,
although there are few laws or regulations that apply directly to Internet-
based services. Due to the increasing popularity and use of the Internet, laws
and regulations may be adopted with respect to the Internet that could decrease
the demand for

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Tunes' services, increase Tunes' cost of doing business and decrease Tunes'
revenue opportunities. Such laws and regulations may cover issues such as user
privacy, security, pricing, taxation, content, copyrights and distribution and
quality of services. The growth and development of the market for online
entertainment, content and commercial transactions may result in more stringent
consumer protection laws that impose additional burdens on those companies
providing such online content, online advertising or other online commercial
transactions. The enactment of laws or regulations that limit or regulate these
activities may impede Tunes' growth and increase Tunes' costs. See "Information
about Tunes--Government Regulation."

Tunes may be subject to liability for misuse of users' private information.

Tunes' privacy policy provides that Tunes will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is available to users
when they initially register on Tunes' Tunes.com website and also is easily
accessible on Tunes' websites. Despite this policy, if third persons were able
to penetrate Tunes' network security or otherwise misappropriate, or if Tunes
inadvertently disclose, Tunes' users' personal information or credit card
information, Tunes could be subject to liability. These liabilities could
include claims for unauthorized purchases with credit card information,
impersonation or other similar fraud claims. They could also include claims for
other misuses of personal information, such as for unauthorized marketing
purposes. These claims could result in litigation which may cause Tunes to
incur substantial costs. Legislatures and government agencies have adopted and
are considering adopting laws and regulations regarding the collection and use
of personal information obtained from individuals when accessing websites. For
example, Congress recently enacted the Children's Online Privacy Protection Act
which restricts the ability of Internet companies to collect information on
children under the age of 13 without their parents' consent. In addition, the
Federal Trade Commission and state and local authorities have been
investigating Internet companies regarding their use of personal information.
Tunes could incur additional expenses if new laws or regulations regarding the
use of personal information are introduced or if these authorities choose to
investigate Tunes' privacy practices. While Tunes has implemented and intend to
implement additional programs designed to enhance the protection of the privacy
of Tunes' users, these programs may not conform with laws or regulations that
are adopted. In addition, these legislative and regulatory initiatives may
adversely affect Tunes' ability to collect demographic and personal information
from users, which could have an adverse effect on Tunes' ability to provide
advertisers with demographic information. The European Union has adopted a
directive that imposes restrictions on the collection and use of personal data.
The directive could impose restrictions that are more stringent than current
Internet privacy standards in the United States. Although it is uncertain
whether this directive and resulting legislation will apply to companies
located in the United States, if it were applied to us, the directive may
prevent Tunes from collecting data from users in European Union member
countries. Historically, approximately 4% to 6% of the visitors to Tunes'
websites have been from European Union member countries. Other countries have
adopted or may adopt similar legislation. See "Information about Tunes--
Government Regulation."

Tunes' marketing and sales efforts rely heavily on its ability to collect user
information.

Tunes typically places information commonly referred to as "cookies" on a
user's hard drive without the user's knowledge or consent. Tunes uses cookies
for a variety of reasons, including enabling Tunes to limit the frequency with
which a user is shown a particular advertisement. Any reduction or limitation
in the use of cookies could limit the effectiveness of this technology, which
may reduce advertising revenue. Several currently available Internet browsers
allow users to modify their browser settings to remove cookies at anytime or to
prevent cookies from being stored on their hard drives. In addition, some
Internet commentators, privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. Laws relating to privacy and the
use of the Internet to collect personal information could limit Tunes' ability
to collect data and use Tunes' database. Because Tunes uses email for direct
marketing, any legislative or consumer efforts to further regulate unsolicited
bulk emails, commonly referred to as "spam," as well as other laws and the
policies of Tunes' technology providers, such as Exodus, regulating the use of
email could significantly impair Tunes' marketing efforts.

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Tunes may be sued for content available or posted on Tunes' websites or
products sold through Tunes' websites.

Tunes may be liable to third parties for content published on Tunes' websites
and other websites where Tunes' syndicated content appears if the music,
artwork, text or other content available violates their copyright, trademark,
patent or other intellectual property rights or if the available content is
defamatory, obscene or pornographic. Those types of claims have been brought,
sometimes successfully, against website operators in the past. Tunes also may
be liable for content uploaded or posted by Tunes' users on Tunes' websites,
such as mp3 files, postings on Tunes' message boards, chat-room discussions and
copyrightable works. For example, each of Sightsound.com, Inc. and intouch
group, inc. have suggested that many online music providers, including Tunes,
violate patent rights that each of them allegedly owns covering the sampling of
music over the Internet through digital downloads. In addition, Tunes could
have liability to some of Tunes' content licensors for claims made against them
for content available on Tunes' websites. Tunes also could be exposed to these
types of claims for the content that may be accessed from Tunes' websites or
other websites via links to other websites. Tunes may need to implement
measures to reduce exposure to these types of claims. Such measures may not be
successful and may require Tunes to expend significant resources. Tunes also
may be sued for product liability claims relating to products sold through
Tunes' websites or websites where Tunes' syndicated content appears. Any
litigation as a result of defending these types of claims could result in
substantial costs and damages. Tunes' insurance may not adequately protect
Tunes against these types of claims or the costs of their defense or payment of
damages.

Tunes' contests and sweepstakes may be subject to state and federal laws which
could reduce Tunes' audience and revenues.

Tunes' contests and sweepstakes may be subject to state and federal laws
governing lotteries and gambling, which may restrict Tunes' ability to offer
contests and sweepstakes in some geographic areas or altogether. Any
restrictions on these promotions could deprive Tunes of a significant method
for attracting user traffic to Tunes' websites. Reductions in Tunes' user
audience would adversely affect Tunes' revenue. Tunes cannot be certain that
Tunes' contests and sweepstakes will continue to be exempt from such laws.

Tunes may be liable for the collection of sales and other taxes which could
adversely affect Tunes' ability to generate revenue from e-commerce.

The imposition of sales and other taxes could adversely affect Tunes' ability
to become profitable. Currently, Tunes collects state sales taxes only for e-
commerce transactions Tunes conducts with residents of the states of
California, Illinois and New York. However, one or more other states may seek
to impose sales tax collection obligations on Tunes. 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 e-commerce and could
adversely affect Tunes' opportunity to generate revenue from e-commerce.
Moreover, if any state or foreign country were to successfully assert that
Tunes should collect sales or other taxes for the sale of merchandise on Tunes'
system, additional administrative burdens would be placed on Tunes' operations.

Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been enacted by Congress. However, this legislation,
known as the Internet Tax Freedom Act, imposes only a three-year moratorium
ending on October 21, 2001 on state and local taxes on e-commerce where such
taxes are discriminatory and on Internet access unless such taxes were
generally imposed and actually enforced prior to October 1, 1998. Failure to
renew this legislation would allow various states to impose taxes on Internet-
based commerce.

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EMUSIC SPECIAL MEETING

General

This joint proxy statement/prospectus is first being mailed to the record
holders of EMusic common stock on or about January 18, 2000. Also enclosed is a
notice of the special meeting of EMusic stockholders and a form of proxy that
the EMusic board of directors is soliciting for use at the special meeting and
at any adjournments or postponements thereof. The special meeting will be held
on February 14, 2000, at 9:00 a.m., local time, at the offices of Gray Cary
Ware & Friedenrich LLP, 400 Hamilton Avenue, Palo Alto, California.

Matters to be Considered

The purpose of the special meeting is to vote on the merger agreement. EMusic
stockholders may also be asked to vote upon a proposal to adjourn or postpone
the special meeting to allow additional time for the solicitation of additional
votes to approve the merger agreement if the secretary of the meeting
determines that there are not sufficient votes to approve the merger agreement.

Proxies

EMusic stockholders should fill out and send back the accompanying form of
proxy if they will be unable to attend the special meeting in person. EMusic
stockholders may revoke their proxies at any time before the proxies are
exercised by giving the secretary of EMusic written notice of revocation,
properly executed proxies of a later date or by attending the special meeting
and voting in person. Written notices of revocation and other communications
with respect to the revocation of EMusic proxies should be addressed to
EMusic.com Inc., 1991 Broadway, 2nd Floor, Redwood City, California 94063,
Attention: Secretary. All shares represented by valid proxies received and not
revoked before they are exercised will be voted in the manner specified in the
proxies. If no specification is made, the proxies will be voted in favor of the
merger agreement. No proxy that is voted against the merger agreement will be
voted in favor of any adjournment or postponement of the special meeting for
the purpose of soliciting additional proxies. However, if a stockholder
abstains from voting on the adoption of the merger agreement and makes no
specification on an adjournment or postponement for the purpose of soliciting
additional proxies, then the proxy will be voted for the adjournment or
postponement.

Solicitation of Proxies

EMusic will pay the entire cost of soliciting proxies. In addition to
soliciting proxies by mail, EMusic will request banks, brokers and other record
holders to send proxies and proxy material to the beneficial owners of EMusic
common stock and obtain their voting instructions, if necessary. EMusic will
reimburse these record holders for their reasonable expenses in performing
these tasks. If necessary, EMusic may also use several of its regular
employees, who will not be specially compensated, to solicit proxies from
EMusic stockholders, either personally or by telephone, letter or other means.

Record Date and Voting Rights

The EMusic board of directors has fixed January 10, 2000 as the record date for
determining the EMusic stockholders entitled to notice of and to vote at the
EMusic special meeting. Therefore, only stockholders of record at the close of
business on the record date will receive notice of, and be able to vote at, the
EMusic special meeting. At the close of business on the record date, there were
approximately 36,600,000 shares of EMusic common stock outstanding held by
about 316 record holders. A majority of these shares must be present at the
special meeting, either in person or by proxy, in order for there to be a
quorum at the special meeting. There must be a quorum in order for the vote on
the merger agreement to occur. Each share of outstanding EMusic common stock
entitles its holder to one vote.

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Shares of EMusic common stock present in person at the EMusic special meeting
but not voting, and shares for which EMusic has received proxies but with
respect to which holders of these shares have abstained, will be counted as
present at the special meeting for purposes of determining whether or not a
quorum exists. Brokers who hold shares in nominee or "street" name for
customers who are the beneficial owners of the shares may not give a proxy to
vote shares held for these customers on the matters to be voted on at the
special meeting without specific instructions from them. However, broker non-
votes will be counted for purposes of determining whether a quorum exists.

Under Delaware law and EMusic's certificate of incorporation, holders of a
majority of the shares of EMusic common stock voted in person or by proxy at
the EMusic special meeting must vote for the merger agreement in order for it
to be adopted by EMusic.
As of the record date, EMusic's directors and executive officers beneficially
owned shares of EMusic common stock entitling them to exercise about 19.6% of
the voting power of the EMusic capital stock entitled to vote at the special
meeting. EMusic expects that each of these directors and/or executive officers
will vote his or her shares for the merger agreement.

Recommendation of the EMusic Board

The EMusic board of directors has unanimously approved the merger agreement and
the proposed merger and other transactions described in the merger agreement.
The EMusic board believes that the merger agreement is in the best interests of
EMusic and its stockholders and recommends that EMusic stockholders vote "FOR"
the merger agreement. See "The Merger--Recommendation of the EMusic Board of
Directors and EMusic's Reasons for the Merger."

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TUNES SPECIAL MEETING

General

This joint proxy statement/prospectus is first being mailed to the record
holders of Tunes common stock and Tunes convertible preferred stock around
January 18, 2000. Also enclosed is a notice of the special meeting of Tunes
stockholders and a form of proxy that the Tunes board of directors is
soliciting for use at the special meeting and at any adjournments or
postponements thereof.

The special meeting will be held on February 14, 2000, 1:00 p.m., local time,
at the offices of Freeborn & Peters, 311 South Wacker Drive, Suite 3000,
Chicago, Illinois.

Matters to be Considered

The purpose of the special meeting is to vote on the transactions set forth in
the merger agreement. Tunes stockholders may also be asked to vote upon a
proposal to adjourn or postpone the special meeting to allow additional time
for the solicitation of additional votes to approve the merger agreement if the
secretary of the meeting determines that there are not sufficient votes to
approve the merger agreement.

Proxies

Tunes stockholders should fill out and send back the accompanying form of proxy
if they will be unable to attend the special meeting in person. Tunes
stockholders may revoke their proxies at any time before the proxies are
exercised by giving the secretary of Tunes written notice of revocation,
properly executed proxies of a later date or by attending the special meeting
and voting in person. Written notices of revocation and other communications
with respect to the revocation of Tunes proxies should be addressed to
Tunes.com Inc., 640 North LaSalle Street, Suite 560, Chicago, Illinois 60610,
Attention: Secretary. All shares represented by valid proxies received and not
revoked before they are exercised will be voted in the manner specified in the
proxies. If a Tunes stockholder does not specify on its proxy card how its
shares are to be voted, that proxy will be voted in favor of the merger
agreement. No proxy that is voted against the merger agreement will be voted in
favor of any adjournment or postponement of the special meeting for the purpose
of soliciting additional proxies. However, if a Tunes stockholder abstains from
voting on the adoption of the merger agreement and makes no specification on an
adjournment or postponement for the purpose of soliciting additional proxies,
then the proxy will be voted for the adjournment or postponement.

Solicitation of Proxies

Tunes will pay the entire cost of soliciting proxies from Tunes stockholders.
Proxies will be solicited principally by mail. If necessary, Tunes may use
several of its regular employees, who will not be specially compensated, to
solicit proxies from Tunes stockholders, either personally or by telephone,
letter or other means.

Record Date

The Tunes board of directors has fixed January 10, 2000 as the record date for
determining the Tunes stockholders entitled to notice of and to vote at the
Tunes special meeting. Therefore, only stockholders of record at the close of
business on the record date will receive notice of, and be able to vote at, the
Tunes special meeting.

Voting Rights, Conditions and Requirements

At the close of business on the record date, there were 1,475,324 shares of
Tunes common stock outstanding and 5,719,962 shares of Tunes convertible
preferred stock outstanding, in the aggregate held by about 130 record holders.
A majority of these shares must be present at the special meeting, either in
person or by proxy,

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in order for there to be a quorum at the special meeting. There must be a
quorum in order for the vote on the merger agreement to occur. Each share of
outstanding Tunes common stock entitles its holder to one vote, and each share
of outstanding Tunes convertible preferred stock entitles its holder to that
number of votes equal to the number of shares of Tunes common stock into which
that share of convertible preferred stock would have been converted had the
conversion occurred immediately prior to the record date for the Tunes special
meeting.

Shares of Tunes common stock and convertible preferred stock present in person
at the Tunes special meeting but not voting, and shares for which Tunes has
received proxies but with respect to which holders of these shares have
abstained, will be counted as present at the special meeting for purposes of
determining whether or not a quorum exists.

Although Delaware law provides that the merger agreement may be approved by the
holders of a majority of the outstanding shares of Tunes capital stock, it is a
condition to the completion of the merger that the holders of at least 95
percent of the outstanding shares of Tunes capital stock entitled to vote at
the Tunes special meeting (with the holders of Tunes' convertible preferred
stock voting on an as-converted basis) approve the merger agreement. Holders of
Tunes convertible preferred stock are not entitled to vote as a separate class
with respect to the approval of the merger agreement.

Because it is a condition to the completion of the merger that the holders of
95 percent of the outstanding shares of Tunes capital stock entitled to vote at
the special meeting vote in favor of the merger, abstentions will have the same
effect as votes against the approval of the merger agreement. Therefore, the
Tunes board of directors urges stockholders to complete, date and sign the
accompanying proxy and return it promptly in the enclosed, postage-paid
envelope.

As of the record date, Tunes' directors and executive officers beneficially
owned about 73,600 shares of Tunes common stock and about 2,684,123 shares of
Tunes convertible preferred stock, entitling them to exercise about 38.5% of
the voting power of the Tunes capital stock entitled to vote at the Tunes
special meeting. Tunes expects that each of these directors and executive
officers will vote his or her shares for the merger agreement. In addition to
Tunes directors and executive officers, other affiliates of Tunes representing
about 1,508,000 shares of Tunes common stock and Tunes convertible preferred
stock representing about 21.0% of the voting power of the Tunes capital stock
entitled to vote at the Tunes special meeting have signed shareholder voting
agreements pursuant to which they have agreed to vote in favor of the merger.
See "The Merger--Shareholder Voting Agreement."

Recommendation of the Tunes Board

The Tunes board of directors has unanimously approved the merger agreement and
the proposed merger and other transactions described in the merger agreement.
The Tunes board believes that the merger agreement is in the best interests of
Tunes and its stockholders and recommends that Tunes stockholders vote "FOR"
the merger agreement. See "The Merger--Recommendation of the Tunes Board of
Directors and Tunes' Reasons for the Merger."

The Tunes board of directors requests that each holder of Tunes common stock
and Tunes convertible preferred stock complete, date and sign the enclosed
Tunes proxy card and return it promptly in the enclosed postage-prepaid
envelope.

42
<PAGE>

THE MERGER

This section of the joint proxy statement/prospectus describes the most
significant aspects of the merger, including the principal provisions of the
merger agreement and the indemnity escrow agreement between Tunes and EMusic.
The following discussion which includes a summary of the significant terms and
provisions of the merger agreement and the indemnity escrow agreement is
qualified by reference to the merger agreement and the indemnity escrow
agreement. The merger agreement is attached as Appendix A and the indemnity
escrow agreement is attached as Appendix B to this joint proxy
statement/prospectus, each of which is incorporated herein by reference.

Background of the Merger

The terms of the merger agreement are the result of arm's length negotiations
between representatives of EMusic and Tunes. The following is a brief
discussion of the background of these negotiations, the merger and related
transactions.

In June 1999, Gene Hoffman, President and Chief Executive Officer of EMusic,
and James Chapman, Executive Vice President of EMusic, called Howard Tullman,
Chairman of the Board, President and Chief Executive Officer of Tunes, to
arrange for a conference call to discuss any interest in engaging in
discussions about a potential business combination. Shortly thereafter, members
of Tunes' senior management met with members of EMusic's senior management by
telephone to discuss each other's businesses and to discuss the general terms
under which a discussion of a strategic combination could continue. Due to
Tunes' plans to pursue its public offering, and after consultation with its
board of directors, Tunes discontinued pursuing further discussions with
EMusic.

On June 14, 1999, Tunes filed a registration statement on Form S-1 with the
Securities and Exchange Commission with respect to a proposed initial public
offering of Tunes' common stock. On August 18, 1999, due to adverse market
conditions, Tunes postponed its initial public offering.

On October 12, 1999, Mr. Chapman left a message for Mr. Tullman inquiring
whether Tunes was interested in reopening discussions regarding a potential
business relationship. On October 14, 1999, Mr. Tullman returned Mr. Chapman's
call and stated that Tunes was not in a position to enter into discussions with
EMusic. On October 15, 1999, EMusic pursued reopening discussions by sending an
unsolicited draft letter of interest to Mr. Tullman which detailed the terms
and conditions upon which EMusic would be prepared to discuss a potential
acquisition of Tunes.

Discussions regarding EMusic's unsolicited proposal resumed on October 28, 1999
with discussions between Mr. Tullman and Mr. Chapman. EMusic sent a revised
letter of intent to Tunes on that day. On October 29, 1999, Mr. Chapman and
Robert Kohn, Chairman of the Board of Directors of EMusic, met with Mr. Tullman
in New York to discuss EMusic's proposed terms for the acquisition. On October
31, 1999, Messrs. Tullman and Chapman continued discussions regarding the
proposed term sheet.

On November 2, 1999, EMusic and Tunes entered into a nonbinding letter of
intent relating to a proposed merger and mutual confidentiality agreements.

On November 3, 1999, Mr. Chapman, along with representatives from CIBC World
Markets, EMusic's financial advisor, met with representatives of Tunes
management and SG Cowen Securities Corporation, Tunes' financial advisor, in
Chicago to discuss Tunes' business model, historical financial performance,
future direction and operations. At this meeting, further negotiations at the
terms of the proposed transaction were conducted. On November 4, 1999, Mr.
Chapman continued to meet with members of Tunes management.

On November 5, 1999, EMusic distributed to Tunes a first draft of the proposed
merger agreement. Between November 5, 1999 and November 24, 1999, senior
management of Tunes, including Mr. Tullman, and senior management of EMusic,
including Mr. Chapman, continued their discussions regarding the various terms
of a possible transaction and other fundamental aspects of a possible
combination.

43
<PAGE>

Over this same period, the parties, together with their legal and financial
advisors, finalized their due diligence reviews and negotiated the terms and
conditions of the proposed merger. Also, over the same period, certain members
of Tunes management visited EMusic's headquarters in Redwood City to continue
each company's due diligence review of the other and to discuss the basis for
the integration of the two businesses. The parties exchanged certain
operational, financial and personnel information relating to their respective
businesses. The two companies and their advisors also engaged in a business
review. During this period, senior management of EMusic continued to be in
contact with members of the EMusic board of directors, briefing them on the
negotiations with Tunes, the status of the transaction and the major
outstanding issues. The Chief Executive Officer and other Tunes representatives
involved in the negotiations were, over this period, in contact with the
members of the Tunes board of directors, briefing them on the negotiations with
EMusic, the status of the transaction and the major remaining issues.

On November 28, 1999, the Tunes board of directors held a special meeting by
conference telephone to consider the proposed merger with EMusic.
Representatives of SG Cowen participated in the meeting. Representatives of SG
Cowen described the economic terms of the transaction and Andrius V.
Jonusaitis, Vice President and General Counsel of Tunes, summarized the legal
terms of the proposed transaction as reflected in the current drafts of the
agreements. SG Cowen delivered an oral opinion, which was subsequently
confirmed by delivery of a written opinion dated November 29, 1999, to the
effect, that as of the date of the opinion and based upon and subject to the
matters stated in the opinion, the consideration provided for in the merger was
fair to the Tunes stockholders from a financial point of view. The Tunes board
reviewed the advantages and disadvantages of the proposed transaction and after
extensive discussion, approved the transaction on the terms presented. The
Tunes board instructed Tunes management to finalize the definitive agreements
with EMusic and authorized management to execute the definitive agreements upon
negotiation of satisfactory terms.

On the morning of November 29, 1999, the EMusic board of directors held a
special meeting by conference telephone. Representatives of EMusic's legal and
financial advisors participated in the meeting. Representatives of CIBC World
Markets described the economic terms of the transaction and Peter Astiz,
Executive Vice President and General Counsel of EMusic, described the legal
terms of the proposed transaction as reflected in the current drafts of the
agreements. CIBC World Markets delivered an oral opinion, which opinion was
confirmed by delivery of a written opinion dated November 29, 1999, to the
effect that, as of that date and based on and subject to the matters described
in the opinion, the exchange ratio provided for in the merger was fair to
EMusic from a financial point of view. The board reviewed the advantages and
disadvantages of the proposed transaction and, after extensive discussion,
approved the transaction on the terms presented. The EMusic board instructed
EMusic management to finalize definitive documents with Tunes and authorized
management to execute the definitive agreements upon negotiation of
satisfactory terms.

Late in the afternoon on November 29, 1999, EMusic and Tunes signed the
definitive merger agreement.

At 7:00 a.m., New York time, on November 30, 1999, a press release announcing
the transaction was released.

Recommendation of the EMusic Board of Directors and EMusic's Reasons for the
Merger

The EMusic board of directors believes that the merger is advisable and fair to
and in the best interests of EMusic and EMusic stockholders. Accordingly, the
EMusic board of directors has unanimously approved the merger agreement and
unanimously recommends that EMusic stockholders vote FOR the adoption of the
merger agreement and the transactions contemplated by that agreement, including
the merger.

The EMusic board considered a potential combination with Tunes at a special
meeting held on November 29, 1999, and unanimously approved the merger
agreement and the merger at such meeting. At the November 29th meeting, the
EMusic board determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement are fair to, and in the best
interests of, EMusic and its stockholders.

44
<PAGE>

In approving the merger, EMusic's board considered the following expected
benefits:

. EMusic will be able to provide its customers with a combination of the
EMusic catalog of music for sale as well as the extensive music
information available from Tunes and its various websites;

. EMusic will be able to market its downloadable music to the larger
audience of music consumers that utilize the services of Tunes.com,
Rollingstone.com, and Downbeatjazz.com;

. EMusic believes that the operation of the Rollingstone.com website and
the closer relationship with Rolling Stone Magazine will further EMusic's
strategy of seeking to work with unsigned bands through its IUMA
subsidiary and with independent record labels which are seeking greater
exposure to the broader music community;

. EMusic will gain access to the Tunes sales force, which has more
experience in selling advertising and sponsorships for music and music
lifestyle advertisers. EMusic will also gain other employees with
additional technical expertise or substantial music industry expertise
which match the skills and experience EMusic is seeking to attract;

. EMusic also believes that combining the Tunes business model, which
primarily has relied on the sale of advertising, with the EMusic model,
which is focussed principally on generating revenue from the sale of
music, will diversify EMusic's revenue sources during the period in which
the market for sales of downloadable music is just developing; and

. EMusic believes that the merger will allow EMusic to offer a broader
combination of downloadable music and music information to distribution
portals such as America Online and Yahoo!.

In assessing the merger, the EMusic board considered a number of sources of
information, including:

. historical information concerning the respective businesses, financial
performance condition, operations and results of operations, technology,
management style, competitive position and trends and prospects of EMusic
and Tunes;

. Securities and Exchange Commission filings by Tunes;

. information and advice based on the results of due diligence
investigations by members of EMusic's management and EMusic's legal,
financial and accounting advisors concerning the business, technology,
products, operations, properties, assets, financial condition, operating
results and prospects of Tunes, trends in Tunes' business and financial
results and the capabilities of Tunes' management team;

. publicly available financial data for companies comparable to EMusic;

. reports from management relating to the prospects for successful
integration of the two companies;

. reports on the terms of the merger agreement and related agreements, and
an evaluation of those terms in comparison to the terms of other recent
mergers and acquisitions; and

. the financial presentation of CIBC World Markets, including its opinion
as to the fairness, from a financial point of view, to EMusic of the
exchange ratio, as described below under the caption "Opinion of EMusic's
Financial Advisor."

The EMusic board also identified and considered a number of uncertainties and
risks in its deliberations concerning the merger, including, but not limited
to:

. the risk that the potential benefits sought in the merger might not be
fully realized, if at all;

. risks regarding EMusic's ability to attract and retain key management,
salespeople and other personnel;

. the prospect of larger ongoing operating losses for the combined company,
and the need to raise capital in the future to continue to finance
operations; and

. the other risks associated with the businesses of Tunes and EMusic and
the merger described under "Risk Factors" in this joint proxy
statement/prospectus.

45
<PAGE>

The EMusic board believed that certain of these risks were unlikely to have a
significant impact on the combined company, while others could be avoided or
mitigated by Tunes or by EMusic, and that, overall, the risks associated with
the merger were outweighed by the potential benefits of the merger.

The above discussion of the information and factors considered by the EMusic
board is not intended to be exhaustive but is believed to include all
significant factors considered by it. In view of the variety of factors
considered in connection with its evaluation of the merger, the EMusic board
did not find it practicable to and did not quantify or otherwise assign
relative or specific weight to the factors considered in reaching its
determination. In addition, individual members of the EMusic board may have
given different weight to different factors.

The EMusic board of directors is unanimous in its recommendation that EMusic
stockholders vote FOR approval and adoption of the merger agreement.

The above discussion of reasons for the merger includes forward-looking
statements about possible or assumed future results of operations of the
combined company and the performance of the combined company after the merger.
Future results and performance are subject to risks and uncertainties, which
could cause such results and performance to differ significantly from those
expressed in these statements. For a discussion of these risks and
uncertainties, and other factors that could affect future results and
performance, see "Risk Factors."

Opinion of EMusic's Financial Advisor

EMusic engaged CIBC World Markets to act as its exclusive financial advisor in
connection with the merger. On November 29, 1999, at a meeting of the EMusic
board of directors held to evaluate the proposed merger, CIBC World Markets
rendered an oral opinion, which opinion was confirmed by delivery of a written
opinion dated November 29, 1999, to the effect that, as of that date and based
on and subject to the matters described in its opinion, the exchange ratio
provided for in the merger was fair to EMusic from a financial point of view.

The full text of CIBC World Markets' written opinion dated November 29, 1999,
which describes the assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix D and is incorporated into this
document by reference. CIBC World Markets' opinion is directed to the EMusic
board of directors, addresses only the fairness of the exchange ratio from a
financial point of view to EMusic, and does not constitute a recommendation to
any stockholder as to any matters relating to the proposed merger. The summary
of CIBC World Markets' opinion described below is qualified in its entirety by
reference to the full text of its opinion.

In arriving at its opinion, CIBC World Markets:

. reviewed the merger agreement and related documents;

. reviewed audited financial statements of Tunes for the fiscal years ended
December 31, 1997 and December 31, 1998, and audited financial statements
of EMusic for the fiscal years ended June 30, 1998 and June 30, 1999;

. reviewed unaudited financial statements of Tunes for the nine months
ended September 30, 1999, and unaudited financial statements of EMusic
for the three months ended September 30, 1999;

. reviewed financial projections prepared by the managements of EMusic and
Tunes;

. reviewed the historical market prices and trading volume for EMusic
common stock;

. held discussions with the senior managements of EMusic and Tunes with
respect to the businesses and prospects for future growth of EMusic and
Tunes;

. reviewed and analyzed publicly available financial data for companies
that CIBC World Markets deemed comparable to EMusic and Tunes;

46
<PAGE>

. reviewed and analyzed publicly available information for transactions
that CIBC World Markets deemed comparable to the merger;

. performed a discounted cash flow analysis of Tunes using assumptions of
future performance provided to CIBC World Markets by the management of
Tunes;

. reviewed public information concerning EMusic; and

. performed other analyses and reviewed other information as it deemed
appropriate.

In rendering its opinion, CIBC World Markets relied on and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to or discussed with CIBC World
Markets by EMusic, Tunes and their respective employees, representatives and
affiliates. With respect to forecasts of future financial condition and
operating results of EMusic and Tunes, CIBC World Markets assumed, at the
direction of the managements of EMusic and Tunes, without independent
verification or investigation, that such forecasts were reasonably prepared on
bases reflecting the best available information, estimates and judgments of the
managements of EMusic and Tunes.

CIBC World Markets did not make or obtain any independent evaluations or
appraisals of the assets or the liabilities of EMusic, Tunes or affiliated
entities. CIBC World Markets assumed, with the consent of the EMusic board of
directors, that the merger will be treated as a tax-free reorganization for
federal income tax purposes. CIBC World Markets expressed no opinion as to the
underlying valuation, future performance or long-term viability of EMusic or
Tunes, or the price at which the EMusic common stock would trade after
announcement or consummation of the merger. CIBC World Markets' opinion was
necessarily based on the information available to CIBC World Markets and
general economic, financial and stock market conditions and circumstances as
they existed and could be evaluated by CIBC World Markets as of the date of the
opinion. Although subsequent developments may affect the opinion of CIBC World
Markets, it does not have any obligation to update, revise or reaffirm its
opinion. No other instructions or limitations were imposed by the EMusic board
of directors upon CIBC World Markets with respect to the investigations made or
the procedures followed by it in rendering its opinion.

The following is a summary of the material financial analyses performed by CIBC
World Markets in connection with its opinion to the EMusic board of directors
dated November 29, 1999. The financial analyses summarized below include
information presented in tabular format. In order to fully understand CIBC
World Markets' financial analyses, the tables must be read together with the
text of each summary. The tables alone do not constitute a complete description
of the financial analyses. Considering the data set forth in the tables below
without considering the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of CIBC World Markets' financial
analyses.

Selected Companies Analysis

CIBC World Markets compared financial and stock market information for EMusic
and Tunes and the following ten selected publicly held companies in the online
music and online content aggregator industries, with particular focus on the
online content aggregator companies since Tunes aggregates a variety of content
such as music clips, reviews, news and photos:

<TABLE>
<CAPTION>
Online Music Companies Online Content Aggregator Companies
---------------------- -----------------------------------
<S> <C>
. Audible Inc. . drkoop.com, Inc.
. Liquid Audio, Inc. . EarthWeb, Inc.
. MP3.com, Inc. . iVillage Inc.
. Musicmaker.com, Inc. . LaunchMedia, Inc.
. SportsLine USA, Inc.
. Women.com Networks, Inc.
</TABLE>

47
<PAGE>

CIBC World Markets reviewed, among other things, enterprise values, calculated
as equity market value, plus debt, less cash, as multiples of estimated
calendar years 2000 and 2001 revenues. All multiples were based on closing
stock prices on November 26, 1999. Estimated financial data for EMusic and the
selected companies were based on publicly available research analysts'
estimates and estimated financial data for Tunes were based on internal
estimates of the management of Tunes. CIBC World Markets then applied a range
of selected multiples of estimated calendar years 2000 and 2001 revenues
derived from the selected online content aggregator companies to corresponding
financial data of Tunes. This analysis indicated an implied exchange ratio
reference range of approximately 0.75x to 1.49x, as compared to the exchange
ratio in the merger of 0.8148x.

Precedent Transactions Analysis

CIBC World Markets reviewed the purchase prices and implied transaction
multiples in the following nine selected transactions in the internet industry:

<TABLE>
<CAPTION>
Acquiror Target
-------- ------
<S> <C>
. CMGI, Inc. . Flycast Communications Corp.
. CMGI, Inc. . AdForce, Inc.
. DoubleClick Inc. . NetGravity, Inc.
. The Columbia House Company . CDnow, Inc.
. MarketWatch.com, Inc. . BigCharts Inc.
. eToys Inc. . BabyCenter, Inc.
. Yahoo! Inc. . broadcast.com inc.
. Yahoo! Inc. . GeoCities
. At Home Corp. . Excite, Inc.
</TABLE>

CIBC World Markets reviewed, among other things, enterprise values in the
selected transactions as multiples of estimated calendar years 1999 and 2000
revenues. All multiples were based on publicly available information at the
time of announcement of the relevant transaction. CIBC World Markets then
applied a range of selected multiples of estimated calendar years 1999 and 2000
revenues derived from the selected transactions to corresponding financial
statistics of Tunes. This analysis indicated an implied exchange ratio
reference range of approximately 1.01x to 1.48x, as compared to the exchange
ratio in the merger of 0.8148x.

Discounted Cash Flow Analysis

CIBC World Markets performed a discounted cash flow analysis to estimate the
present value of the unlevered, after-tax free cash flows that Tunes could
generate for fiscal years 1999 through 2004, based on internal estimates of the
management of Tunes. The range of estimated terminal values for Tunes was
calculated by applying terminal value multiples ranging from 4.0x to 6.0x to
Tunes' projected fiscal year 2004 revenues. The present value of the cash flows
and terminal values were calculated using discount rates ranging from 22.5% to
27.5%. This analysis indicated an implied exchange ratio reference range of
approximately 0.75x to 1.08x, as compared to the exchange ratio in the merger
of 0.8148x.

Relative Contribution Analysis

CIBC World Markets performed a contribution analysis, based on internal
estimates of the managements of EMusic and Tunes, comparing the relative
contributions of EMusic and Tunes to fiscal years 1999, 2000 and 2001 estimated
revenues, earnings before interest, taxes, depreciation and amortization,
commonly referred to as EBITDA, earnings before income, taxes and amortization,
commonly referred to as EBITA, and net income before amortization of the
combined company. EBITDA, EBITA and net income before amortization data were
not considered meaningful due to operating losses of EMusic and Tunes for these
operational measures. This analysis indicated the following implied percentage
contribution reference ranges for EMusic and Tunes, as

48
<PAGE>

compared to the pro forma equity ownership of the stockholders of EMusic and
Tunes in the combined company upon consummation of the merger:

<TABLE>
<CAPTION>
EMusic Tunes
Percentage Percentage
Revenues Contribution Contribution
-------- ------------ ------------
<S> <C> <C>
1999............................................. 6.4% 93.6%
2000............................................. 24.9% 75.1%
2001............................................. 51.2% 48.8%
</TABLE>

Pro Forma Equity Ownership in Combined Company

<TABLE>
<CAPTION>
EMusic Tunes
------ -----
<S> <C>
78.1% 21.9%
</TABLE>

Pro Forma Merger Analysis

CIBC World Markets analyzed the potential pro forma effect of the merger on
EMusic's earnings per share, commonly referred to as EPS, for estimated
calendar years 2001, 2002 and 2003, based on internal estimates of the
managements of EMusic and Tunes, without taking into account the potential
synergies that could be realized in the merger. This analysis indicated that
the proposed merger could be dilutive to, or result in a decrease in, EMusic's
EPS in estimated calendar years 2001 and 2002 and accretive to, or result in an
increase in, EMusic's EPS in estimated calendar year 2003. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.

Other Factors

In rendering its opinion, CIBC World Markets also reviewed and considered,
among other things:

. historical and projected financial data for Tunes; and

. historical market prices and trading volumes for EMusic common stock and
the relationship between movements in EMusic common stock, movements in
two indices comprised of the common stock of the selected companies in
both the online music and online content aggregator industries and
movements in the Nasdaq market.

The above summary is not a complete description of CIBC World Markets' opinion
to the EMusic board of directors or the financial analyses performed and
factors considered by CIBC World Markets in connection with its opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
summary description. CIBC World Markets believes that its analyses and the
summary above must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of
the analyses, could create a misleading or incomplete view of the processes
underlying CIBC World Markets' analyses and opinion.

In performing its analyses, CIBC World Markets considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
EMusic and Tunes. No company, transaction or business used in the analyses as a
comparison is identical to EMusic, Tunes or the merger, and an evaluation of
the results of those analyses is not entirely mathematical. Rather, the
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the companies, business segments or
transactions being analyzed.

49
<PAGE>

The estimates contained in CIBC World Markets' analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by its analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, CIBC World Markets' analyses and estimates are
inherently subject to substantial uncertainty.

The type and amount of consideration payable in the merger was determined
through negotiation between EMusic and Tunes. Although CIBC World Markets
provided financial advice to EMusic during the course of negotiations, the
decision to enter into the merger was solely that of the EMusic board of
directors. CIBC World Markets' opinion and financial analyses were only one of
many factors considered by the EMusic board of directors in its evaluation of
the merger and should not be viewed as determinative of the views of the EMusic
board of directors or management with respect to the merger or the exchange
ratio provided for in the merger.

EMusic selected CIBC World Markets based on CIBC World Markets' reputation,
expertise and familiarity with EMusic and its business. CIBC World Markets is
an internationally recognized investment banking firm and, as a customary part
of its investment banking business, is regularly engaged in valuations of
businesses and securities in connection with acquisitions and mergers,
underwritings, secondary distributions of securities, private placements and
valuations for other purposes. CIBC World Markets has in the past provided
financial services to EMusic unrelated to the proposed merger, including having
acted as lead managing underwriter for a secondary offering of EMusic common
stock, for which services CIBC World Markets has received compensation. In the
ordinary course of business, CIBC World Markets and its affiliates may actively
trade the securities of EMusic for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.

EMusic has agreed to pay CIBC World Markets for its services upon completion of
the merger an aggregate financial advisory fee equal to 1.25% of the total
consideration payable, including liabilities assumed, in the merger. In
addition, EMusic has agreed to reimburse CIBC World Markets for its reasonable
out-of-pocket expenses, including reasonable fees and expenses of its legal
counsel, and to indemnify CIBC World Markets and related parties against
liabilities, including liabilities under the federal securities laws, relating
to, or arising out of, its engagement.

Recommendation of the Tunes Board of Directors and Tunes' Reasons for the
Merger

The Tunes board of directors has unanimously determined that the merger is
advisable and fair to and in the best interests of Tunes and Tunes'
stockholders. Accordingly, the Tunes board of directors has unanimously
approved the merger agreement and unanimously recommends that Tunes
stockholders vote FOR the adoption of the merger agreement and the transactions
contemplated by that agreement, including the merger.

The Tunes board considered the proposed merger at a special board meeting held
on November 28, 1999 and unanimously approved the merger agreement and the
merger at such meeting. At the November 28th meeting, the Tunes board
determined that the merger, the merger agreement and the transactions
contemplated by the merger agreement are fair to and in the best interests of
Tunes and its stockholders.

In arriving at its decision to approve the merger agreement and the merger, the
Tunes board considered a number of factors. In particular, the Tunes board
considered:

. the strategic benefits expected from the merger, and the anticipated
effect of the merger on long-term stockholder value, in light of the
business, financial condition, results of operations and prospects of
Tunes and EMusic, the current economic and industry environment, and the
risks and uncertainties of proceeding as a separate stand-alone company;

. the complementary characteristics of the respective business and
management philosophies and corporate cultures of Tunes and EMusic;

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<PAGE>

. the potential for reduced stockholder risk after the merger as a result
of the diversification of product and service offerings and revenue
bases;

. the fairness to Tunes of the terms and conditions of the merger
agreement, which were the product of extensive arm's length negotiations;

. the opinion of SG Cowen Securities Corporation that the exchange ratio
was fair to the holders of Tunes common stock, taken as a whole, as of
the date of the opinion, from a financial point of view; and

. the fact that the merger is expected to qualify as a tax-free
reorganization, generally enabling Tunes stockholders to exchange their
Tunes common stock for EMusic common stock without having current taxes
due.

In assessing the merger, the Tunes board considered a number of sources of
information, including:

. Securities and Exchange Commission filings by EMusic;

. current and historical market prices, volatility and trading data for
EMusic;

. information and advice based on the results of due diligence
investigations by members of Tunes' management and Tunes' legal,
financial and accounting advisors concerning the business, technology,
products, operations, properties, assets, financial condition, operating
results and prospects of EMusic, trends in EMusic's business and
financial results and the capabilities of EMusic's management team;

. publicly available financial data for companies comparable to EMusic and
the financial presentation of SG Cowen Securities Corporation; and

. reports from management relating to the prospects for successful
integration of the two companies.

The Tunes board also identified and considered a number of uncertainties and
risks in its deliberations concerning the merger, including, but not limited
to:

. the risk that the potential benefits sought in the merger might not be
fully realized, if at all;

. the potential effects of the public announcement of the merger on Tunes'
sales, customer relations and operating results and Tunes' ability to
attract and retain key management, salespeople and other technical and
non-technical personnel; and

. the other risks associated with the businesses of Tunes and EMusic and
the merger described under "Risk Factors" in this proxy
statement/prospectus.

The Tunes board believed that certain of these risks were unlikely to have a
significant impact on the combined company, while others could be avoided or
mitigated by Tunes or by EMusic, and that, overall, the risks associated with
the merger were outweighed by the potential benefits of the merger.

The above discussion of the information and factors considered by the Tunes
board is not intended to be exhaustive but is believed to include all
significant factors considered by it. In view of the variety of factors
considered in connection with its evaluation of the merger, the Tunes board did
not find it practicable to and did not quantify or otherwise assign relative or
specific weight to the factors considered in reaching its determination. In
addition, individual members of the Tunes board may have given different weight
to different factors.

The Tunes board of directors is unanimous in its recommendation that Tunes
stockholders vote FOR approval and adoption of the merger agreement. For a
discussion of the interests of certain executive officers and directors of
Tunes in the merger, see "-- Interests of Tunes' Management in the Merger and
Potential Conflicts of Interests."

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<PAGE>

Opinion of Tunes' Financial Advisor

Pursuant to an engagement letter dated November 16, 1999, Tunes retained SG
Cowen Securities Corporation to act as the exclusive financial advisor to Tunes
in connection with the merger.

On November 28, 1999, SG Cowen delivered certain of its written analyses and
its oral opinion to the Tunes board, subsequently confirmed in writing as of
November 29, 1999, to the effect that and subject to the various assumptions
set forth therein, as of November 29, 1999, the exchange ratio in the merger
was fair, from a financial point of view, to the stockholders of Tunes, taken
as a whole, other than EMusic and its affiliates. The
full text of the written opinion of SG Cowen, dated November 29, 1999, is
attached as Appendix E and is incorporated by reference. Holders of Tunes
common stock are urged to read the opinion in its entirety for the assumptions
made, procedures followed, other matters considered and limits of the review by
SG Cowen. The summary of the written opinion of SG Cowen set forth herein is
qualified in its entirety by reference to the full text of such opinion. SG
Cowen's analyses and opinion were prepared for and addressed to the Tunes board
of directors and are directed only to the fairness, from a financial point of
view, of the exchange ratio in the merger, and do not constitute an opinion as
to the merits of the transaction or a recommendation to any stockholder as to
how to vote on the merger agreement. The exchange ratio in the transaction was
determined through negotiations between Tunes and EMusic and not pursuant to
recommendations of SG Cowen.

In arriving at its opinion, SG Cowen reviewed and considered such financial and
other matters as it deemed relevant, including, among other things:

. a draft of the merger agreement, dated as of November 22, 1999;

. audited financial statements of EMusic for the fiscal years ended June
30, 1997, 1998, and 1999, unaudited financial statements of EMusic for
the first fiscal quarter ended September 30, 1999 and certain other
relevant financial and operating data prepared by EMusic;

. audited financial statements of Tunes for the fiscal years ended December
31, 1997 and 1998, unaudited financial statements of Tunes for the nine
months ended September 30, 1999 and certain other relevant financial and
operating data prepared by Tunes;

. certain publicly available information for EMusic, including EMusic's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999;

. certain publicly available information for Tunes, including the
Registration Statement on Form S-1, dated June 14, 1999, and all
amendments thereto;

. financial projections provided in currently available analyst reports for
EMusic;

. certain internal financial analyses, financial forecasts, reports and
other information concerning each of EMusic and Tunes prepared by the
management of EMusic and Tunes, respectively;

. discussions SG Cowen has had with certain members of the management of
each of EMusic and Tunes concerning the historical and current business
operations, financial conditions and prospects of EMusic and Tunes,
respectively, and such other matters we deemed relevant;

. the reported price and trading history of the shares of EMusic common
stock;

. the respective financial conditions of Tunes and EMusic as compared to
the financial conditions of certain other companies SG Cowen deemed
relevant;

. certain financial terms of the Merger as compared to the financial terms
of certain selected business combinations SG Cowen deemed relevant;

. based on the forecasts provided by the management of Tunes, the cash
flows generated by Tunes on a stand-alone basis to determine the present
value of the discounted cash flows;

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<PAGE>

. based on the forecasts prepared by the management of EMusic Tunes,
respectively, the potential pro forma financial effects of the merger;
and

. such other information, financial studies, analyses and investigations
and such other factors that SG Cowen deemed relevant for the purposes of
this opinion.

In conducting its review and arriving at its opinion, SG Cowen, with Tunes'
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to it
by Tunes and EMusic or which was publicly available, and SG Cowen did not
undertake any responsibility for the accuracy, completeness or reasonableness
of, or independently to verify, this information. In addition, SG Cowen did not
conduct any physical inspection of the properties or facilities of Tunes or
EMusic. SG Cowen further relied upon the assurance of Tunes' management that it
was unaware of any facts that would make the information provided to SG Cowen
incomplete or misleading in any respect. SG Cowen, with Tunes' consent, assumed
that the financial forecasts provided to SG Cowen by the management of Tunes
and EMusic were reasonably prepared by the management of Tunes and EMusic,
respectively, and reflected the best currently available estimates and good
faith judgments of such management as to the future performance of Tunes and
EMusic, respectively. Management of each of Tunes and EMusic confirmed to SG
Cowen, and SG Cowen assumed, with Tunes' consent, that each of the financial
forecasts provided by Tunes and EMusic and the analyst projections with respect
to EMusic provided a reasonable basis for its opinion.

SG Cowen did not make or obtain any independent evaluations, valuations or
appraisals of the assets or liabilities of Tunes or EMusic, nor was SG Cowen
furnished with these materials. With respect to all legal matters relating to
Tunes and EMusic, SG Cowen relied on the advice of legal counsel to Tunes. SG
Cowen assumed, with Tunes' consent, that each share of preferred stock of Tunes
would be converted into common stock of Tunes immediately prior to the
effective time of the merger. SG Cowen did not express any opinion as to the
terms of such conversion, or the effects of any preference.

SG Cowen's opinion was necessarily based upon economic and market conditions
and other circumstances as they existed and could be evaluated by SG Cowen on
the date of its opinion. It should be understood that although subsequent
developments may affect its opinion, SG Cowen does not have any obligation to
update, revise or reaffirm its opinion and SG Cowen expressly disclaims any
responsibility to do so. Additionally, SG Cowen was not authorized or requested
to, and did not, solicit alternative offers for Tunes or its assets, nor did SG
Cowen investigate any other alternative transactions that may be available to
Tunes.

In rendering its opinion, SG Cowen assumed, in all respects material to its
analysis, that the representations and warranties of each party contained in
the merger agreement are true and correct, that each party will perform all of
the covenants and agreements required to be performed by it under the merger
agreement and that all conditions to the consummation of the merger will be
satisfied without waiver thereof. SG Cowen assumed that the final form of the
merger agreement would be substantially similar to the last draft reviewed by
SG Cowen prior to rendering its opinion. SG Cowen also assumed that all
governmental, regulatory and other consents and approvals contemplated by the
merger agreement would be obtained and that, in the course of obtaining any of
those consents, no restrictions would be imposed or waivers made that would
have an adverse effect on the contemplated benefits of the merger. Tunes
informed SG Cowen, and SG Cowen assumed, that the merger (i) will be recorded
as a purchase under generally accepted accounting principles and (ii) will be
treated as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended.

SG Cowen's opinion does not constitute a recommendation to any stockholder as
to how the stockholder should vote with respect to the merger or to take any
other action in connection with merger or otherwise. SG Cowen does not express
an opinion as to what the value of EMusic common stock will be when issued to
Tunes' stockholders nor as to the fairness of the exchange ratio as it relates
to any individual stockholders. SG Cowen does not express an opinion as to what
the future price, trading range or value of EMusic common stock will be
following the merger or as to the effects, financial or otherwise, of any of
the restrictions on transfer imposed on the EMusic common stock pursuant to the
merger agreement. SG Cowen was not requested to opine as to, and its opinion
does not address, Tunes' underlying business decision to effect the merger.

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<PAGE>

The following is a summary of the principal financial analyses performed by SG
Cowen to arrive at its opinion. Some of the summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of the financial analyses. SG Cowen performed
certain procedures, including each of the financial analyses described below,
and reviewed with the management of Tunes the assumptions on which such
analyses were based and other
factors, including the historical and projected financial results of Tunes and
EMusic. No limitations were imposed by the Tunes board of directors with
respect to the investigations made or procedures followed by SG Cowen in
rendering its opinion.

Analysis of Certain Transactions. SG Cowen reviewed the financial terms, to the
extent publicly available, of six transactions (the "Internet Information
Provider Transactions") involving the acquisition of companies in the internet
information provider industry, which were announced or completed since August
1, 1998. These transactions were (listed as acquiror/target):

. Multex.com, Inc./Market Guide Inc.

. MarketWatch.com, Inc./BigCharts Inc.

. America Online Inc./MovieFone, Inc.

. Cdnow, Inc./N2K Inc.

. Lycos Inc./Wired Ventures, Inc.

. Lycos Inc./WhoWhere?, Inc.

SG Cowen reviewed the market values of the common stock paid in the selected
transactions as multiples of the latest reported twelve months of revenues.

The following table presents certain ratios of the market value of the common
stock paid in the selected transaction to the latest reported twelve months of
revenues. The information for the multiple implied by the exchange ratio in the
merger for Tunes in the table is based on the closing price of EMusic common
stock on November 24, 1999.

<TABLE>
<CAPTION>
Multiple
Implied by
Multiples for Selected Exchange
Transactions Ratio in the
----------------------- merger for
Low Mean Median High Tunes
---- ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
Ratio of Value of Common Stock to
Latest Reported Twelve Months of
Revenues........................... 3.4x 20.8x 16.2x 55.5x 36.3x
</TABLE>

Although the selected transactions were used for comparison purposes, none of
those transactions is directly comparable to the merger, and none of the
companies in those transactions is directly comparable to Tunes or EMusic.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical, but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the acquisition value of such companies or Tunes to which they are being
compared.

Analysis of Certain Publicly Traded Companies for Tunes. To provide contextual
data and comparative market information, SG Cowen compared selected historical
operating and financial data and ratios for Tunes to the corresponding
financial data and ratios of certain other selected companies whose securities
are publicly

54
<PAGE>

traded and which SG Cowen believes have operating, market valuation and trading
valuations similar to what might be expected of Tunes. These companies were:

. CNET, Inc.

. About.com, Inc.

. SportsLine.com, Inc.

. StarMedia Network, Inc.

. iVillage Inc.

. drkoop.com, Inc.

. theglobe.com, Inc.

. Hoover's Inc.

. Launch Media, Inc.

The data and ratios included the enterprise value, calculated as the market
capitalization of the companies' equity plus total debt, minus cash and cash
equivalents, of these selected companies as multiples of the last reported
quarter's revenues annualized, and calendar year 1999 and 2000 projected
revenues. SG Cowen also examined the historical and projected revenue growth
rates of each of these selected companies over certain periods, more
specifically the third calendar quarter of 1999 over the third calendar quarter
of 1998, the third calendar quarter of 1999 over the second calendar quarter of
1999, the projected calendar year 1999 over the actual calendar year 1998, and
the projected calendar year 2000 over the projected calendar year 1999 (in each
case, as available from research analyst reports). SG Cowen also examined the
gross margin of each of these companies returned for the third calendar quarter
of 1999.

The following table presents, for the periods indicated, certain ratios of
enterprise value to the last reported quarter's revenues annualized and
projected revenues for calendar year 1999 and 2000, as well as the revenue
growth rates for the third calendar quarter of 1999 over the third calendar
quarter of 1998, the third calendar quarter of 1999 over the second calendar
quarter of 1999, the projected calendar year 1999 over the actual calendar year
1998, and the projected calendar year 2000 over the projected calendar year
1999, and the gross margin for the third calendar quarter of 1999. The
information for the multiple implied by the exchange ratio in the merger for
Tunes in the table is based on the closing stock price of EMusic stock on
November 24, 1999.

<TABLE>
<CAPTION>
Multiple
Implied by
Tunes Selected Exchange
Company Multiples Ratio in the
---------------------- merger for
Low Mean Median High Tunes
--- ---- ------ ---- ------------
<S> <C> <C> <C> <C> <C>
Enterprise Value as a Ratio of:
Last Reported Quarter's Revenue
Annualized.......................... 9x 33x 19x 110x 28.4x
CY1999 Projected Revenues............ 13 42 33 143 28.6
CY2000 Projected Revenues............ 5 18 10 59 9.9
Revenue Growth:
CY99 Q3 / CY98 Q3.................... 90% 225% 182% 667% 124%
CY99 Q3 / CY99 Q2.................... 11 56 32 186 28
CY99E / CY98A........................ 61 234 213 410 108
CY00E / CY99E........................ 46 139 135 291 190
CQ3 Gross Margin...................... 45 65 56 100 15
</TABLE>

Although these selected companies were used for comparison purposes, none of
those companies is directly comparable to Tunes. Accordingly, an analysis of
the results of such a comparison is not purely mathematical,

55
<PAGE>

but instead involves complex considerations and judgments concerning
differences in historical and projected financial and operating characteristics
of these selected companies and other factors that could affect the public
trading value of these selected companies or Tunes to which they are being
compared.

Analysis of Certain Publicly Traded Companies for EMusic. To provide contextual
data and comparative market information, SG Cowen compared selected historical
operating and financial data and ratios for EMusic to the corresponding
financial data and ratios of certain other selected companies whose securities
are publicly traded and which SG Cowen believes have operating, market
valuation and trading valuations similar to what might be expected of EMusic.
These companies were:

. RealNetworks, Inc.

. MP3.com, Inc.

. Liquid Audio, Inc.

. Cdnow, Inc.

. Musicmaker.com, Inc.

The data and ratios included the enterprise value of these companies as
multiples of the last reported quarter's revenue annualized and calendar year
1999 and 2000 projected revenues. SG Cowen also examined the historical and
projected revenue growth rates of these companies over certain periods, more
specifically the third calendar quarter of 1999 over the third calendar quarter
of 1998, the third calendar quarter of 1999 over the second calendar quarter of
1999, the projected calendar year 1999 over the actual calendar year 1998, and
the projected calendar year 2000 over the projected calendar year 1999 (in each
case, as available from research analyst reports). SG Cowen also examined the
gross margin of each of these companies returned for the third calendar quarter
of 1999.

The following table presents, for the periods indicated, certain ratios of
enterprise value to the last reported quarter's revenue annualized and
projected revenues for calendar year 1999 and 2000, as well as the revenue
growth rates for the third calendar quarter of 1999 over the third calendar
quarter of 1998, the third calendar quarter of 1999 over the second calendar
quarter of 1999, the projected calendar year 1999 over the actual calendar year
1998, and the projected calendar year 2000 over the projected calendar year
1999, and the gross margin for the third calendar quarter of 1999. The
information in the table is based on the closing stock price of EMusic stock on
November 24, 1999.

<TABLE>
<CAPTION>
EMusic Selected Company
Multiples
-------------------------
Low Mean Median High EMusic
---- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Enterprise Value as a Ratio of:
Last Reported Quarter's Revenue
Annualized ............................ 3x 131x 96x 167x 612x
CY1999 Projected Revenues............... 3 98 106 159 710
CY2000 Projected Revenues............... 2 34 37 79 42
Revenue Growth:
CY99 Q3 / CY98 Q3....................... 78% 635% 164% 1,471% 1,400%
CY99 Q3 / CY99 Q2....................... 6 116 113 297 253
CY99E / CY98A........................... 78 1,024 170 3,407 3,000
CY00E / CY99E........................... 34 352 206 1,101 1,602
CQ3 Gross Margin......................... (306) (14) 58 83 86
</TABLE>

Although these selected companies were used for comparison purposes, none of
those companies is directly comparable to EMusic. Accordingly, an analysis of
the results of such a comparison is not purely mathematical, but instead
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of these
selected companies and other factors that could affect the public trading value
of these selected companies or EMusic to which they are being compared.

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<PAGE>

Pro Forma Ownership Analysis. SG Cowen analyzed the pro forma ownership in the
combined company by the holders of Tunes and noted that holders of Tunes common
stock would own approximately 21.9% of the combined company, based on the
exchange ratio.

Discounted Cash Flow Analysis. SG Cowen estimated a range of values for Tunes
common stock based upon the discounted present value of the projected after-tax
cash flows of Tunes described in the financial forecasts provided by management
of Tunes for the fiscal years ended December 31, 1999 through December 31,
2004, and of the terminal value of Tunes at December 31, 2004, based upon a
perpetual growth rate of EBITDA. After-tax cash flow was calculated by taking
projected EBIT and subtracting from this amount projected taxes, capital
expenditures, changes in working capital and changes in other assets and
liabilities and adding back projected depreciation and amortization. This
analysis was based upon certain assumptions described by, projections supplied
by and discussions held with the management of Tunes. In performing this
analysis, SG Cowen utilized discount rates ranging from 17.5% to 19.5%, which
were selected based on the estimated industry weighted average cost of capital.
SG Cowen utilized perpetual growth rate of EBITDA ranging from 9.0% to 11.0%,
these percentages representing the general range of perpetual growth of EBITDA
for those companies selected in comparison to Tunes.

Utilizing this methodology, the present value of equity of Tunes ranged from
$68 million to $128 million, based on the financial forecasts. Because of the
limited number of years for which projected financial information for Tunes was
provided by Tunes, and because the discounted terminal value accounted for such
a high percentage of the discounted present value of Tunes, SG Cowen did not
ascribe significance to this analysis in reaching its opinion.

The summary set forth above does not purport to be a complete description of
all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. SG Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above, SG
Cowen believes, and has advised the Tunes board, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, SG Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Tunes and EMusic. These analyses performed by SG
Cowen are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors. None of Tunes, EMusic, SG
Cowen or any other person assumes responsibility if future results are
materially different from those projected. The analyses supplied by SG Cowen
and its opinion were among several factors taken into consideration by the
Tunes board of directors in making its decision to enter into the merger
agreement and should not be considered as determinative of such decision.

SG Cowen was selected by the Tunes board of directors to act as exclusive
financial advisor to Tunes because SG Cowen is a nationally recognized
investment banking firm and because, as part of its investment banking
business, SG Cowen is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. SG Cowen is
providing financial services for Tunes for which it will receive customary
fees. In addition, in the ordinary course of its business, SG Cowen and its
affiliates trade the equity securities of EMusic for their own account and for
the accounts of their customers, and, accordingly, may at any time hold a long
or short position in such securities. SG Cowen

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<PAGE>

and its affiliates in the ordinary course of business have from time to time
provided, and in the future may continue to provide, commercial and investment
banking services to Tunes, including serving as a financial advisor on
potential acquisitions and as an underwriter on equity offerings, and have
received and may in the future receive fees for the rendering of such services.
In particular, SG Cowen acted as lead manager of Tunes' private placement
offering in May 1999.

Pursuant to the SG Cowen engagement letter, if the transaction is consummated,
SG Cowen will be entitled to receive a transaction fee equal to $1,000,000.
Tunes has also agreed to pay a fee of $200,000 to SG Cowen for rendering its
opinion, which fee shall be credited against any transaction fee paid.
Additionally, Tunes has agreed to reimburse SG Cowen for its out-of-pocket
expenses, including attorneys' fees, and has agreed to indemnify SG Cowen
against certain liabilities, including liabilities under the federal securities
laws. The terms of the fee arrangement with SG Cowen, which are customary in
transactions of this nature, were negotiated at arm's length between Tunes and
SG Cowen, and the Tunes board of directors was aware of the arrangement,
including the fact that a significant portion of the fee payable to SG Cowen is
contingent upon the completion of the merger.

Interests of Tunes' Management in the Merger and Potential Conflicts of
Interests

Some members of Tunes' management have interests in the merger that are in
addition to their interests as Tunes stockholders generally. The Tunes board
was aware of these interests and considered them in approving the merger
agreement.

Stock Options. All members of Tunes' management have been granted options to
purchase shares of Tunes common stock under the Tunes 1997 Stock Option Plan
and/or the Tunes 1999 Stock Option Plan. As a result of the merger, EMusic will
assume outstanding options to purchase Tunes common stock under both Tunes
stock option plans. In addition, both Tunes stock option plans provide that
vesting of all options granted under those plans will accelerate upon the
closing of the merger. This means that, subject to certain limitations, all
options held by members of Tunes' management will become fully vested and
exercisable upon the closing of the merger. EMusic has also agreed to grant all
members of Tunes' management options to purchase shares of EMusic common stock
granted under EMusic's stock option plans promptly following the closing of the
merger.

Employment Letters. At the time of the signing of the merger agreement, EMusic
presented Tunes employees with employment letters outlining the terms under
which those persons will become employees of EMusic upon the closing of the
merger. As a condition to the closing of the merger, all of Tunes' senior
employees, including Howard A. Tullman, Howard J. Katz, Stuart B. Frankel, Todd
S. Anderman, Scott P. Mitchell and Andrius V. Jonusaitis, must have signed
those employment letters. Each of these employees will commence employment with
EMusic or one of its subsidiaries on the day after the closing of the merger
and will serve in roughly the same capacities as he serves in his current
position with Tunes. Each will also be entitled to a specified annual base
salary, an option to purchase a specified number of shares of EMusic common
stock that vests over a four year period and a specified minimum annual bonus
during the first year of his employment.

Each of the employment letters provides that the employee will be an at-will
employee and either the employee or EMusic may terminate the employment
relationship at any time. EMusic has agreed, however, that it will not
terminate the employment of the employee during the six month period following
the closing of the merger except if the employee is grossly derelict in his
duties, commits fraud against EMusic, or is convicted of a felony. EMusic has
also agreed that if it terminates the employment of the employee at any time
for reasons other than the occurrence of those events, the period during which
the employee may exercise the employee's stock options granted under the Tunes
stock option plans will be extended to three years.

The employment letters further entitle each employee to severance pay equal to
12 months' base pay and minimum bonus if his employment is terminated without
cause. In addition, each employee will be entitled to receive the same
severance benefits if he terminates his employment with EMusic within 30 days
following a

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<PAGE>

reduction in his base compensation, a significant breach of the terms of his
employment letter by EMusic, or the relocation of his principal employment
location outside of the Chicago area.

In addition, as a condition to the closing of the merger, Messrs. Tullman,
Katz, Frankel, Anderman, Mitchell and Jonusaitis as well as several other key
Tunes employees must enter into non-competition agreements with EMusic. Each
non-competition agreement provides that the employee will not compete with,
solicit the employees of, or interfere with any contractual relationship with
any customer or supplier of EMusic or post-merger Tunes during the period
ending on the earlier of two years after the effective date of the merger or
one year following EMusic's termination of the employee's employment with
EMusic or post-merger Tunes.

Indemnification of Tunes' Directors and Officers. The merger agreement provides
that, after the merger, EMusic will, as currently obligated by law, bylaw, or
agreement, indemnify persons who were Tunes' directors or officers before the
merger who suffer liabilities or losses from any threatened or actual claim or
proceeding based on the merger agreement or on the fact that the person was a
Tunes director or officer.

The Merger

Once the conditions to completing the merger contained in the merger agreement
have been satisfied or waived, the merger will be completed in accordance with
Delaware law.

Closing

The closing date of the merger will take place three days after the
satisfaction or waiver of the latest to occur of the conditions to the merger
in the merger agreement. EMusic and Tunes anticipate that the merger will close
no later than February 15, 2000. However, a delay in obtaining any required
governmental approval may delay closing the merger. We cannot assure you if or
when these approvals will be obtained or that the merger will, in fact, be
completed. If the merger does not occur on or before March 28, 2000, either
EMusic or Tunes may terminate the merger agreement and its obligations to
consummate the merger unless the failure to complete the merger by that date is
due to the failure of the party seeking to terminate the merger agreement to
perform or observe its obligations in the merger agreement. See "--Conditions
to Completing the Merger" and "--Regulatory and Other Approvals Required for
the Merger."

Conversion of Tunes Stock; Treatment of Tunes Stock Options and Warrants

In the merger, Tunes stockholders will receive for each share of Tunes capital
stock that number of shares of EMusic common stock equal to 10,600,000 divided
by the number of shares of Tunes capital stock outstanding on a fully-diluted
basis (including all options, warrants or other rights to acquire shares of
Tunes capital stock) as of the effective time of the merger. While the exact
number of shares of EMusic common stock to be issued in exchange for each share
of Tunes capital stock is subject to adjustment based on the number of
outstanding shares, options and warrants at the effective time of the merger,
as of January 10, 2000, this formula would have resulted in approximately .82
shares of EMusic common stock being issued for each share of Tunes capital
stock.

Each stock option to acquire Tunes common stock granted under Tunes' stock
option plans and all warrants to purchase shares of Tunes common stock
outstanding and unexercised immediately before the merger will be converted
automatically in the merger into a stock option or warrant to purchase EMusic
common stock. In each case, the number of shares of EMusic common stock subject
to the new EMusic options or warrants will be equal to the number of shares of
EMusic common stock (rounded down to the nearest whole number) that the holder
of the Tunes option or warrant would have been entitled to receive had the
holder exercised the option or warrant in full immediately before the merger.
The applicable exercise price per share for each option or warrant will be
adjusted to a price (rounded up to the nearest whole cent) equal to the
aggregate exercise price that would have been paid had the option or warrant
been exercised immediately prior to the merger divided by the number of EMusic
shares subject to the option or warrant following the merger. The terms of

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each new EMusic option or warrant will be substantially the same as the terms
of the corresponding Tunes
option or warrant. In any event, options that are incentive stock options under
the Internal Revenue Code will be adjusted as provided by the Internal Revenue
Code.

Following the closing of the merger, EMusic will deliver to the holders of
Tunes stock options notices that describe the holders' rights under the Tunes
stock plans and confirmation that the terms of the agreements evidencing the
grants of the options continue subject to the adjustments described above.
EMusic will also deliver to the holder of each outstanding Tunes warrant a
notice confirming the adjusted terms of that warrant.

Exchange of Certificates; Fractional Shares

Following the merger, EMusic will mail to each Tunes stockholder a transmittal
letter. The transmittal letter will contain instructions with respect to the
surrender of certificates representing Tunes capital stock. Upon the surrender
of certificates representing Tunes capital stock in accordance with the
instructions in the transmittal letter, each Tunes stockholder will receive a
certificate representing the shares of EMusic common stock issuable with
respect to those shares of Tunes capital stock. Tunes stockholders will also
receive cash instead of any fractional shares that would otherwise be issued in
exchange for their outstanding shares of Tunes capital stock. The amount of
cash (rounded to the nearest whole cent) that each Tunes stockholder will
receive instead of a fractional share will be equal to the fraction of a EMusic
share that the stockholder would otherwise receive multiplied by the average of
the last reported sales price for EMusic common stock as reported on the Nasdaq
National Market for the 20 most recent days that EMusic common stock is traded
immediately before the effective date of the merger.

Tunes stockholders should not return Tunes stock certificates with the enclosed
proxy and should not forward their certificates to EMusic unless and until they
receive a letter of transmittal following the merger.

EMusic will pay former Tunes stockholders dividends or other distributions
declared on EMusic common stock only after the merger has occurred and after
Tunes stockholders have surrendered their certificates representing Tunes
capital stock.

If a certificate for Tunes capital stock has been lost, stolen or destroyed,
EMusic will issue shares of EMusic common stock and any cash instead of a
fractional share to the holder of those shares of Tunes capital stock only
after the stockholder has delivered to EMusic an affidavit as to such loss,
theft or destruction and as to the stockholder's ownership of the certificate.
EMusic may require the stockholder to post a customary bond in such amount as
EMusic may determine is reasonably satisfactory as indemnity against any claim
that may be made against EMusic with respect to the lost, stolen or destroyed
certificate.

Representations and Warranties

The merger agreement contains representations and warranties by EMusic and
Tunes. These include:

. due organization, existence, good standing and qualification to do
business;

. capitalization of the companies;

. due authorization and valid issuance of the outstanding securities of the
companies;

. corporate power and authority to enter into the merger agreement and
perform its obligations under the merger agreement;

. proper execution, delivery and enforceability of the merger agreement and
all other documents required to be delivered under the terms of the
merger agreement;

. compliance of the merger agreement with each party's charter documents,
significant agreements and applicable law;

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. each party's financial statements and, in the case of EMusic, SEC
filings;

. accuracy of the information about each party furnished to the other
and/or included in this joint proxy statement/prospectus; and

. broker's fees arising from the merger.

The merger agreement contains additional representations and warranties of
EMusic. These include:

. valid issuance of the shares of EMusic common stock to be issued to the
Tunes stockholders in the merger; and

. capitalization and operations of GNB Corporation, the EMusic subsidiary
created in connection with the merger.

The merger agreement contains additional representations and warranties of
Tunes. These include:

. payment of taxes and filing of tax returns;

. absence of undisclosed significant and negative changes in its business;

. absence of undisclosed liabilities;

. title to, and leases of, properties and absence of liens on properties
and assets;

. ownership of rights to music-related assets;

. payment of royalties with respect to music-related assets;

. proprietary assets and warranty claims;

. employee benefit plans;

. bank accounts and receivables;

. scheduled contracts and commitments;

. absence of existing defaults under its significant agreements;

. compliance with applicable laws;

. labor and employment matters;

. transactions with affiliates;

. independent contractors and consultants;

. insurance;

. absence of legal proceedings and injunctions;

. subsidiaries;

. compliance with environmental laws; and

. accuracy of corporate documents.

Conduct of Business Before the Merger

Each of EMusic and Tunes has agreed to do certain things before the merger
occurs. Tunes has agreed to:

. conduct its business and maintain its business relationships in the
ordinary course;

. allow EMusic and its representatives free access to all information about
itself as EMusic reasonably requests;

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. fulfill or terminate to the satisfaction of EMusic any obligation of
Tunes to issue stock, warrants or options to Tunes employees; and

. submit the merger agreement and related matters to Tunes stockholders for
their consideration and approval and recommend such approval to the Tunes
stockholders.

EMusic and Tunes have also agreed to:

. promptly tell the other party about any events or circumstances that
would cause any representations or warranties to not be true or any
obligations not to have been fulfilled;

. cooperate with each other and use all reasonable efforts to make all
filings, and obtain consents and approvals of all governmental
authorities, necessary to complete the merger;

. obtain all consents and authorizations of third parties, and make all
filings with and give notices to third parties, necessary to complete the
merger;

. call meetings of their stockholders to approve the merger and solicit
proxies in favor of the merger;

. use their best efforts to cause the merger to be treated as a tax-free
reorganization; and

. use their best efforts to satisfy or cause to be satisfied all conditions
precedent to the merger.

Unless the merger agreement permits, or except as consented to by EMusic in
writing or as provided for in the merger agreement, Tunes has agreed for itself
and on behalf of its subsidiaries not to:

. borrow any money in excess of $25,000;

. incur any liability other than in the ordinary and usual course of its
business;

. encumber or permit to be encumbered any of its assets except in the
ordinary course of its business;

. dispose of any of its assets, except inventory in the regular and
ordinary course of business;

. enter into any lease or contract for the purchase or sale of any
significant real or personal property, except for inventory purchased in
the ordinary course of business;

. fail to maintain its equipment and other assets in good working condition
and repair;

. pay or authorize any bonus, increased salary, or other special
compensation to any Tunes officer or employee, including any amounts for
accrued but unpaid salary or bonuses;

. enter into any agreement for the acquisition or license of any
significant music-related asset;

. adopt or change any accounting methods;

. declare, set aside or pay any cash or stock dividend or other
distribution with respect to its capital stock;

. redeem or otherwise acquire any of its capital stock;

. amend or terminate any significant contract, agreement or license;

. enter into any other significant contract;

. loan any amount to any person or entity, or guarantee any obligation of
any person or entity;

. waive or release any right or claim;

. issue or sell any shares of its capital stock;

. issue or create any warrants, obligations, subscriptions, options,
convertible securities, or other commitments to issue shares of capital
stock or amend the terms of any existing warrant, option or other
commitment to issue shares of capital stock;

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. split or combine the outstanding shares of its capital stock or enter
into any recapitalization of its outstanding shares of its capital stock;

. merge, consolidate or reorganize with any entity;

. license all or a significant portion of its assets;

. amend any of its charter documents; or

. take any action or omit to take any action that would have the effect of
increasing the tax liability of Tunes or EMusic.

The merger agreement restricts Tunes' ability to discuss or negotiate proposals
for certain significant transactions with anyone other than EMusic. These
provisions require Tunes not to have or continue discussions with anyone else
for any third-party acquisition transaction.

We use the term third-party acquisition transaction to mean any of the
following:

. the acquisition of Tunes by anyone other than EMusic;

. the sale of any substantial portion of Tunes' assets to anyone other than
EMusic; and

. the sale of shares of Tunes common stock (other than issuances of stock
or options to Tunes employees in the ordinary course of business);

Tunes has agreed that it will:

. not discuss or enter into any agreement concerning any third-party
acquisition transaction;

. terminate or suspend any discussions concerning any third-party
acquisition transaction in progress on the date that the merger agreement
was signed; and

. notify EMusic if Tunes receives any proposal for a third-party
acquisition transaction, or any request for nonpublic information in
connection with a third-party acquisition transaction, including the
transaction's key terms and conditions and the identity of the third-
party.

EMusic has agreed that it will:

. file a registration statement for EMusic's shares issuable upon exercise
of its assumed stock options;

. grant to Tunes employees options to purchase an aggregate of 500,000
shares of EMusic common stock;

. use reasonable efforts to provide each employee of EMusic, who was
previously an employee of Tunes, full credit for services performed for
Tunes for employee benefits purposes;

. to the extent permitted by any EMusic employee benefit plan, use
reasonable efforts to waive all limitations as to preexisting conditions,
exclusions and waiting periods with respect to coverage of Tunes
employees under those benefit plans and to provide each Tunes employee
with credit for any co-payments or deductibles paid prior to the
effective time of the merger;

. permit one person designated by the holders of a majority of Tunes
capital stock to attend all meetings of the EMusic board of directors in
a non-voting observer capacity during the 12-month period following the
effective date of the merger;

. upon the effective date of the merger, take all actions necessary to
appoint a representative of Tunes who is reasonably acceptable to Tunes
to the EMusic board of directors; and

. lend Tunes $3,000,000 to be repaid to EMusic, along with interest at the
annual rate of two percent above the prime lending rate, upon the earlier
of the effective date of the merger and November 29, 2000, which loan is
expected to be completed on or about January 10, 2000.

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Conditions to Completing the Merger

Tunes will not be required to complete the merger unless:

. EMusic's representations and warranties in the merger agreement are true
on the date of the merger;

. EMusic has performed each of its covenants to be performed before the
merger;

. there is no litigation pending and no litigation has been threatened
against EMusic for the purpose or with the probable effect of preventing
the completion of the merger or that would have a significant adverse
effect on EMusic after the completion of the merger;

. the EMusic board of directors and EMusic stockholders have approved the
merger agreement;

. there have been no events, changes or effects, individually or in the
aggregate, having a significant adverse effect on EMusic;

. EMusic and Tunes have received all governmental approvals or other
requirements necessary to complete the merger;

. Tunes shall have received a legal opinion of Gray Cary Ware & Freidenrich
LLP, EMusic's legal counsel in the merger;

. the EMusic stockholders have approved the issuance of shares of EMusic
common stock to the Tunes stockholders by the minimum vote required under
the rules of the National Association of Securities Dealers, Inc.; and

. the registration statement containing this joint proxy
statement/prospectus has become effective and is not subject to any stop
order or proceedings seeking a stop order by the SEC.

EMusic will not be required to complete the merger unless:

. Tunes' representations and warranties contained in the merger agreement
are true on the date of the merger;

. Tunes has performed each of its covenants to be performed before the
merger;

. there is no litigation pending and no litigation has been threatened
against Tunes for the purpose or with the probable effect of preventing
the completion of the merger or that would have a significant adverse
effect on Tunes after the completion of the merger;

. the Tunes board of directors and the Tunes stockholders holding not less
than 95 percent of the outstanding shares of Tunes capital stock have
approved the merger agreement;

. there have been no events, changes or effects, individually or in the
aggregate, having a material adverse effect on Tunes;

. Tunes shall have obtained all necessary consents and waivers to continue
all Tunes significant contracts and leases in full force and effect
following the merger;

. Tunes shall have obtained approvals and consents of Tunes stockholders to
certain matters relating to the merger;

. EMusic shall have obtained a legal opinion from Freeborn & Peters, Tunes'
legal counsel in the merger;

. EMusic and Tunes have received all governmental approvals or other
requirements necessary to complete the merger;

. all applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 have terminated or expired;

. the officers and key employees of Tunes shall have entered into non-
competition agreements and employment letters with EMusic; and

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. the registration statement containing this joint proxy
statement/prospectus has become effective and is not subject to any stop
order or proceedings seeking a stop order by the SEC.

All of the conditions to completing the merger are waivable. If any condition
is waived that is material to the stockholders of the waiving party, the party
waiving that condition will resolicit its stockholders' approval and will
recirculate this joint proxy statement/prospectus to its stockholders. EMusic
and Tunes cannot assure you that all of the conditions to completing the merger
will be satisfied or waived.

Regulatory and Other Approvals Required for the Merger

General. EMusic and Tunes have agreed to use all reasonable efforts to do all
things reasonably necessary under applicable law to complete the merger. These
things include:

. obtaining consents of all third-parties and governmental authorities
necessary or advisable to complete the merger; and

. contesting any legal action designed to prevent the merger.

Antitrust. Under the Hart-Scott-Rodino Antitrust Improvements Act, and the U.S.
Federal Trade Commission's rules, EMusic and Tunes may not complete the merger
until we have filed the required notifications with the Federal Trade
Commission or the Antitrust Division of the U.S. Department of Justice, and
have waited a specified period of time. On December 9, 1999, Tunes and EMusic
filed the notifications required under the Hart-Scott-Rodino Act, as well as
certain information required to be given to the Federal Trade Commission and
the Department of Justice. Tunes and EMusic have received notice from the
Federal Trade Commission that early termination of the waiting period has been
granted effective as of December 20, 1999. At any time before or after the
merger, and even if the Hart-Scott-Rodino Act waiting period has expired, the
Department of Justice, the Federal Trade Commission or any state or foreign
governmental authority could take action under the antitrust laws as it deems
necessary in the public interest. This action could include seeking to enjoin
the merger or seeking EMusic's divestiture of Tunes or EMusic's divestiture of
its or Tunes' businesses. Private parties may also seek to take legal action
under the antitrust laws under certain circumstances.

Based on information available to them, EMusic and Tunes believe that the
merger will comply with all significant federal, state and foreign antitrust
laws. However, we cannot assure you that there will not be a challenge to the
merger on antitrust grounds or that, if this kind of challenge were made, we
would prevail.

EMusic and Tunes are not aware of any other significant regulatory approvals or
actions that are required for the merger. If any additional governmental
approvals or actions are required, we intend to obtain them. We cannot assure
you, however, that we will be able to obtain any additional approvals or
actions.

Waiver and Amendment of the Merger Agreement

At any time before the merger, EMusic and Tunes may agree to waive the other's
compliance with any of the agreements or conditions in the merger agreement.
The merger agreement also may be changed by us at any time before or after the
Tunes stockholders and the EMusic stockholders approve the merger. Any change
which by law requires the approval of the Tunes stockholders or the EMusic
stockholders will, however, require their subsequent approval to be effective.

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Termination of the Merger Agreement

Termination. The merger agreement may be terminated and the merger abandoned at
any time before completing the merger, whether or not approved by Tunes
stockholders and/or EMusic stockholders. This termination may occur in the
following ways:

. EMusic and Tunes agree in writing to terminate it; or

. EMusic or Tunes decides to terminate it because:

1. the other party fails to fulfill its obligations under the merger
agreement and that failure is not remedied within 30 days; or

2. the merger is not completed by March 28, 2000, unless the failure to
complete it by that date is due to the failure of the party seeking
to terminate the merger agreement to perform its agreements in the
merger agreement.

Effect of Termination. Even after the merger agreement has been terminated, its
confidentiality and fees and expenses provisions will remain in effect. In the
event that the merger agreement is terminated, we have each agreed to pay our
own fees and expenses incurred in connection with the merger agreement.

Material Federal Income Tax Consequences

The following discussion addresses the material federal income tax
considerations of the merger that are generally applicable to Tunes
stockholders who are exchanging their Tunes capital stock for EMusic common
stock pursuant to the merger. The following discussion does not deal with all
federal income tax considerations that may be relevant to particular Tunes
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, banks, insurance companies, foreign persons, or
tax-exempt organizations. This discussion also does not apply to stockholders
who are subject to alternative minimum tax, hold their shares as part of a
hedge, straddle or other risk reduction transaction or acquired their Tunes
capital stock through stock option or stock purchase programs or otherwise as
compensation. In addition, it does not address the tax consequences of the
merger under foreign, state or local tax laws or tax consequences of
transactions completed before or after the merger, such as the exercise of
options or rights to purchase Tunes capital stock in anticipation of the
merger.

Tunes stockholders are urged to consult their own tax advisors regarding the
tax consequences to them of the merger based on their own circumstances,
including the applicable federal, state, local and foreign tax consequences to
them of the merger.

The following discussion is based on the Internal Revenue Code, applicable
Treasury Regulations, judicial decisions and administrative rulings and
practice, all as of the date of this proxy statement/prospectus, all of which
are subject to change. Any such changes could be applied retroactively and
could affect the accuracy of the statements and conclusions in this discussion
and the tax consequences of the merger to EMusic, Tunes and/or their
stockholders.

Neither EMusic nor Tunes has requested or will request a ruling from the
Internal Revenue Service with regard to any of the tax consequences of the
merger. In addition, neither EMusic nor Tunes will receive an opinion of its
counsel with regard to the tax consequences of the merger.

If the merger constitutes a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code as discussed above, and subject to the limitations
and qualifications referred to in this discussion, the following U.S. federal
income tax consequences will result from the merger:

. no gain or loss will be recognized by a Tunes stockholder upon the
receipt of EMusic common stock solely in exchange for Tunes capital stock
in the merger, except for gain or loss arising from the receipt of cash
in lieu of a fractional share as discussed below;

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. the aggregate tax basis of the EMusic common stock received by a Tunes
stockholder in the merger, including any fractional share of EMusic
common stock for which cash is received and the EMusic common stock held
in the escrow account, will be the same as the aggregate tax basis of the
Tunes capital stock exchanged for the EMusic stock;

. the holding period of the EMusic common stock received by each Tunes
stockholder in the merger will include the period for which the Tunes
capital stock exchanged therefor was considered to be held, provided that
such Tunes capital stock was held as a capital asset at the time of the
merger;

. a Tunes stockholder receiving cash instead of a fractional share of
EMusic common stock will generally recognize gain or loss equal to the
difference between the amount of cash received and the stockholder's
basis in the fractional share; and

. neither EMusic nor Tunes will recognize gain or loss solely as a result
of the merger.

If the Internal Revenue Service successfully challenges the treatment of the
merger as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, Tunes stockholders must recognize gain or loss with respect to
each share of Tunes capital stock surrendered in the merger in an amount equal
to the difference between the tax basis in the share and the fair market value
of the EMusic common stock received in exchange for the Tunes share. In such
event, a Tunes stockholder's aggregate basis in the EMusic common stock
received in the merger would equal its fair market value, and the stockholder's
holding period for the stock would begin the day after the merger.

With respect to cash payments received by a Tunes stockholder in lieu of a
fractional share of EMusic common stock, a noncorporate stockholder of Tunes
may be subject to backup withholding at a rate of 31%. However, backup
withholding will not apply to a stockholder who either (i) furnishes a correct
taxpayer identification number and certifies that he or she is not subject to
backup withholding by completing the substitute Form W-9 that will be included
as part of the transmittal letter, or (ii) otherwise proves to EMusic that the
stockholder is exempt from backup withholding.

A Tunes stockholder who exercises dissenters' rights of appraisal with respect
to such stockholder's shares of Tunes capital stock and receives payment for
such shares in cash will generally recognize capital gain or loss (if such
shares were held as a capital asset on the closing date of the merger),
measured by the difference between the stockholder's basis in such shares and
the amount of cash received. If, however, Tunes or EMusic have current or
accumulated earnings and profits within the meaning of Section 316 of the
Internal Revenue Code and if the payment received is essentially equivalent to
a dividend and is not a substantially disproportionate redemption within the
meaning of Section 302 of the Internal Revenue Code, then such stockholder's
receipt of cash may result in recognition of ordinary income. A sale of shares
pursuant to the exercise of dissenters' rights will generally not be treated as
a dividend, regardless of whether or not Tunes or EMusic have current or
accumulated earnings and profits if, as a result of such exercise, the
stockholder exercising dissenters' rights owns no shares of EMusic common stock
(either actually or constructively within the meaning of Section 318 of the
Internal Revenue Code) after such sale.

Accounting Treatment

EMusic will account for the merger as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, EMusic will make a determination of the
fair value of Tunes' assets and liabilities in order to allocate the purchase
price to the assets acquired and the liabilities assumed. For accounting
purposes, the purchase price of the merger is estimated to be $138.9 million.
For this purchase price calculation, we used an EMusic stock price of $14.29,
which is the average of EMusic's stock price for 10 days around the merger
agreement date of November 29, 1999. We based the calculation on approximately
7.2 million Tunes shares outstanding which will be exchanged for an aggregate
of 10.6 million EMusic shares, less an aggregate of approximately 4.7 million
EMusic shares reserved for issuance upon exercise of assumed options and
warrants. We also included

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approximately $50.8 million for the value of employee stock options outstanding
and warrants outstanding and professional and financial advisors' fees of
approximately $3.9 million. The purchase price allocation will be determined
when additional information concerning asset and liability valuation is
obtained and analyzed.

Tunes Stockholders' Dissenters' Rights of Appraisal

As a corporation incorporated under Delaware law, the Delaware General
Corporation Law (the " DGCL") governs the internal legal matters of Tunes.
Section 262 of the DGCL gives each Tunes stockholder certain appraisal rights
with respect to their Tunes shares. These appraisal rights permit a stockholder
that has otherwise complied with the terms and conditions of Section 262 of the
DGCL to petition the Court of Chancery of the State of Delaware to determine
the fair value of that stockholder's Tunes shares.

In order to exercise those appraisal rights, a Tunes stockholder must strictly
comply with each applicable term, condition and requirement of Section 262 of
the DGCL. These terms, conditions and requirements include, among other things:

. a requirement that any stockholder seeking to exercise its appraisal
rights timely deliver to Tunes a written demand for the appraisal of the
stockholder's Tunes shares satisfying the requirements of Section 262(d)
of the DGCL;

. a requirement that the stockholder hold its shares of Tunes stock
continuously from the date of such demand through the effective date of
the merger,

. a requirement that the stockholder neither vote in favor of the merger or
otherwise consent to the merger in writing, and

. a requirement that the stockholder file a petition with the Court of
Chancery within 120 days of the effective date of the merger requesting a
determination of the value of the stockholder's Tunes shares.

Even if a Tunes stockholder satisfies these requirements, the stockholder may,
at any time within 60 days after the effective date of the merger, withdraw its
demand for appraisal and accept the terms offered in the merger.

In the event that a Tunes stockholder seeks to exercise its appraisal rights
and has complied with the above-mentioned requirements, Tunes must do the
following:

. At least 20 days prior to the Tunes special meeting, notify each Tunes
stockholder that appraisal rights are available for any or all Tunes
shares and attach a copy of Section 262 of the DGCL to that notice;

. Within ten days after the effective date of the merger, notify each
complying stockholder of the date that the merger became effective; and

. Upon written request of a Tunes stockholder received within 120 days
after the effective date of the merger, provide the requesting
stockholder with a written statement stating (1) the aggregate number of
shares not voted in favor of the merger and with respect to which demands
for appraisal have been received and (2) the aggregate number of holders
of such shares. Tunes must mail this statement to each requesting Tunes
stockholder within ten days of the later of the date of receipt of the
request or the date of expiration of the period for delivery of demands
for appraisal specified above.

The foregoing description of the appraisal rights afforded Tunes stockholders
under the DGCL is only a summary of the terms and conditions of those appraisal
rights and related obligations of Tunes. To fully understand their appraisal
rights, Tunes stockholders are encouraged to read Section 262 of the DGCL, a
copy of which is attached as Appendix F to this joint proxy
statement/prospectus.

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EMusic Stockholders' Dissenters' Rights of Appraisal

Under Section 262 of the DGCL, stockholders who do not vote in favor of or
consent to a merger are not entitled to appraisal rights if their stock and the
stock to be received by them in the merger is designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. Because the Nasdaq National
Market is designated as such a system and the EMusic common stock is quoted on
the Nasdaq National Market, EMusic stockholders are not entitled to appraisal
rights with respect to the merger.

Indemnity Escrow Agreement

The following describes the significant provisions of the indemnity escrow
agreement. This description of the escrow agreement does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
escrow agreement, which is attached as Appendix B to this joint proxy
statement/prospectus and is incorporated in this document by reference. All
Tunes stockholders are urged to read the escrow agreement carefully and in its
entirety.

Pursuant to the terms of the escrow agreement, EMusic will retain on a pro-rata
per stockholder basis in escrow ten percent of the shares of EMusic common
stock to be issued at the closing of the merger to holders of outstanding
shares of Tunes capital stock. The shares of EMusic common stock are reserved
for the purpose of satisfying the indemnification obligations owed to EMusic by
the Tunes stockholders. Ten business days after the one-year anniversary of the
effective date of the merger, shares of EMusic common stock that have not been
used to satisfy any resolved indemnity claims and that are not being withheld
to satisfy pending indemnity claims will be distributed to the Tunes
stockholders pro rata in accordance with the relative ownership percentage of
each stockholder.

If EMusic believes it is entitled to payment for an indemnification claim, it
must deliver written notice of that claim to the stockholder representative
containing a brief description of the facts, circumstances or events giving
rise to the claim and a good faith estimate of the losses to be incurred with
respect to that claim. Unless the stockholder representative objects within 30
days after receipt of the claim notice, EMusic will be entitled to remove from
the escrow account the number of EMusic shares estimated in the claim notice to
be necessary to satisfy that claim. Those shares will be retained by EMusic
until EMusic either determines that no liability will result of the claim, in
which case the shares will be returned to the escrow account, or submits to the
stockholder a claim invoice as described below.

Upon resolution of a claim, EMusic will deliver to the stockholder
representative an invoice setting forth the actual losses incurred by EMusic in
connection with that claim. Unless the stockholder representative objects to
the invoice amount within 30 days of receipt of the claim invoice, EMusic will
be entitled to the number of EMusic shares necessary to satisfy the amount
specified in the claim invoice. The shares of EMusic common stock in the escrow
account will be valued based on the average closing price of EMusic common
stock for the twenty trading day period prior to the completion of the merger.

If the stockholder representative timely objects to a claim notice or a claim
invoice, the matter will be resolved by binding arbitration in accordance with
the terms of the escrow agreement.

Howard A. Tullman, as stockholder representative, will not receive a fee for
his services. He may be removed by the majority vote of the Tunes stockholders.
The stockholder representative is indemnified by the Tunes stockholders for
losses and liabilities incurred without gross negligence or willful misconduct
on the part of the stockholder representative.

Tunes Stockholders' Indemnification and Liability Obligations

General. Pursuant to the terms of the merger agreement and the escrow
agreement, ten percent of the shares of EMusic common stock to be delivered by
EMusic at the closing of the merger will be deposited on a pro-

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rata per stockholder basis into an escrow account, for a period not to exceed
one year, for purposes of indemnifying EMusic. For a period of one year after
the effective time of the merger, the Tunes stockholders will jointly and
severally indemnify and hold harmless EMusic and its affiliates, for, and shall
pay to EMusic and its affiliates the amount of, any damages directly or
indirectly arising or resulting from or in connection with:

. any breach of any representation or warranty made by Tunes in the merger
agreement or in any certificate delivered by Tunes in connection with the
merger agreement;

. any breach by Tunes of any covenant or obligation of Tunes in the merger
agreement; or

. any legal proceeding relating to a breach of a representation or warranty
or covenant or obligation of Tunes.

Limitations on Indemnification. Tunes stockholders will not have liability for
indemnification unless and until the total amount of all damages with respect
to such matters, taken together, exceeds $250,000, in which case EMusic will be
entitled to indemnification for the entire amount of its damages, subject to
the limits described in the merger agreement.

Exclusive Remedy. Except with respect to breaches of Tunes' confidentiality
obligations under the merger agreement or claims for fraud or intentional
misrepresentation, the indemnification provisions of the merger agreement are
the exclusive remedy of EMusic for claims following the completion of the
merger, and the maximum liability of each Tunes stockholder is limited to the
number of shares of EMusic common stock otherwise issuable to that stockholder
but deposited into escrow pursuant to the terms of the merger agreement and the
escrow agreement.

Appointment of Representative of Tunes Stockholders

Pursuant to the terms of the merger agreement, each Tunes stockholder who votes
in favor of the merger will be deemed to have consented to the appointment of
Howard A. Tullman, Chairman and Chief Executive Officer of Tunes, as the
representative of the Tunes stockholders in connection with the indemnity
escrow agreement. See "The Merger--Indemnity Escrow Agreement." As stockholder
representative, Mr. Tullman will have the right to act on behalf of all Tunes
stockholders with respect to the escrow, including the right to waive the terms
and conditions of the escrow agreement, to authorize the release of shares of
EMusic common stock from the escrow to satisfy any indemnity claims by EMusic,
and to negotiate, enter into settlements and demand arbitration of claims by
EMusic. Mr. Tullman is also indemnified by the Tunes stockholders for losses
and liabilities incurred without gross negligence or willful misconduct.

Shareholder Voting Agreements

As a condition and inducement to EMusic entering into the merger agreement,
EMusic and Tunes entered into shareholder voting agreements with the following
stockholders of Tunes:

. Doerge-Internet, L.P.

. GS Capital Partners II, L.P.

. GS Capital Partners II Offshore, L.P.

. Goldman Sachs & Co. Verwaltungs GmbH

. Stone Street Fund 1997, L.P.

. Bridge Street Fund 1997, L.P.

. netWorth Partners I, L.L.C.

. JAMtv Venture Partners, L.L.C.

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. Heartland Internet Music, L.L.C.

. Music Convergence, L.L.C.

. Greg T. Buchholz

. Matthew S. Kaplan

. Howard A. Tullman

The following description sets forth certain significant provisions of the
shareholder voting agreements. This description does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the form of
shareholder voting agreement that is attached as Appendix C to this joint proxy
statement/prospectus and is incorporated herein by reference.

General. The shareholder voting agreements provide, among other things, that
each of the Tunes stockholders who are parties to those agreements have agreed:

. to vote all of the shares of Tunes over which the stockholder has voting
power in favor of the merger agreement and the merger and any other
transaction contemplated by the merger agreement;

. to vote all of the shares Tunes over which the stockholder has voting
power against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of Tunes in the
merger agreement;

. to vote all of the shares Tunes over which the stockholder has voting
power against the following actions: (1) any merger, consolidation or
other business combination involving Tunes with any party other than
EMusic or its affiliates; (2) any sale, lease or transfer of more than a
significant part of the assets of Tunes to any party other than EMusic or
its respective affiliates (except in the ordinary course of business);
(3) any reorganization, recapitalization, dissolution or liquidation of
Tunes; (4) any change in a majority of the board of directors of Tunes;
(5) any amendment to the certificate of incorporation of Tunes; (6) any
significant change in Tunes' capitalization or Tunes' corporate
structure; or (7) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the merger or any of the other transactions contemplated
by the merger agreement;

. to waive the stockholder's dissenters' rights of appraisal in connection
with the merger;

. to not directly or indirectly: (1) solicit, initiate, entertain,
encourage any proposals or offers from, or conduct discussions with or
engage in negotiations with any person, relating to any possible
acquisition of Tunes or any portion of its capital stock or assets or any
equity interest in Tunes, (2) provide information with respect to Tunes
to any person, other than EMusic and its affiliates or representatives,
or otherwise cooperate with, facilitate or encourage any effort or
attempt by any such person with regard to any such acquisition, (3) enter
into an agreement with any person, other than EMusic, providing for such
an acquisition or (4) make or authorize any statement, recommendation or
solicitation in support of any such acquisition other than by EMusic; and

. to grant to EMusic an irrevocable proxy to vote all of the shares of
Tunes over which the stockholder has voting power with respect to
approval of the merger agreement at any meeting of the Tunes
stockholders.

Under Delaware law, the merger agreement must be approved by the affirmative
vote of the holders of a majority of the outstanding shares of Tunes capital
stock. The merger agreement provides, however, that it is a condition to the
completion of the merger that the merger agreement be approved by the
affirmative vote of the holders of at least 95% of the outstanding shares of
Tunes capital stock. Together, the stockholders who have entered into
shareholder voting agreements beneficially own and have voting control over
approximately 59.5% of the outstanding shares of Tunes capital stock.

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Termination. The shareholder voting agreements provide that they will terminate
upon the earlier of:

. the effective time of the merger; or

. the termination of the merger agreement.

Restrictions on Resales by Affiliates

The shares of EMusic common stock issuable to Tunes stockholders in the merger
and upon exercise of outstanding Tunes stock options after the merger have been
registered under the Securities Act. Therefore, subject to the restrictions
described below applicable to all Tunes stockholders, these shares of EMusic
common stock may be traded freely and without restriction by those Tunes
stockholders and holders of Tunes stock options who are not "affiliates" of
Tunes as defined under the Securities Act. An "affiliate" of Tunes is a person
who controls, is controlled by, or is under common control with, Tunes. Any
subsequent transfer of these shares by a person who is an affiliate of Tunes at
the time the merger is voted on by the Tunes stockholders will require one of
the following:

. further registration of these shares under the Securities Act;

. compliance with Rule 145 under the Securities Act; or

. the availability of another exemption from registration under the
Securities Act.

These restrictions are expected to apply to Tunes' directors and executive
officers and the holders of 10% or more of its outstanding shares of common
stock. EMusic will give stop transfer instructions to its transfer agent and
legend certificates representing the EMusic common stock to be received by
affiliated persons.

Restrictions on Transfers by Stockholders

Pursuant to the terms of the merger agreement, Tunes stockholders, may not
during the six months following the merger, offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of EMusic common stock except to the extent such shares are
transferred as a gift or gifts, bequested or transferred to a family trust
(provided that any such case the transferee agrees in writing to be bound by
these transfer restrictions). The merger agreement explicitly provides that the
foregoing restriction preclude Tunes stockholders from engaging in any hedging
or other transaction which is designed to or reasonably expected to lead to or
result in a disposition during such six-month period. Such prohibited hedging
or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
EMusic shares or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from EMusic shares. EMusic will have the right to impose a legend on
the certificates representing the EMusic shares consistent with the foregoing
and to enter stock transfer instructions with EMusic's transfer agent against
the transfer of the EMusic shares except in compliance with this restriction.

Restrictions on Transfers by Option Holders

Pursuant to the merger agreement, EMusic has agreed to file a registration
statement on Form S-8 for the shares of EMusic common stock issuable with
respect to assumed Tunes stock options so that such registration statement will
become effective on or before the 180th day following the closing of the merger
and maintain the effectiveness of such registration statement thereafter for so
long as any of such options remain outstanding. Notwithstanding the
registration of such EMusic common stock, no person may sell or otherwise
transfer any shares of EMusic common stock issued with respect to assumed Tunes
stock options within the 180-day period commencing on the closing date of the
merger.

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MANAGEMENT AFTER THE MERGER

Boards of Directors

The only change to the EMusic board of directors following the merger is the
anticipated appointment to the EMusic board of Howard A. Tullman, the current
Chairman and Chief Executive Officer of Tunes, following the completion of the
merger.

Following the completion of the merger, the Tunes board of directors will
consist of one or more directors selected by EMusic.

Management

The composition of EMusic's management is not expected to change as a result of
the merger.

It is anticipated that all of Tunes senior employees, including Howard A.
Tullman, Howard J. Katz, Stuart B. Frankel, Todd S. Anderman, Scott P. Mitchell
and Andrius V. Jonusaitis, will remain with Tunes with responsibilities
comparable to those of their current positions as specified in their employment
letters with EMusic. Other key staff positions within Tunes post-merger have
not been finally determined. From time to time prior to the merger, decisions
may be made with respect to the management and operations of Tunes post-merger,
including its other officers and managers.

EMusic Officers and Directors

For information about the current Emusic directors and executive officers, see
"Information about EMusic--Executive Officers, Directors and Key Employees."

Information about Mr. Tullman

It is anticipated that Howard A. Tullman, the current Chairman and Chief
Executive Officer of Tunes, will be appointed to the EMusic board of directors
following the completion of the merger. Information about Mr. Tullman is set
forth below.

Biographical Information. Mr. Tullman, 54, has served as Tunes' Chairman since
February 1999, and served as Tunes' Chief Executive Officer and a director
since Tunes' June 1997 reorganization from an Illinois limited liability
company to a Delaware corporation. He also served as a manager of the limited
liability company from September 1996 to June 1997. Mr. Tullman also serves as
a director of UBID, Inc. and serves as the Chairman of the board of directors
of The Cobalt Group, Inc. From June 1993 to January 1998, Mr. Tullman served as
Chief Executive Officer of Imagination Pilots, Inc., a developer and producer
of interactive CD games and educational software. From 1990 to May 1993, Mr.
Tullman served as Chief Executive Officer of Eager Enterprises Inc., a venture
capital firm concentrating in investments in the information and computer
industries. Mr. Tullman holds a B.A. and J.D. from Northwestern University.

Summary Compensation. The following table summarizes the compensation paid by
Tunes during 1999 to Mr. Tullman:

Summary Compensation Table

<TABLE>
<CAPTION>
Long-term
compensation
awards
Annual ------------
Compensation Securities
---------------- underlying All other
Name and principal position Salary Bonus options compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Howard A. Tullman,................. $159,000 $82,500 125,000 $ --
Chairman of the Board of Directors
and Chief Executive Officer
</TABLE>

Stock Option Grants. The following table sets forth information concerning
grants of stock options during 1999 to Mr. Tullman. Tunes has never granted any
stock appreciation rights. All options granted in 1999 were

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<PAGE>

granted under Tunes' 1997 and 1999 stock option plans. In accordance with the
1997 and 1999 stock option plans, each grant had an exercise price equal to the
fair market value of our common stock on the date of grant as determined by
Tunes board of directors, and the options have a ten-year term.

<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential
Percent of Realizable Value at
Total Assumed Annual
Number of Options Rates of Stock
Securities Granted to Exercise Price Appreciation
Underlying Employees in Price for Option Term(2)
Options Fiscal Per Expiration -------------------
Name Granted Year 1998(1) Share Date 5% 10%
---- ---------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Tullman....... 125,000 16.5% $10.00 05/17/09 $786,118 $1,992,178
</TABLE>
- ------------------
(1) Based on an aggregate of 756,230 options granted to employees in 1999.

(2) This table presents the hypothetical gains or "options spreads" that would
exist for the respective options. These gains are based on assumed rates of
annual compounded stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. The SEC rules mandate the use
of 5% and 10% assumed rates of appreciation. These rates of appreciation do
not represent our estimate or projection of future increases in the price
of our common stock. Actual gains, if any, on stock option exercises and
common stock depend on the future performance of our common stock and the
overall stock market conditions. There is no assurance that we will achieve
the rates of appreciation in the table.

The following table shows the number of shares covered by both exercisable and
unexercisable stock options held by Mr. Tullman as of December 31, 1999 and the
values of these exercisable and unexercisable options. Mr. Tullman did not
exercise any stock options during 1999. The value of unexercised in-the-money
options at December 31, 1999 is based on the difference between $8.40, which
represents the fair market value of one share of common stock on December 31,
1999 as determined by Tunes' board of directors, and the exercise price for
these options. An option is in-the-money if the fair market value of the
underlying securities is greater than the exercise price of the option.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at December 31, 1999 December 31, 1999
---------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard A. Tullman....... 326,430 -- $2,195,050 $ --
</TABLE>

Employment Agreement. Tunes entered into a three-year employment agreement with
Mr. Tullman, which expires in June 2000. Mr. Tullman's current annual base
salary is $175,000. The employment agreement provides for an annual
discretionary bonus, with a target bonus of at least $25,000. The employment
agreement prohibits Mr. Tullman from competing with Tunes and soliciting Tunes'
customers and employees during the term of the employment agreement and for the
12-month period after the date of his termination. If Tunes terminates the
employment agreement, Tunes is required to make severance payments to Mr.
Tullman over a six-month period in the aggregate amount of Mr. Tullman's annual
base salary.

Related Party Transactions

Tunes has entered into a registration rights agreement with Mr. Tullman and all
purchasers of its preferred stock and several holders of its warrants.

In June 1997, Tunes entered into a stockholders' agreement with Mr. Tullman and
Tunes' then current stockholders. All other purchasers of Tunes common stock
and preferred stock have also entered into this agreement.

Tunes' lease agreement with MAC Management Co., Inc., as agent for 640 LaSalle
Partners Limited Partnership, provides Tunes with 16,238 square feet of office
space at 640 North LaSalle Street in Chicago, Illinois. The lease expires in
May 2002. Mr. Tullman is a limited partner of 640 LaSalle Partners. Currently,
Tunes' monthly lease payments are approximately $24,000 and increase
approximately 3% per year.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS

When EMusic and Tunes complete the merger, Tunes stockholders will become
EMusic stockholders.

The following is a description of the EMusic common stock to be issued in the
merger and a summary of the significant differences between the rights of
holders of EMusic common stock and Tunes common stock.

Description of EMusic Capital Stock

EMusic's 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 is subject to, and qualified in its entirety by, the provisions of
EMusic's amended and restated certificate of incorporation where such rights
are set forth in full, and the provisions of applicable law.

Common Stock. As of December 31, 1999, there were approximately 36,600,000
shares of common stock outstanding held of record by approximately 316
shareholders. The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the holders of
common stock. Subject to preferences applicable to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. In the event of a liquidation, dissolution, or winding up
of EMusic, the holders of common stock are entitled to share ratably in all
assets remaining after payment of its 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. EMusic's 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 its stockholders. The issuance of preferred stock by EMusic's 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 EMusic's
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 the completion of the merger, there
will be no shares of preferred stock outstanding, and EMusic has no current
plans to issue shares of preferred stock.

Warrants. As of December 31, 1999, EMusic had outstanding warrants to purchase
an aggregate of approximately 4,437,462 shares of its common stock. Warrants
for 100,000 shares expire in October 2003 and have an exercise price equal to
$7.10. The exercise price of these warrants is subject to certain adjustments
upon future issuances of common stock or rights to acquire common stock at a
price less than the applicable exercise price. The warrants for the remaining
shares have an average exercise price of $10.97 and expire by December 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 its acquisition of
Group K Inc. d/b/a Cductive, EMusic has agreed to file a registration statement
covering the resale of the shares issued within six months of the closing of
that acquisition.

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Effect of Delaware Anti-takeover Statute. EMusic is 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. EMusic's 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. See "Comparison of Rights of EMusic Stockholders and Tunes
Stockholders."

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

Comparison of Rights of EMusic Stockholders and Tunes Stockholders

The rights of holders of EMusic common stock are governed by Delaware law,
EMusic's amended and restated certificate of incorporation and EMusic's amended
and restated bylaws, while the rights of Tunes stockholders are governed by
Delaware law, Tunes' restated certificate of incorporation and Tunes' amended
and restated bylaws. In most respects, the rights of Tunes stockholders are
similar to those of EMusic stockholders. The

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<PAGE>

following discussion summarizes the significant differences between the
companies' charter documents. This summary is not a complete discussion of, and
is qualified by reference to, EMusic's amended and restated certificate of
incorporation, EMusic's amended and restated bylaws, Tunes' restated
certificate of incorporation, Tunes' amended and restated bylaws and Delaware
law.

Capital Stock. Tunes' restated certificate of incorporation provides that
Tunes' authorized capital stock consists of 20,000,000 shares of common stock,
$0.01 par value, and 7,000,000 shares of preferred stock, $0.01 par value. As
of December 31, 1999, there were 1,475,324 shares of Tunes common stock
outstanding held by approximately 60 stockholders of record and 5,719,962
shares of Tunes preferred stock outstanding held by approximately 95
stockholders of record. EMusic's 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.

Classified Board. The EMusic amended and restated certificate of incorporation
provides that the EMusic board of directors be divided into three classes with
staggered three-year terms. As a result, only one of the three classes of
EMusic's board of directors will be elected each year. The classification of
the EMusic 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. The Tunes restated certificate of incorporation does not provide for
a classified board, although the Tunes' board is divided into classes such that
certain holders of Tunes' Convertible Preferred Stock have the sole right to
elect certain directors. See "Comparison of Rights of EMusic Stockholders and
Tunes Stockholders--Directors."

Directors. EMusic's amended and restated certificate of incorporation provides
that EMusic's board of directors consists of five members. The board has the
exclusive right to set the authorized number of directors and to fill vacancies
on the board of directors. Subject to the rights of the holders of any series
of preferred stock then outstanding, board vacancies resulting from any
increase in the authorized number of directors or any vacancies in the board
resulting from death, resignation, removal or other cause may only be filled by
the affirmative vote of a majority of the directors then in office.

Tunes' amended and restated bylaws provide that the Tunes board of directors
consists of no fewer than three nor more than seven members. Tunes' restated
certificate of incorporation provides that the Tunes board directors shall
consist of seven members. The directors are divided into classes such that the
holders of the shares of Tunes' Series A Convertible Preferred Stock have the
sole right to elect a certain number of members of the Tunes board of directors
based on the percentage interest of the outstanding shares of Tunes' capital
stock represented by the outstanding shares of Series A Convertible Preferred
Stock. The holders of the shares of Tunes' Series E Convertible Preferred Stock
also have the sole right to elect one member of the Tunes board. The remaining
members of the Tunes board are elected by the holders of the Tunes common stock
and the holders of the Series B, Series C and Series D Convertible Preferred
Stock voting as a single class.

Members of the Tunes board of directors may be removed from office with cause
by the affirmative vote of the holders of at least a majority of the voting
power of the outstanding shares entitled to vote. The members of the Tunes
board of directors elected by the holders of Tunes' Series A Convertible
Preferred Stock may only be removed without cause by the holders of at least a
majority of the outstanding shares of Series A Convertible Preferred Stock. The
member of the Tunes board of directors elected by the holders of Tunes' Series
E Convertible Preferred Stock may only be removed without cause by the holders
of at least a majority of the outstanding shares of Series E Convertible
Preferred Stock. Board vacancies may be filled by the affirmative vote of a
majority of the voting power of the outstanding shares of the class of stock
entitled to elect the member whose resignation, removal or other termination of
service as a member of the Tunes board of directors resulted in such vacancy.

Directors' Committees. The EMusic amended and restated bylaws provide that the
board of directors may by vote of a majority of the board of directors delegate
powers normally held by the board of directors to a committee comprised of one
or more members of the EMusic board to the extent permitted by resolution of
the board of directors or the bylaws. To the extent provided in the resolution
which designates the committee or in

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<PAGE>

a supplemental resolution, these committees may exercise the power and
authority to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger.

The Tunes amended and restated bylaws provide that a majority of the board of
directors may designate committees of the board. The Tunes restated certificate
of incorporation provides that any committee of the Tunes board must include at
least one director elected by the holders of the Tunes Series A Convertible
Preferred Stock and that no action may be taken without the approval of the
directors elected by the holders of Tunes' Series A Convertible Preferred Stock
and, except with respect to matters approved by the Tunes' Compensation
Committee, the director elected by the holders of the Tunes Series E
Convertible Preferred Stock.

Committees of the Tunes board of directors may exercise all the powers and
authority of the board in the management of the business and affairs of Tunes
except that no committee may:

. amend the certificate of incorporation;

. adopt an agreement of merger or consolidation;

. recommend to the Tunes stockholders the sale, lease or exchange of all
or substantially all of Tunes' property and assets;

. recommend to the Tunes stockholders a dissolution of Tunes or a
revocation of a dissolution;

. amend the bylaws; or

. declare a dividend or authorize the issuance of stock.

Supermajority Voting. The EMusic amended and restated certificate of
incorporation requires the approval of the holders of at least 66 2/3% of the
combined voting power of EMusic to effect certain amendments to the amended and
restated certificate of incorporation with respect to the bylaws, directors,
stockholder meetings and indemnification. EMusic's amended and restated bylaws
may be amended by either a majority of the board of directors or by the holders
of EMusic's voting stock, provided that amendments approved by EMusic's
stockholders require the approval of at least 66 2/3% of EMusic's combined
voting power.

The Tunes restated certificate of incorporation requires the approval of the
holders of at least 66 2/3% of the outstanding shares of the Tunes Series C
Convertible Preferred Stock to amend the certificate in such a manner as to
materially alter or change the powers, preferences or special rights of the
Series C Convertible Preferred Stock. The Tunes certificate also requires the
approval of the holders of at least 66 2/3% of the outstanding shares of the
Tunes Series D Convertible Preferred Stock to amend the certificate in such a
manner as to materially alter or change the powers, preferences or special
rights of the Series D Convertible Preferred Stock.

Special Meetings of Stockholders. EMusic's amended and restated bylaws provide
that special meetings of stockholders of EMusic may be called only by the board
of directors, by the chairman of EMusic's board of directors or by EMusic's
president. This provision prevents the EMusic stockholders from initiating or
effecting any action by calling a meeting of the stockholders. Tunes' amended
and restated bylaws provide that special meetings of stockholders of Tunes may
be called by the chief executive officer of Tunes or at the request of the
Tunes board of directors or the holders of at least a majority of the
outstanding Tunes capital stock entitled to vote at the requested special
meeting.

No Stockholder Action by Written Consent. EMusic's 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 EMusic stockholders from
initiating or effecting any action by written consent. Tunes' amended and
restated bylaws permit any action required or permitted to be taken at any
annual or special meeting of stockholders to be taken by written consent.

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Notice Procedures. EMusic's 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 EMusic's 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 EMusic's secretary not less than 120 days prior to the meeting. The notice
must contain certain information specified in the EMusic amended and restated
bylaws. Tunes' amended and restated bylaws do not contain advance notice
procedures with regard to stockholder proposals.

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PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION

EMusic. EMusic common stock is listed on The Nasdaq Stock Market under the
symbol "EMUS" and has traded since June 2, 1999. The following table shows, for
the periods indicated, the high and low reported closing sale prices per share
of EMusic common stock on The Nasdaq Stock Market. EMusic has never declared or
paid any cash dividends on its common stock and does not plan on declaring any
dividends in the near future.

<TABLE>
<CAPTION>
Price Range
of Common
Stock
-------------
High Low
------ ------
<S> <C> <C>
1999
Second Quarter (commencement of trading through June 30,
1999)....................................................... $35.00 $13.44
Third Quarter (July 1 through September 30, 1999)............ $26.19 $12.50
Fourth Quarter (October 1 through December 31, 1999)......... $19.63 $ 9.00
2000
First Quarter (January 1 through January 10, 2000)........... $10.13 $ 8.38
</TABLE>

On January 10, 2000, the last sale price reported on the Nasdaq Stock Market
for EMusic common stock was $10.13 per share.

Tunes. There is no established public trading market for Tunes capital stock.
Tunes has never declared or paid any cash dividends on its capital stock, and
does not plan on declaring any dividends in the near future. The merger
agreement prohibits Tunes from paying cash dividends on Tunes capital stock
before the merger. See "The Merger--Conduct of Business Before the Merger."

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INFORMATION ABOUT EMUSIC

Overview

EMusic is a leading provider of downloadable music over the Internet. Through
its website at EMusic.com, EMusic offers a compelling selection of music from
which its 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 EMusic's relationships with a growing roster
of recording artists and independent record labels. EMusic currently has
exclusive, multi-year, digital download licenses from over 500 record labels
and over 2,500 recording artists, including selected titles from such well
known artists as Bush, Phish, They Might Be Giants, B.B. King and Ella
Fitzgerald. EMusic currently has over 50,000 titles available for download. In
addition, EMusic's IUMA subsidiary offers its customers access to over 7,500
unsigned artists. EMusic believes this represents one of the largest digital
music content archives currently licensed for distribution over the Internet.

EMusic's 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
currently offered for sale on EMusic.com and partners' websites in the "mp3"
format, the most widely-recognized compression standard for the download of
musical recordings. EMusic believes that its combination of selection,
convenience, varied content, improved distribution and tracking capabilities
creates a compelling music purchasing experience for consumers as well as an
attractive distribution alternative for artists and independent record labels.

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

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

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

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

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

In recent years, consumers have increasingly used their computers to play and
store music. Dataquest estimates that in 1998, 50% of U.S. households had
multimedia PCs with a sound card, speakers and either a CD-ROM or DVD-ROM
drive. Consumers can now play CDs on their computers with the ease and fidelity
formerly associated only with high-end stereo systems. Consumer electronics
companies and technology companies have capitalized on the growing popularity
of digital music by introducing portable music devices. The Rio, introduced in
November 1998 by Diamond Multimedia Systems has already sold over 300,000
units. Other manufacturers, including Sony, Creative Labs, Sensory Sciences,
RCA/Thomson, Samsung, Toshiba and LG Electronics have released, or have
announced plans to release, portable digital music-players that support mp3
files. 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). PC manufacturers such as
Dell Computer, Hewlett-Packard and Gateway have also begun to introduce
computer systems that include special features to be used with digital music
such as high fidelity speaker systems, digital music players and rewritable CD
recorders.

The EMusic Opportunity. EMusic believes 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, EMusic believes that these shortcomings will
drive consumers to the solution of purchasing downloadable music direct from
the Internet.

EMusic believes 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, many
independent record labels rely on the distribution infrastructure of major
record labels to distribute their offerings. They are subject to constraints of
these physical channels, such as higher distribution costs driving lower
margins, limited shelf space and subordination to the offerings of the major
record labels, as well as more limited promotional capabilities. While the
promise of an electronic distribution infrastructure is compelling, most
independent record labels lack the resources and expertise to create a viable
proprietary electronic distribution channel. EMusic believes that these
independent record labels will seek to partner with established providers of
downloadable music to leverage their branding, site traffic and technology.

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By supporting independent record labels, EMusic believes 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. EMusic believes 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.
EMusic believes 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. EMusic is a leading provider of downloadable music.
EMusic's website allows consumers to quickly and conveniently purchase music
online at a lower price than most traditional music CDs. EMusic's website also
allows consumers to download and listen to music immediately. EMusic believes
that the limitations associated with the traditional music industry present it
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.

EMusic believes that its solution provides the following benefits:

Benefits to Consumers.

Convenience. Through EMusic's website, consumers can download music at any
time, 24 hours a day, seven days a week. Consumers can register to make
purchases from EMusic's site in a few easy steps, and can purchase titles on
multiple visits to EMusic's site without having to re-enter personal and credit
card information. Consumers can search EMusic's 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 digital music devices for greater
portability, without having to carry physical media with them. In addition,
digital music devices have no moving parts and, as a result, do not skip and
can be used in situations where traditional music CDs are not optimal, such as
running or mountain biking.

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

Compelling Music Selection. EMusic currently has exclusive, multi-year, digital
download licenses from over 500 record labels and over 2,500 recording artists,
including selected titles from such well known artists as Bush, Phish, They
Might Be Giants, B.B. King and Ella Fitzgerald. EMusic currently has over
50,000 titles available for download. In addition, EMusic's IUMA subsidiary
offers EMusic's customers access to over 7,500 unsigned artists. EMusic
believes this represents one of the largest digital music content archives
currently licensed for distribution over the Internet. Furthermore, EMusic's
downloadable music infrastructure allows it to carry hard-to-find, out-of-
production or international titles that are not commercially viable to produce
or stock in a physical format.

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Varied Information and Content. Visitors to EMusic's website can access music
news, as well as links to concert information, sites for free mp3 software
downloads and other information on downloadable music. EMusic provides its
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, EMusic is beginning
to offer other services to its customer base, including online concerts,
organizing online chat sessions with their favorite artists and "undiscovered"
talent, and other initiatives that EMusic believes will offer a more direct
connection between artists and consumers.

Benefits to Artists and Independent Labels.

Powerful Distribution Capabilities. EMusic's website and partners' websites
provide a powerful distribution solution to artists and independent labels by
allowing them access to a broad range of music listeners. Because EMusic is not
dependent on physical media, EMusic 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, EMusic's distribution capabilities can allow
artists to directly distribute their offerings to the public, such as a new
They Might Be Giants mp3-only album which was released exclusively on EMusic's
website.

Greater Understanding of Fan Base. By tracking the behavior and purchasing
patterns of users on EMusic's website, EMusic is 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
EMusic's 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, EMusic is currently beginning initiatives that
will enable it to offer artists significant exposure to its fan bases. This
includes concerts broadcast online, chat rooms featuring artists and fans, and
other exposure on EMusic's website. This relatively inexpensive promotion on a
global basis is a significant benefit to artists and independent labels.

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

EMusic Business Strategy

EMusic's objective is to become the leading provider of compelling,
downloadable music directly to consumers over the Internet. EMusic's strategy
is to leverage its first-to-market advantage together with its established
music industry relationships as it takes advantage of the growing market for
the digital distribution of music. The following are key elements of EMusic's
strategy:

Continue to Acquire Compelling and Varied Content. EMusic will continue to
increase the number of musical selections available on its website in order to
build its global consumer base and increase the number of online

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music purchases. EMusic is 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. EMusic intends 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 EMusic's global Internet user base and its ability to
attract providers of music content. EMusic promotes its brand through
traditional media, event sponsorships, online media and other marketing
activities as well as leveraging strategic relationships within the industry.
EMusic intends to enhance brand awareness of its website by providing original
and proprietary content, aggressively expanding its online and offline
marketing activities, enabling consumers to purchase music and related
merchandise, and establishing strategic and referral fee relationships whereby
other websites engage EMusic as an online music retail source and content
provider.

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

Continue to Enhance EMusic's Website. EMusic intends to devote substantial
resources to improving the quality of its consumer users' experience on its
website. Features EMusic intends to incorporate into future versions of its
website include: chat-rooms, music hubs, additional music-related content, more
advanced search capabilities and dynamic site personalization. EMusic believes
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. EMusic intends to
further develop its technology infrastructure to be readily scaleable to
support its rapidly growing sales of online music, including the calculation of
royalty payments, while maintaining the speed and reliability of its site.
Furthermore, EMusic intends to maintain low pricing to provide an attractive
legal alternative to piracy among the general public. EMusic believes that
providing a reliable, trusted technology and payment infrastructure will
position it more favorably with record labels and artists as the premiere
provider of downloadable music.

Continue to Promote Development of Downloadable Music Market. EMusic believes
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. EMusic currently is an active member of the Digital Media
Association and Electronic Frontier Foundation, organizations dedicated to,
among other matters, improving the ease of consumer acquisition and use of
downloadable music. EMusic intends 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. EMusic intends
to refine and simplify the downloadable music purchasing experience through the
continued development of its website, which is designed to encourage purchases
and repeat visits, demonstrating to record labels and artists the value of the
downloadable music market.

Continue to Develop and Enhance IUMA. EMusic believes 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 EMusic to establish early relationships with potential future music
content providers. EMusic intends 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.

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Content Acquisition

EMusic has acquired, and intends 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, EMusic has focused on partnering
with independent record labels and established recording artists. EMusic is
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.

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

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

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

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

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

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

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

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

EMusic has also entered into contracts giving it the exclusive right to allow
its customers to download music from a variety of recognizable, brand name
artists. Included in the content catalog are recordings from Phish, Bush, Goo
Goo Dolls, James Brown, Frank Zappa, Louis Armstrong, Ella Fitzgerald, Judy
Garland, Shirley Bassey, Kool Keith, Kansas, Foghat and thousands of others.

In June 1999, EMusic 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, and in November 1999, EMusic purchased
the master recording catalog of Xanadu Records, including such Jazz artists as
Dexter Gordon and Jimmy Raney. When EMusic acquires masters, EMusic will seek
to work with label partners to exploit the physical distribution rights while
also selling the music in downloadable form on its website.

In December 1999, EMusic acquired Group K Inc., d/b/a Cductive. Cductive has
content license agreements with over 350 labels, most of which are in the
dance/electronic, alternative rock and hip-hop genres.

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Strategic Partnerships

Distribution and Marketing Partnerships.

EMusic is aggressively pursuing a variety of partnerships aimed at building a
channel of distribution for its downloadable music and music-related products
and services across the Internet. To accomplish this, EMusic is developing
strategic relationships and alliances with high-traffic Internet sites to
feature its brand and exclusive content and in some cases offer its content for
sale.

. EMusic has entered into an agreement with America Online pursuant to
which EMusic's content is to be made available to customers of AOL's ICQ,
Spinner and WinAmp interactive properties.

. EMusic has also entered into an agreement with Yahoo! Digital Service for
downloadable music.

. EMusic also has advertising and marketing agreements with Real Networks,
CNET, Listen.com and CMJ Online, among others.

In addition, EMusic is also working with its label partners to offer them a
solution for selling EMusic's 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. In December 1999, EMusic launched 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.

EMusic is 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 its
overall customer acquisition strategy, EMusic is typically providing sample
titles, promotional coupons and other content to improve its partners' offering
to the music consumer and to continue to promote the downloadable music market.

. EMusic has established relationships with digital audio device
manufacturers such as Creative Labs (Nomad), Diamond Multimedia (Rio) and
Sensory Sciences (Rave). As part of these arrangements, EMusic provides
purchasers of the devices with sample recordings with the installation
software.

. As an additional way to attract customers, promote downloadable music and
distribute its label partners' music effectively, EMusic plans to
introduce certain marketing initiatives and alliances with OEM computer
suppliers, sound card, high fidelity speaker and computer peripheral
suppliers and wireless product manufacturers. For example, EMusic has an
agreement with Hewlett-Packard pursuant to which the sample recordings
are to be provided with each of H-P's Pavilion branded computers.

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 its compliance with these requirements, EMusic has focused on
building strong relationships and alliances with the following organizations:

. EMusic has a licensing agreement with the Harry Fox Agency, or HFA, a
wholly-owned licensing subsidiary of the National Music Publishers'
Association. EMusic 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.

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

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. EMusic has 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 EMusic. EMusic will
share peermusic income derived from music publishing rights acquired by
EMusic. EMusic also has licensed certain recordings from the peermusic
catalog.

IUMA--Internet Underground Music Archive

In June 1999, EMusic 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 7,500 artists on individual websites with unique
URLs (bandname.iuma.com). IUMA artist websites enable audio sampling in mp3 and
RealAudio formats, and offer options for the sales of physical products and
downloadable music. IUMA artist websites also feature other content, including
artist biographies, cover art, lyrics, photos and tour dates. IUMA has received
worldwide media attention, including articles in Rolling Stone, Newsweek, USA
Today and the Financial Times, as well as spots on MTV and CNN.

The following are key elements of EMusic's strategy with respect to IUMA:

Enhance Content and Build Traffic. EMusic believes 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. EMusic believes 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 EMusic's label partners. EMusic believes that
by facilitating the process of signing unsigned artists, EMusic will be
promoting a new generation of artists with a greater appreciation of the value
of digital downloading of music. Consequently, this will encourage the growth
of the market as well as position EMusic to obtain additional downloadable
music rights.

Sales and Marketing

EMusic's 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, EMusic's 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 EMusic's 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. EMusic is regularly adding new elements designed to improve content,
navigability and the overall buying process.

Corporate Branding Campaign. EMusic has recently launched an aggressive
corporate branding campaign. The campaign is initially targeted at early
adopters, music enthusiasts, record labels and the Internet business community.
EMusic has 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 EMusic's target audience.

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

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

EMusic also sells advertising on its website. This advertising is generally
related to EMusic's music offerings either by the product or music oriented
nature of their promotion. EMusic currently uses the Doubleclick Dart program
to manage, track and report EMusic's advertising sales to its advertising
customers.

Operations

EMusic's 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 EMusic's growing multimedia
content is central to EMusic's digital asset management system. This scalable
system allows EMusic to, among other things, track user preferences to enable
effective marketing programs and maintain an efficient royalty accounting
program. EMusic's system utilizes Oracle database technology running on Sun
Microsystems' Enterprise equipment and Linux webservers.

Ordering and Fulfillment. EMusic's 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, EMusic
places an emphasis on website and download reliability. At any time during a
visit to EMusic's 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 EMusic's website and add additional items
if desired. New customers are prompted to register with EMusic at the time of
purchase and to enter their email addresses and passwords. Customers then
securely submit their credit card information online to purchase the music. The
customers' email addresses and passwords are used to identify them in the
future, eliminating the need to resubmit credit card and billing information
for subsequent orders.

Audio Encoding and Delivery. EMusic uses a variety of audio compression
technologies for its audio samples and downloads, tailoring them to specific
applications. EMusic currently uses the mp3 format for digital distribution of
its downloadable music. In light of current user patterns, EMusic uses
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. EMusic is exploring other download formats and plan
to adjust the format of its content to stay current with industry trends and
customer preferences. EMusic may need to obtain a third party license to use a
newly adopted format.

Infrastructure. EMusic's 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. EMusic's servers are currently based in a
co-location facility in Sunnyvale, California. EMusic's architecture allows it
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
EMusic's 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 EMusic expects 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

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hundred music retailing websites on the Internet. EMusic faces competitive
pressures from numerous actual and potential competitors, including:

. providers selling online music content from signed artists such as
MusicMaker.com, CDNow Inc. and various private companies;

. providers of music news and community such as MTVi, Launch Media, Inc.,
Tunes and various other 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 EMusic such as
online music retailers like Amazon.com, 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.

In many cases, companies with which EMusic has certain joint marketing or other
arrangements may be or may become direct competitors as well.

Certain companies have agreed to work together to offer music over the
Internet, and EMusic may face increased competitive pressures as a result. For
example, in the summer of 1999 it was 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.

EMusic believes that it competes primarily on the bases of:

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

. the price of the downloaded content;

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

. the ability to effectively promote brand equity; and

. the ease of use and speed of its website.

. longer operating histories;

. significantly greater financial, technical and marketing resources;

. greater brand name recognition;

. larger existing customer bases; and

. more popular content or artists.

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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 EMusic can. Websites maintained by EMusic's existing and potential
competitors may be perceived by consumers, artists, talent management companies
and other music-related vendors or advertisers as being superior to EMusic's.
In addition, EMusic may not be able to maintain or increase its website traffic
levels, purchase inquiries and number of click-throughs on its online
advertisements. Further, EMusic's competitors may experience greater growth in
these areas than EMusic does. Increased competition could result in advertising
price reduction, reduced margins or loss of market share, any of which could
harm EMusic's business.

Intellectual Property

EMusic's success and ability to compete are substantially dependent on its
internally developed technology. EMusic pursues the registration of its
trademarks in the United States and internationally. EMusic currently holds a
registered trademark from the United States Patent & Trademark Office for
"EMusic." While EMusic relies on trademark, service mark, copyright and trade
secrets laws and restrictions in the United States and other jurisdictions,
together with contractual restrictions, to protect its proprietary rights, such
trademark, service mark, copyright and trade secret protection may not be
available in every jurisdiction in which EMusic distributes or make available
its musical content and technology through the Internet. Although EMusic
believes that the use of material on its websites is protected under current
provisions of copyright law, legal rights to certain aspects of Internet
content and commerce are not clearly settled. EMusic 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
EMusic's business.

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

There are no pending lawsuits against EMusic regarding infringement of any
existing patents or other intellectual property rights or any material notices
that EMusic is infringing the intellectual property rights of others. However,
there can be no assurance that such infringement claims will not be asserted by
third parties in the future. Any such claims could result in litigation
subjecting EMusic to significant liability for damages, or in invalidation of
EMusic's 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 EMusic to enter into royalty or licensing
agreements.

Employees

As of December 31, 1999, EMusic had 91 full-time employees, including 20 in
selling and marketing, 49 in engineering and product development and 22 in
finance and operations. EMusic's future success depends, in significant part,
upon the continued service of its key technical, editorial, product
development, and senior management personnel and on its ability to attract and
retain highly qualified technical and management personnel, for whom
competition is intense. None of EMusic's employees are represented by a
collective bargaining unit, and EMusic has never experienced a work stoppage.
EMusic's relationships with its employees are good.

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Legal Proceedings

From time to time, EMusic may be involved in litigation relating to claims
arising out of its operations. EMusic is not currently engaged in any legal
proceedings that, individually or in the aggregate, are expected to have a
material adverse effect on EMusic's business.

Facilities

EMusic's corporate headquarters are located in approximately 20,000 square feet
in Redwood City, California occupied under a lease expiring in April 2004.
EMusic believes that its 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.

Executive Officers, Directors and Key Employees

EMusic's current executive officers and directors as well as certain members of
EMusic's senior management, and their ages and positions as of December 31,
1999 are as follows:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert H. Kohn*....... 42 Chairman and Secretary
Gene Hoffman, Jr.*.... 24 President, Chief Executive Officer, and Director
Joseph H. Howell*..... 47 Executive Vice President and Chief Financial Officer
Peter M. Astiz*....... 41 Executive Vice President and General Counsel
James R. Chapman*..... 32 Executive Vice President, Corporate Strategy
Gary Culpepper........ 50 Executive Vice President, Business Affairs
Spencer Leyton........ 51 Senior Vice President, Sales
Brian Brinkerhoff..... 37 Vice President, Content Acquisition
Steve Grady........... 33 Vice President, Marketing
Peter Harter.......... 31 Vice President, Global Public Policy and Standards
Marv Su............... 37 Vice President, Interactive Marketing
Brett A. Thomas....... 29 Vice President, Technology
Tor Braham............ 42 Director
Ralph Peer, II........ 55 Director
Ed Rosenblatt......... 64 Director
</TABLE>
- ------------------
*Executive Officer

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

Gene Hoffman, Jr., a co-founder of EMusic, has been President, Chief Executive
Officer, and a Director since January 1998. From November 1996 to December
1997, Mr. Hoffman was Director of Business Development

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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.

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

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

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

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

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

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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.

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

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

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

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

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

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Board of Directors

The terms of the EMusic board of directors are divided into three classes:
Class I, whose term will expire at the annual meeting of stockholders to be
held in 2002; 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 control of EMusic. The EMusic board
of directors consists of five members. EMusic's 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 EMusic's directors, officers or key
executives.

Board Committees. EMusic has established an Audit Committee and a Compensation
Committee. The Audit Committee, which currently consists of Messrs. Braham,
Peer and Rosenblatt, reviews EMusic's internal accounting procedures and
consults with and reviews the services provided by EMusic's 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 EMusic's executive officers, establishes and
reviews general policies relating to EMusic compensation and benefits and
administers EMusic's stock plans.

Director Compensation. EMusic 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, EMusic granted Mr. Peer a fully-vested, nonqualified
stock option to purchase 100,000 shares of EMusic common stock at an exercise
price of $5.00 per share. In June 1999, EMusic granted Messrs. Braham and
Rosenblatt fully-vested, nonqualified stock options to purchase 35,000 and
100,000 shares of EMusic common stock, respectively, at an exercise price of
$13.63 per share.

Compensation Committee Interlocks and Insider Participation. None of the EMusic
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.

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Executive Compensation

Summary Compensation Information. The following table sets forth information
concerning the compensation EMusic paid for services rendered during the fiscal
years ended June 30, 1998 and 1999 by its Chief Executive Officer:

Summary Compensation Table

<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------- ------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
--------------------------- ---- ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gene Hoffman, Jr. President and 1999 $82,291 -- -- 250,000
Chief 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
Stock Price
Appreciation for
Option Term(2)
-------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
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
Underlying Unexercised In-
Unexercised the-Money
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>

EMusic has not awarded stock appreciation rights to any of its employees and
does not have any multi-year incentive plans.

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Stock Plans

1998 Stock Option Plan. The EMusic 1998 stock option plan was approved by the
board of directors in March 1998 and was subsequently approved by the EMusic
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 September 30, 1999, six million shares are reserved for issuance under
the 1998 option plan, 195,985 shares have been issued upon the exercise of
options, options to purchase of a total of 2,796,165 shares at a weighted
average exercise price of $3.95 per share were outstanding and 3,007,850 shares
were available for future option grants.

1998 Nonstatutory Stock Option Plan. The EMusic 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).

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

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

As of September 30, 1999, five million shares are reserved for issuance under
the nonstatutory plan, 20,000 shares have been issued upon the exercise of
options, options to purchase of a total of 3,827,200 shares at a weighted
average exercise price of $10.85 per share were outstanding and 1,155,800
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 the EMusic 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.
The EMusic employees (including our officers and employee directors) and those
of any of EMusic 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. EMusic has 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. EMusic's amended and restated certificate of
incorporation and bylaws provide that EMusic 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, EMusic intends to
enter into separate indemnification agreements with its directors and officers
which would require EMusic, among other things, to indemnify the directors and
officers against certain liabilities which may arise by reason of their status
or service (other than liabilities arising from willful misconduct of a
culpable nature). EMusic 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 EMusic's 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
EMusic's directors, officers, employees or other agents in which
indemnification is being sought nor is EMusic aware of any threatened
litigation that may result in a claim for indemnification by any of its
directors, officers, employees or other agents.

98
<PAGE>

Certain Transactions and Relationships

EMusic was formed on January 8, 1998 as a Delaware corporation under the name
GoodNoise Corporation. In February 1998, EMusic issued 3,100,000 shares of
common stock to each of Robert Kohn, EMusic's chairman of the board, and Gene
Hoffman, Jr., EMusic's chief executive officer and a member of EMusic's board,
and 900,000 shares of common stock to Gary Culpepper, EMusic's 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
September 30, 1999, the restricted stock purchase agreement provides EMusic
with the right to repurchase approximately 262,000 of these shares at a nominal
price subject to ratable vesting over three years ending February 2001.

In February 1998, EMusic entered into an agreement to borrow $10,000 from Mr.
Kohn and $50,000 from peermusic, an entity controlled by Ralph Peer, II, one of
EMusic's 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, EMusic sold shares of Series B preferred stock through
Warburg Dillon Read LLC, a placement agent. Mr. Tor Braham was a managing
director of Warburg Dillon Read LLC at this time. Mr. Braham subsequently
became a member of EMusic's board of directors on May 5, 1999. Of the 117,570
shares of Series B preferred stock sold on March 23, 1999, EMusic sold 614
shares to peermusic III, Ltd. which is affiliated with Ralph Peer, II, a member
of EMusic's 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 EMusic's
outstanding common stock.

Also in connection with the sale of its Series B preferred stock, on March 23,
1999 EMusic 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 EMusic common stock
owned by Messrs. Kohn and Hoffman be held subject to a right of repurchase in
favor of EMusic. As of December 20, 1999, 1,943,293 and 1,672,650 shares of
EMusic 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.

Principal Stockholders

The following table sets forth the beneficial ownership of EMusic's voting
stock, including optioned shares, as of December 31, 1999 by:

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

. each of EMusic's directors and executive officers; and

. all executive officers and directors as a group.

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<PAGE>

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 December 31, 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 December 31, 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>
Number of
Shares of
Common Stock
Beneficially
Beneficial Owner Owned Percent(1)
- ---------------- ------------ ----------
<S> <C> <C>
5% Stockholders
Citiventure 96 Partnership, L.P.
c/o Invesco Private Capital
1166 Avenue of the Americas, Suite 2700
New York, NY 10036 (2)................................. 3,333,400 9.0%
Directors and Executive Officers
Robert H. Kohn (3)...................................... 2,918,367 7.8%
Gene Hoffman, Jr. (4)................................... 3,243,667 8.7%
Joseph H. Howell (5).................................... 268,898 *
Peter M. Astiz (6)...................................... 235,169 *
James R. Chapman (7).................................... 157,723 *
Tor Braham (8).......................................... 46,600 *
Ralph Peer, II (9)...................................... 308,900 *
Ed Rosenblatt (10)...................................... 100,000 *
Executive officers and directors as a group
(8 persons) (11)....................................... 7,279,324 19.6%
</TABLE>
- ------------------
* Less than 1%
(1) Percentage of beneficial ownership excludes up to 6,929,048 shares
issuable upon exercise of outstanding stock options and warrants.
(2) Represents shares owned by Invesco related partnerships as follows: 58,300
shares owned by Chancellor Private Capital Offshore Partners I, C.V.;
624,000 shares owned by Chancellor Private Capital Offshore Partners II,
L.P.; 379,000 shares owned by Chancellor Private Capital III, L.P.;
1,627,100 shares owned by Citiventure 96 Partnership, L.P.; and 645,000
shares owned by Drake & Co. for the account of Citiventure Private
Participations III.
(3) Includes 41,667 shares issuable upon exercise of outstanding options.
(4) Includes 41,667 shares issuable upon exercise of outstanding options.
(5) Includes 232,898 shares issuable upon exercise of outstanding options.
(6) Includes 19,169 shares issuable upon exercise of outstanding options.
(7) Includes 141,123 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
were issued in connection with the 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 681,524 shares issuable upon exercise of outstanding options.

100
<PAGE>

EMusic's Management's 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.
EMusic's actual results may differ materially from those indicated in these
forward-looking statements.

Results of Operations

EMusic was incorporated on January 8, 1998 and is a development stage company.
Through September 30, 1999, EMusic incurred costs to organize and develop an
Internet website to conduct its business. EMusic began selling musical
recordings over the Internet in July 1998 and began its first significant
selling and marketing initiatives in the quarter ended June 30, 1999. EMusic
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 EMusic's Internet sites;

. the amount and timing of capital expenditures and other costs relating to
the expansion of EMusic's operations;

. the introduction of new sites and services by EMusic or its 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.

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<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>
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1999 1999 1999
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 12 $ 8 $ 21 $ 51 $ 180
Cost of revenues........ -- -- 4 9 14 25
---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ -- 12 4 12 37 155
Operating expenses:
Product development.... 919 667 925 1,654 8,444 6,011
Selling and marketing.. -- -- -- -- 556 4,771
General and
administrative........ 172 197 205 314 883 812
Amortization of trade
names................. -- -- -- 334 1,348 2,283
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 1,091 864 1,130 2,302 11,231 13,877
---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (1,091) (852) (1,126) (2,290) (11,194) (13,722)
Interest income, net.... -- 3 1 1 317 203
---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (1,091) $ (849) $ (1,125) $ (2,289) $ (10,877) $ (13,519)
Accretion of Series A
preferred stock to
redemption value....... -- -- (25) -- -- --
Beneficial conversion
charge, Series A
preferred stock........ -- -- (144) -- -- --
Accretion of B preferred
stock to redemption
value.................. -- -- -- (8) (214) (224)
Beneficial conversion
charge, Series B
preferred stock........ -- -- -- (31,577) -- --
Dividend on Series B
preferred stock........ -- -- -- (40) (529) (493)
---------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to
common Stockholders.... $ (1,091) $ (849) $ (1,294) $ (33,914) $ (11,620) $ (14,236)
========== ========== ========== ========== ========== ==========
Net loss per common
share, basic and
diluted................ $ (0.08) $ (0.06) $ (0.09) $ (2.31) $ (1.02) $ (1.09)
========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding,
basic and diluted...... 12,847,724 14,591,336 14,581,212 14,674,372 11,437,948 13,057,809
========== ========== ========== ========== ========== ==========
</TABLE>

The following discussion includes a comparison of the period from January 8,
1998 (inception) through June 30, 1998 and the year ended June 30, 1999:

Net Revenues. EMusic is a development stage company. EMusic earned no revenue
from inception through June 30, 1998. For the year ended June 30, 1999,
EMusic's revenues totaled $92,000. EMusic's revenues to date have been
comprised of advertising and sales of physical merchandise and downloadable
music recordings. In the future, EMusic expects sales of merchandise to be
limited.

Cost of Revenues. Cost of revenues for the year ended June 30, 1999 include the
cost of merchandise sold, credit card processing fees, royalties and other
costs related to downloadable music revenues. Costs related to

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<PAGE>

physical merchandise exceeded related revenues during this period. EMusic
believes that the sale of physical merchandise will become an increasingly
smaller portion of its future sales. As sales of physical merchandise become a
lower portion of EMusic's revenues, EMusic expects that its gross margins will
improve.

Product Development Expenses. EMusic began its development efforts in February
1998. Product development expenses principally consist of:

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

. telecommunications charges;

. salaries, rent, depreciation and other expenses related to building
EMusic's music distribution business; and

. amortization of music content.

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

Included in the amount above is an expense relating to the fair value of fully-
vested options to advisors to purchase up to 666,000 shares of common stock at
exercise prices ranging from $5.75 to $13.625 per share. EMusic also issued
warrants to individuals operating in the music industry to purchase up to
1,388,300 common shares at exercise prices ranging from $7.10 to $13.625 per
share. All of these options and warrants were issued at the closing market
price on the date of issue. Using the Black Scholes model, EMusic estimated the
total fair value of these options to be $2,379,000 and the warrants to be
$5,682,000. EMusic charged the combined total of $8,061,000 to product
development expense in 1999. During the period January 8, 1998 (inception) to
June 30, 1999 EMusic recorded $752,000 in respect of the fair value of 280,000
options granted to advisors.

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

Selling and Marketing Expenses. EMusic incurred no significant selling and
marketing costs from inception through March 31, 1999. Commencing with the
launch of its EMusic brand in the quarter ended June 30, 1999, EMusic began an
extensive selling and marketing campaign. As a result, selling and marketing
expenses for the quarter and year ended June 30, 1999 were $556,000. EMusic
also expects 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, EMusic expects 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. EMusic has
incurred costs of $1,818,000 from inception through June 30, 1999, related to
general and administrative expenses. Of these costs, $1,599,000 was incurred in
the year ended June 30, 1999. In April 1999, EMusic moved its 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.
EMusic expects general and administrative expenses to continue to increase as
EMusic expands its staff and incurs additional costs related to the growth of
its business.

The following discussion includes a comparison of the three months ended
September 30, 1998 and 1999:

Net Revenues. Revenues for the quarters ended September 30, 1999 and 1998 were
$180,000 and $12,000, respectively. Revenues increased in the quarter ended
September 30, 1999

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<PAGE>

primarily as a result of the growth in customer base, the increase in customer
purchases and the increase in advertising revenues made possible by the
increase in customer traffic on EMusic's websites.

Cost of Revenues. Cost of revenues consist of credit card processing fees, and
royalties and related fees on downloadable music sales. Cost of revenues for
the quarter ended September 30, 1999 were $25,000. There were no similar costs
during the quarter ended September 30, 1998. Gross margins due to increased
advertising revenues, for which EMusic incurred no cost of revenues.

Product Development Expenses. Product development expenses include the cost of
engineering EMusic's websites and the cost of acquiring the rights to the music
available for sale on its EMusic website. These costs consist principally of
stock compensation charges and other expenses including salaries, contractor
fees, rent and depreciation.

Stock compensation charges were $3,960,000 and $97,000 during quarters ended
September 30, 1999 and 1998, respectively. These charges represent the cost of
fully-vested stock warrants and stock options granted to advisors. All of these
warrants and options were issued at the closing price on the date of issue, and
the total value of the warrants and options were determined by using the Black
Scholes model.

Other product development expenses for the quarters ended September 30, 1999
and 1998 were $2,051,000 and $570,000, respectively, reflecting an increase in
EMusic's product development efforts, particularly in software engineering,
graphic design, and development of the infrastructure and "e-commerce" required
to deliver downloadable music from EMusic's Internet website.

We currently plan to continue aggregating a compelling repertoire of musical
recordings available for customer downloads, and continue to develop the
software necessary to manage such downloads, and expect product development
expenses will increase in future periods.

Selling and Marketing Expenses. Selling and marketing expenses consist of
advertising and promotion activities, including television, radio and magazine
ads, and salaries and other costs related to selling music on the EMusic and
IUMA websites. These expenses for the quarter ended September 30, 1999, were
$4,771,000. There were no similar selling and marketing expenses during the
quarter ended September 30, 1998. The increase in selling and marketing
expenses reflects the launch of an extensive marketing campaign to establish
the brand name "EMusic." Advertising and promotion costs were approximately $4
million in the quarter ended September 30, 1999. There were no similar costs in
the prior quarters.

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. These
expenses for the quarters ended September 30, 1999 and 1998, were $812,000 and
$197,000, respectively. EMusic expects general and administrative expenses to
increase as EMusic expands its staff and incur additional costs related to the
growth of its business.

Amortization of Trade Names

During 1999, EMusic purchased the "EMusic" and "IUMA" trade names for a
combined total of $26,362,000 in cash and stock. EMusic began amortizing these
costs over three-year lives, resulting in an amortization expense of $1,682,000
in the year ended June 30, 1999 and $2,283,000 in the three months ended
September 30, 1999. Future amortization related to these trade names will be:

<TABLE>
<CAPTION>
Year ending Amortization
June 30 Expense
----------- ------------
<S> <C>
2000 $6,849,000
2001 9,132,000
2002 6,416,000
</TABLE>

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<PAGE>

Liquidity and Capital Resources

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

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

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

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

As of September 30, 1999, EMusic had a cash balance of $78,904,000. For the
three months ended September 30, 1999, net cash of $15,644,000 was used in
operating activities consisting of net losses of $13,519,000, and an increase
in prepayments as a result of prepaid advertising substantially offset by:

. non-cash expense of $1,273,000 associated with stock and stock options
granted to advisors;

. non-cash expense of $2,687,000 associated with warrants granted to
advisors; and

. non-cash expense of $2,283,000 associated with amortization of trade
names.

Additionally, EMusic purchased approximately $1,128,000 and $1,113,000 in
capital equipment from inception through June 30, 1999 and for the three months
ended September 30, 1999, respectively. EMusic expects to incur negative cash
flow from operations for the foreseeable future, as it continues to develop its
business.

In October 1998, EMusic 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 common stock. The Series A shares were subsequently converted into
shares of Series B preferred stock.

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

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

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

On September 24, 1999 EMusic completed a public offering of 5,270,000 shares of
common stock resulting in proceeds of $78,573,000, net of issuance costs of
approximately $1,109,000, of which $1,069,000 remained in accrued liabilities
at September 30, 1999.

We believe that EMusic's existing capital resources will be sufficient to fund
its current level of operating activities, capital expenditures and other
obligations through the next 12 months. However, if during that period or
thereafter EMusic is not successful in generating sufficient liquidity from
operations or in raising sufficient

105
<PAGE>

capital resources, on terms acceptable to it, this could have a material
adverse effect on EMusic's business, results of operations liquidity and
financial condition.

Year 2000 Readiness

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in 99, the common two-digit reference for 1999. As a result, as
EMusic transitions 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 EMusic has not conducted a formal audit internally
or by any third party, the software used in EMusic's internal systems has
either been developed by EMusic or has been purchased in the last 12 months. As
a result, EMusic believes its internal systems are year 2000 compliant. To
date, EMusic has not had any Year 2000 issues arise with any of its systems.

Costs. To date, EMusic has not incurred any material costs directly associated
with its year 2000 compliance efforts, except for compensation expenses
associated with its salaried employees who have devoted some of their time to
EMusic's year 2000 assessment. EMusic does not expect the total cost of year
2000 problems to be material to its business. Despite EMusic's current
assessment, EMusic 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
EMusic's business.

Risks. EMusic is not currently aware of any year 2000 readiness problems
relating to its internally-developed proprietary systems that would
substantially harm its business. EMusic may discover year 2000 readiness
problems in these systems that will require substantial revision. In addition,
third-party software, hardware or services incorporated into EMusic's material
systems may need to be revised or replaced, all of which could be time-
consuming and expensive. EMusic's failure to fix or replace its 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 EMusic's business. Moreover, EMusic's failure to adequately
address year 2000 readiness issues in EMusic's 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 EMusic's control
may not be year 2000 ready. The failure by these entities to be year 2000 ready
could result in a systemic failure beyond EMusic's control, such as a prolonged
Internet, telecommunications or electrical failure, which could also prevent
EMusic from delivering its services to its customers, decrease the use of the
Internet or prevent users from accessing websites.

Contingency Plan. As discussed above, EMusic is engaged in an ongoing year 2000
assessment and has not yet developed any contingency plans.

Quantitative and Qualitative Disclosures About Market Risk

EMusic has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
EMusic had no holdings of derivative financial or commodity instruments at
September 30, 1999. However, EMusic is exposed to financial market risks,
including changes in interest rates. All of EMusic's revenue and capital
spending is transacted in U.S. dollars. EMusic's investments portfolio
comprises amounts invested in short term cash deposits and therefore EMusic
believes that the fair value of its investment portfolio or related income
would not be significantly impacted by

106
<PAGE>

increases or decreases in interest rates due mainly to the short-term nature of
its investment portfolio. However, a sharp increase in interest rates could
have a material adverse effect on the fair value of its investment portfolio.
Conversely, sharp declines in interest rates could seriously harm interest
earnings of EMusic's 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
EMusic's investment portfolio as at September 30, 1999.

<TABLE>
<CAPTION>
Due within
one year Thereafter Total
---------- ---------- -----------
<S> <C> <C> <C>
Cash..................................... 78,904,000 $-- $78,904,000
Weighted Average Interest Rate......... 5.18% --
Total Portfolio.......................... 78,904,000 $-- $78,904,000
========== ==== ===========
</TABLE>

Recent Accounting Pronouncements

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

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 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. EMusic believes the adoption of
SOP 98-5 will not have a material impact on its results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 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. EMusic does not currently hold derivative instruments or engage in
hedging activities.

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INFORMATION ABOUT TUNES

Tunes is an online music network, providing music fans with extensive and
exclusive music content, community features and e-commerce services. Tunes'
network of websites ranked among the top five music content websites as
measured by unique visitors in October 1999. Tunes' hub website, Tunes.com, is
a "one-stop shop" designed to appeal to a broad spectrum of music fans by
covering a wide range of genres, from urban to rock to classical. The Tunes.com
website is supported by and integrated with Tunes' network of genre-specific
websites Rollingstone.com--rock and pop, and Downbeatjazz.com--jazz and blues.
Tunes has built these websites through Tunes' exclusive relationships with
leading music industry magazines, Rolling Stone and Down Beat. Tunes' websites
provide advertisers and retailers with an attractive channel to reach consumers
across both broad and targeted demographic groups. Tunes generates revenue from
a number of sources, including advertising, sponsorships, promotions, e-
commerce and content syndication.

Tunes' sites offer one of the Web's most comprehensive collections of music
content, including approximately 1,000,000 song clips, 1,000 music videos,
130,000 album reviews and 85,000 artist profiles. Through Tunes' websites, a
visitor may:

. watch a live concert or music video;

. read a daily news story, artist biography or album review;

. listen to an audio preview of an album or to Rolling Stone Radio or Tunes
Radio, Tunes' originally programmed Internet radio;

. download near CD-quality digital music;

. communicate with fellow fans through home pages, chat sessions or message
boards; or

. buy CDs.

In addition to producing Tunes' websites, Tunes provides its content to a
number of major websites, including Yahoo!, Netscape, Lycos and Snap, as well
as approximately 5,000 fan websites and over 100 radio station websites. Tunes
is also a featured content provider, or anchor tenant, on America Online's
music channel, where Tunes' "Rolling Stone" button, linking users to
Rollingstone.com, is prominently displayed.

Tunes' websites have grown significantly in 1999. Monthly page views have
increased from 10.7 million during October 1998 to 28 million during November,
1999. Registered users have increased from 308,000 as of December 31, 1998 to
1,260,000 as of November 30, 1999. Tunes intends to continue to increase its
websites' traffic and user base by capitalizing on the brand recognition of
Rolling Stone and Down Beat to promote Tunes' websites and the Tunes.com brand,
expanding Tunes' music content and community features and selectively pursuing
e-commerce opportunities.

Industry Background

The Web as a New Medium for Advertising and Commerce

The Web is becoming an essential medium for advertisers because it offers a
level of targetability, interactivity and measurability not available in
traditional media. Through the Web, advertisers can efficiently reach specific
population groups and selected individuals with highly targeted interactive
advertisements and promotions. In addition, advertisers can measure the reach
of an advertisement by tracking the number of times an advertisement has been
viewed as well as the responses to the advertisement. Forrester Research
estimates that online advertising in North America will increase from $1.3
billion in 1998 to $10.7 billion in 2003.

The Web is also emerging as a medium for global commerce. A growing number of
consumers are transacting business over the Web, including purchasing CDs,
paying bills, booking airline tickets, trading securities and purchasing other
consumer goods. Online transactions can be faster, less expensive and more
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traditional commerce. Forrester Research estimates that the total value of
retail goods and services, other than automobiles and travel, purchased on the
Web in the United States will increase from $4.8 billion in 1998 to $78.6
billion in 2003.

The Music Industry

Music is one of the world's leading forms of entertainment. It is also big
business. According to the Recording Industry Association of America, domestic
sales of recorded music were $13.7 billion in 1998.

Historically, consumers' ability to discover new songs and artists has been
strongly influenced by large record labels and traditional media, such as
radio, television and print. Record labels sign many artists to long-term
contracts and then deploy significant resources and capital to promote and
distribute the music of only those artists that they consider most promising.
Radio stations have also had a significant impact on consumers' access to music
by de-emphasizing the introduction of new music in favor of programming
strategies designed to appeal to the largest possible audience.

Despite the influence of major record labels and traditional media, there has
been an increasing number of new genres, artists and releases, resulting in a
rapidly growing catalog of available music. In addition, there has been
significant growth in the number of independent labels, which has been fueled
largely by artists, such as rap artists in the early 1980s, who created new
non-mainstream genres.

Music and the Web

The Web is emerging as an important source of music, dramatically altering the
way consumers discover, listen to and purchase music. According to Jupiter
Communications, domestic sales of recorded music over the Internet are
projected to grow from approximately $36.6 million in 1997 to $1.6 billion in
2002. The Web offers music fans major advantages over traditional media, such
as unprecedented interactivity and access to new and archived music content on
demand. Since music initially appeared on the Web, the number and types of
music websites have expanded to include content, fan, e-commerce and
downloadable music sites. As a result, both consumers and artists have embraced
the Web as an attractive medium for exploring and distributing music content.
Forrester Research estimates that approximately 50 million individuals will be
capable of downloading and playing digital music by the end of 1999. In
addition, a number of artists, such as Public Enemy, Green Day, Hole and Todd
Rundgren, either sell CDs directly through their websites or allow visitors to
purchase and download digital music.

Music consumers have increasingly used their computers to play music that they
receive, or download, from the Internet and to store audio files for playback
on their computers and on portable devices. Because music files can be very
large, technologies have been developed that compress the size of these files.
These compression technologies now permit consumers to download to their
computers near CD-quality audio files at rates that are much faster than
uncompressed file formats. As a result of consumers' acceptance of downloading
music, numerous compression technologies have been developed by companies such
as a2b Music, Liquid Audio, Microsoft, Nullsoft and RealNetworks, and have
become widely available and used. In part as a reaction to consumer acceptance
of these technologies and in part pressed by a concern over piracy, record
labels have formed relationships to promote standards for digital music
delivery. For example, BMG Entertainment, Sony Music Entertainment and
Universal Music Group, among others, and leading technology providers, such as
IBM, Microsoft and RealNetworks, have formed the Secure Digital Music
Initiative with the objective of developing a standard for digital music
security. Other initiatives similar to SDMI have formed. However, no single
standard has emerged for the digital distribution of music.

The convergence of music and the Web has produced numerous music-related
websites. Most of these websites, however, offer relatively limited content,
features and services or are restricted to a specific genre, artist or record
label. As a result, consumers often must navigate a bewildering array of
websites without any assurance of fulfilling their online music needs.

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The Tunes.com Solution and Strategy

Tunes intends to create the premier online music network, providing music fans
with extensive and exclusive music content, community features and e-commerce
services. Tunes provides a compelling online music experience that attracts and
engages Tunes' visitors by featuring exclusive content from two of the leading
names in music: Rolling Stone and Down Beat. In addition, Tunes offers music
content covering a wide range of genres to attract visitors of diverse tastes.
Tunes' websites present Tunes' content in an organized format that is easy to
use and intuitive, with interactive community features that provide users with
an enjoyable music experience. Tunes intends to continue to expand Tunes'
traffic and user base to provide advertisers with an attractive channel
designed to reach both broad and targeted demographic groups. Tunes' strategy
is to:

. Deliver compelling music content. Tunes plans to expand Tunes' music
content through strategic relationships and the development of original
music content. Tunes intends to acquire and develop additional audio and
video content, including live and archived concerts, music videos, audio
samples and downloadable digital recordings. In addition, Tunes intends
to continue to create and compile exclusive and original music content
that it believes will attract and engage its users, such as news,
biographies and album reviews, and that provides users with a third-
party, editorial perspective. Tunes also may deploy additional sites
focused on other genres.

. Provide easy to use and feature-rich web sites. Tunes will continue to
compile and organize content and utilize the latest technologies to
enable users to simply and quickly access the content they want. In
addition, Tunes enables users to tailor their search of Tunes' vast
collection of music content to suit their individual preferences. Based
on individual preferences, Tunes offers users suggestions about content
that may interest them. In addition, Tunes plans to continue to provide
the latest technologies so that Tunes may offer enhanced interactive and
multimedia content. Current examples of such features include the ability
to download video and audio for later use and receive Web broadcasts, or
streaming, of video and audio. As part of this strategy, Tunes has joined
with technology companies, such as Microsoft and RealNetworks, to develop
specific applications. For example, through Tunes' relationship with
RealNetworks, Tunes launched Rolling Stone Radio, Tunes' Web-based radio,
and Tunes is working with Microsoft to develop an enhanced broadband
video section of the Rollingstone.com website. See "--Strategic
Relationships--Technology and E-commerce Relationships."

. Grow Tunes' music community. Tunes has designed its hub website to
develop a loyal and active community of music fans dedicated to the
Tunes.com network. Interactive features include Tunes' chat rooms,
message boards and email capabilities. Tunes plans to continue to
introduce new features that will extend and unify Tunes' user base, such
as expanded home pages and allowing users to email sound clips to each
other. Tunes' websites enable users to create, post and share new content
with other users. For example, Tunes enables users to post their own
album reviews. In addition, Tunes' "Download This" feature allows music
fans to freely download music created and provided to Tunes by
independent artists. User-generated content is a dynamic source of music
information and encourages regular and active participation in the
community. Tunes believes that the more time a user invests to develop
content and interact with others on its sites, the more likely it is that
such a user will continue to return to Tunes' sites for music content.

. Leverage the Rolling Stone and Down Beat brands. Assuming the completion
of the merger, Tunes plans to significantly increase Tunes' general
marketing and promotional activities through traditional and new media to
increase user traffic and to further capitalize on the brand awareness of
Rolling Stone and Down Beat magazines. Tunes will also seek to drive user
traffic through a combination of additional distribution relationships,
such as Tunes' relationship with America Online and Lycos, and through
other forms of offline and online promotion.

. Generate advertising and sponsorship revenue. As Tunes grows its user
base and traffic, Tunes will develop an increasingly attractive channel
for advertisers to reach consumers. Tunes emphasizes the attractive
demographics of its user base, the emotional appeal and power of music to
Tunes' users, and the ability to target specific segments of its audience
based on their music preferences. Tunes intends to

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significantly expand its sales force and marketing efforts in order to
capitalize on advertising and sponsorship revenue opportunities.

. Generate e-commerce revenue. As part of its goal to provide Tunes' users
with a comprehensive music experience, Tunes intends to expand its e-
commerce services. For example, Tunes intends to grow its existing CD
sales. In December 1999, Tunes launched an online store featuring music-
related and other merchandise.

Tunes' Websites

Tunes' network of websites consists of Tunes' hub site, Tunes.com, as well as
Tunes' branded genre-specific websites: Rollingstone.com and Downbeatjazz.com.

Tunes.com Hub Site

Tunes intends to establish Tunes.com as the Web's definitive music site by
capitalizing on one of the Web's largest collections of music content,
personalization tools and compelling genre-specific programming. By providing
customizable access to content residing on Rollingstone.com and
Downbeatjazz.com, as well as content from other third parties, Tunes can
provide a single site solution for accessing, exploring and enjoying music
content and buying music on the Web. While many other sites are primarily
focused on specific genres, Tunes.com provides the user with access to a wide
range of music. Users can enjoy revisiting classics as well as exploring new
music. In addition, Tunes.com's features facilitate the discovery of music
particularly suited to each user's tastes and present easy and efficient access
to one of the largest catalogs of music information on the Web.

Genre-Specific Websites

Each of Tunes' genre-specific sites features one of the major genres of music.
Tunes believes each of its genre-specific websites is positioned to be a
leading online destination for music fans who prefer to focus on a particular
style of music. These sites may be accessed directly and are also integrated
with the Tunes.com hub website.

. Rollingstone.com--Tunes developed the Rollingstone.com website in
conjunction with Rolling Stone magazine. Tunes believes that it has
positioned Rollingstone.com to become the leading rock and pop website by
capitalizing on Rolling Stone's brand, offline marketing and promotion,
long-standing label and artist relationships and exclusive new and
archived content. The Rollingstone.com website was launched in March 1998
and generally attracts users 15 to 35 years of age.

. Downbeatjazz.com--Tunes developed the Downbeatjazz.com website in
conjunction with Down Beat magazine, one of the oldest and most
recognized jazz and blues music publications. Launched in February 1999,
the Downbeatjazz.com website is expected to attract visitors similar to
Down Beat magazine's 25 to 54 age demographic.

Tunes has also operated Tunes' initial website, JAMtv.com, since March 1997.
Tunes is currently redirecting traffic from this site to the Rollingstone.com
website and will cease operating the JAMtv.com website on or before June 30,
2000. See "Risk Factors--Tunes needs to increase public awareness of its brands
or it may not be able to attract a significant number of visitors to Tunes'
websites." In addition, Tunes developed the TheSource.com website in
conjunction with The Source magazine, an urban and hip-hop music and lifestyle
magazine. By mutual agreement, at the end of 1999, Tunes will cease operating
the TheSource.com website and turn over the operation of the website to the
publisher of The Source magazine.

The Tunes.com hub site, together with Tunes' genre-specific sites, offers a
variety of content, community and e-commerce features to Tunes' users. Tunes
believes that by providing a comprehensive online music experience, it will
attract and maintain a growing base of dedicated users.

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Content

Tunes offers one of the Web's most comprehensive collections of music content,
including approximately 1,000,000 song clips, 1,000 music videos, 130,000 album
reviews and 85,000 artist profiles covering 18 major genres. On Tunes' sites, a
visitor may:

. watch a live concert in Tunes' Virtual Venue, a high bandwidth music
video in Tunes' Big Video section or music news in Tunes' Daily Video
News;

. read a daily news story, artist biography or album review;

. listen to an audio preview from an album or to Rolling Stone Radio,
Tunes' originally programmed Internet radio;

. download near CD-quality digital music through a number of technologies
including a2b Music, Liquid Audio, mp3 and Windows Media;

. browse Tunes' extensive collection of artist photos in Tunes' Gallery;

. post concert or album reviews;

. access concert tour information; or

. access user generated reviews or music.

Tunes believes the quality, quantity and nature of its content provides a
valuable online music experience for its users. Tunes' magazine content
providers furnish Tunes with a continuing source of new and fresh content such
as news, photos, interviews, feature stories and album and concert reviews.
Tunes' magazine content providers also give Tunes access to their historical
archives. For example, Rolling Stone provides Tunes with over 30 years of
Rolling Stone covers and reviews, while Down Beat provides Tunes with over 60
years of photographs and profiles of legendary jazz musicians. Tunes' editorial
and artist relations staff focuses on developing and acquiring content with and
from artists and many of the major and independent record labels. Tunes
currently obtains and develops content from BMG, EMI, Sony Music, Universal,
Beggars Banquet, CMC International, Epitaph, Mute, No Limit/Priority, Platinum,
Sub-Pop and TVT Records.

Through these relationships Tunes has been able to offer a variety of music
content on its websites, including interviews, broadcasts over the Web, also
known as webcasts, music videos and in-studio performances. Tunes has featured
video interviews and performances from a variety of new and established artists
and events, including:

Webcasts

. Dave Matthews Band

. Farm Aid

. Garbage

. KISS

. Lilith Fair

. Metallica

. The Rolling Stones

. Sheryl Crow

. The Smashing Pumpkins

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Interviews

. Beck

. Ben Folds Five

. Bush

. Jonny Lang

. Julian Lennon

. Kid Rock

. Luscious Jackson

. Motley Crue

. Van Halen

Videos

. Backstreet Boys

. Britney Spears

. Green Day

. Liz Phair

. Mariah Carey

. Master P

. Snoop Dogg

. TLC

. Usher

Community

Tunes encourages visitors to Tunes' websites to become active participants in
Tunes' user community. Membership is free and only requires that a visitor
provide his or her email address, zip code, age and gender, and choose a member
name and password to be used throughout the site. Once registered on the
Tunes.com website, members may use a variety of features and personalization
tools which are designed to facilitate active membership participation and
loyalty.

Tunes believes that music fans' tastes are an important part of their personal
identity and a powerful magnet for forming online communities. Tunes'
personalization tools facilitate community development by enabling members to
actively express and share their music interests with each other. Upon
registering with Tunes.com, Tunes' site automatically creates a member profile
page called MyTunes which offers users a range of personalization tools.
Through MyTunes, a member may:

. create a personal profile which includes a personal portrait, a virtual
CD collection catalogue and a selection of favorite artists;

. receive artist and album recommendations based upon usage history,
personal selection and demographic profile;

. customize the look and feel as well as the type of content displayed on
their Tunes.com home page;

. display a teaser profile of their MyTunes page to users with similar
music interests; and

. browse other MyTunes profiles to discover favorite albums and artists of
other members and to read their album reviews.

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Many of Tunes' community activities and features encourage user interaction and
the creation of user-generated content. Through Tunes' community-building
activities and features, members may:

. access email features, chat rooms or message boards;

. write and post album reviews; and

. upload original music for other members to download and enjoy.

These activities provide an additional source of music discovery and encourage
regular, active participation in Tunes' community. Tunes believes that the more
time a user invests to develop content and interact with others on Tunes'
sites, the more likely it is that such user will continue to return to Tunes'
sites for music content.

Commerce

As part of Tunes' strategy to provide users with a comprehensive music
experience, Tunes currently sells music CDs to consumers directly through
Tunes' Tunes.com website. In addition, CDs are sold on Tunes' genre-specific
websites through CDnow and on Rolling Stone Radio through Amazon.com.

In December 1999, Tunes launched an online merchandise and memorabilia store
that will be integrated with its websites. Tunes initially expects to sell
licensed apparel such as t-shirts, jerseys and hats, jewelry, limited edition
lithographs and prints and memorabilia such as clothing and instruments. Tunes
is also pursuing e-commerce opportunities through strategic and marketing
relationships with retailers and service providers focused on Web distribution.
Tunes believes that having broad based but targetable audiences on its sites
provides Tunes with excellent opportunities to build strategic e-commerce
relationships with clothing retailers, consumer electronic suppliers, music and
booksellers and others.

Advertising Sales and Promotion

Tunes generates a substantial portion of its revenue by selling advertising and
promotions prominently displayed on Tunes' websites. Tunes generated $970,000,
or 39%, of Tunes' revenue from advertising and promotion in 1998 and $2.5
million, or 74%, of Tunes' revenue from advertising and promotion for the nine
months ended September 30, 1999. Because music preferences are frequently
considered by advertisers to be indicative of an individual's interests and
lifestyle, Tunes gathers extensive data on site traffic, user demographics,
personal interests and psychographic data, using industry-standard measurement
tools. Tunes uses this data with the goal of providing its advertisers with a
large, demographically desirable audience, which can be targeted by segment,
genre and individual tastes.

Tunes offers several different advertising options that may be purchased as
stand alone products or as part of a more integrated marketing campaign.
Additionally, unlike traditional websites that offer only text based banner
advertisements, Tunes' extensive use of audio, video and multimedia content on
its websites enables Tunes to offer advertisers compelling rich-media
advertisements. Advertising options on Tunes' sites include:

Banners. Tunes offers banner advertisements on a general rotation or "run of
site" basis primarily to advertisers seeking to establish general brand
recognition across one or more of Tunes' sites. Targeted banner campaigns
generally appeal to advertisers seeking to communicate a particular message
regarding their product or service and are displayed when a user browses
through specific content sections on Tunes' sites.

Sponsorship. Tunes also offers sponsorship opportunities that enable
advertisers to associate their messages with Tunes' websites, live concerts and
coverage of events, such as Farm Aid and Lilith Fair, and special features of
Tunes' websites, such as Big Video and Daily Video News. Sponsorships are
generally in the form of special promotions or contests and are offered through
fixed positions within Tunes' websites. Tunes typically sells sponsorships for
a fixed monthly fee over the life of the contract and may include other
advertising components such as general rotation or targeted banner
advertisements or emails.

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Rich media. Tunes offers advertisers the ability to place their messages in
rich-media formats, which incorporate audio, video or other multimedia
elements. These advertisements typically are incorporated into the presentation
of music videos, Daily Video News, audio clips, concert webcasts, audio and
video interviews and multimedia features. These advertisements are presented to
Tunes' users prior to, during, or at the conclusion of the performance of
Tunes' streaming or multimedia content. Tunes currently sells these
advertisements at a higher rate than its traditional banner ads.

Targeted promotions. Targeted promotions are designed to communicate to users a
"call to action" such as directly purchasing a product or service, registering
as a member with the advertiser or entering a particular contest. Tunes is
typically paid for targeted promotions through a combination of a flat fee and
a per action basis.

Tunes targets traditional music advertisers for advertising on its websites,
including consumer product and service companies, record labels, entertainment
companies, technology companies, consumer electronics manufacturers, motion
picture studios, home video distributors, book publishers and automobile
companies. Since January 1998, Tunes has had over 100 advertisers. Tunes'
largest advertisers, based upon Tunes' revenue during 1999, include:

. 3Com . Forward Slash . Philips

. American Express . IBM . RealNames

. Animalhouse.com . Lycos . Sony

. Ashford.com . Media X . Sprint

. Berkeley Systems . Microsoft . TDK

. Brown-Forman . MP3.com . Second Spin

. CDnow . musicmaker.com . The Globe

. College Club . MusicFile . Toshiba

. Columbia House . Net Radio . Universal Studio

. ebates . Netscape . Varsity Books

. Excite . NFL . Virgin Atlantic

. Fans Only . Oldsmobile . VR Services

. Fortune City . On Now

Prior to October 1998, Tunes primarily used a third-party to sell advertising
on its sites. Between December 31, 1998 and September 30, 1999 Tunes increased
its internal sales staff from five to twenty employees. In May 1999, Tunes
hired a Vice President of Sales and began to focus even more resources on
building and developing Tunes' sales staff. Tunes believes that having an
internal sales force allows Tunes to better understand, respond to and meet
advertisers' needs. Tunes also believe an internal sales force increases Tunes'
access to potential advertisers and enables it to maintain strong relationships
with its existing advertising clients. Tunes' sales staff creates a variety of
value-added packages for advertisers that integrate an advertiser's message
with content available on Tunes' websites. Tunes' sales staff includes Internet
sales personnel as well as those from traditional media. Tunes uses Net Gravity
ad serving software to provide advertising management and delivery services for
Tunes' sites and to provide advertisers with reports describing the delivery of
their advertisements.

Marketing

Tunes employs a variety of methods to promote its brands and drive traffic to
its websites. In addition to print ads and promotion in Rolling Stone, Down
Beat and other publications, Tunes advertises on other websites and

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on radio stations. Tunes has advertised on leading websites, including CBS
Sportsline, Excite, InfoSeek, Lycos, Microsoft Network and Yahoo!, as well as
popular consumer sites like Alloy.com, TalkCity.com and TheOnion.com. Tunes
maintains an aggressive public relations program generating online, print and
broadcast press coverage, as well as speaking opportunities for Tunes
executives. Tunes employs online direct marketing; 1) by developing its own
online newsletters with over 400,000 subscribers, and 2) purchasing targeted
opt-in lines for content- and event-specific promotional efforts. Tunes creates
from six to 12 sweepstakes and contests each month designed to generate traffic
on Tunes' websites and to promote user registrations and newsletter
subscriptions. Tunes also has an active grassroots program that includes
employees who interact directly with fan sites, newsgroups and message boards,
providing site news and promotions. Tunes has an affiliate program, "Steal Our
Sites", with over 16,000 affiliate sites driving traffic to the Tunes Network.
In addition, Tunes distributes promotional materials at selected music and
technology industry events and on college campuses. Tunes is involved in a
variety of promotions where links to its websites are bundled into software
products distributed online or through other retail channels. Tunes utilizes
cross-promotional arrangements to secure advertising, promotional
considerations and increase traffic.

Strategic Relationships

Content Providers

Tunes believes that its strategic relationships with the publishers of Rolling
Stone and Down Beat magazines will help establish its network of websites as
the premier destination for music content on the Web.

Rolling Stone. In November 1997, Tunes entered into an agreement with Straight
Arrow Publishers, the publisher and owner of Rolling Stone magazine, which
makes Tunes the exclusive licensee on the Internet of selected content of all
domestic editions of Rolling Stone, including covers, photos, feature stories,
reviews, editorials and access to the archives of Rolling Stone. Tunes also
sublicenses this content to third parties in conjunction with Straight Arrow.
Tunes' agreement with Straight Arrow remains in effect until February 2011,
and, at that time, will be renewed automatically until February 2016 if
EMusic's market capitalization is at least $2 billion at the time of renewal.
Straight Arrow may terminate this agreement earlier if Tunes does not fulfill
its contractual obligations. See "Risk Factors -- Tunes depends on its
exclusive relationships with the publishers of Rolling Stone and Down Beat
magazines for content and their brand name recognition and may not be able to
attract visitors to Tunes' websites if these relationships terminate." Tunes
pays Straight Arrow an annual license fee of $1.0 million, which increases to
$1.3 million in 2001 and $1.5 million in 2006, subject to annual increases
based on the consumer price index for the immediately preceding year. In June,
Tunes also made a one-time license fee payment of $1.5 million to Straight
Arrow, which was triggered by Tunes' May 1999 private placement of preferred
stock. Under the agreement, Tunes also is required to purchase at least
$1.1 million of annual advertising in Rolling Stone. In return, Tunes receives
recurring editorial coverage in Rolling Stone and the right to include, in
selected issues of the magazine, its "Connected CDs," containing music,
interviews and video material as well as additional web-enabled and encrypted
multimedia content. Tunes generally pays Straight Arrow 10% of advertising
revenue from Rollingstone.com. For sublicensing of Rolling Stone content, the
party responsible for originating the business receives 15% of the revenue, and
Tunes splits the remaining 85% with Straight Arrow evenly. In connection with
the agreement, Tunes also granted Straight Arrow warrants to purchase 28.5% of
Tunes' common stock outstanding as of December 8, 1999, assuming the exercise
and conversion of all options, warrants, including the Straight Arrow warrants,
and convertible securities. Straight Arrow also has the right to appoint one
member of Tunes' board of directors during the term of the agreement.

Down Beat. In February 1999, Tunes entered into an agreement with Maher
Publications, the owner and publisher of Down Beat, one of the world's leading
and longest standing magazines featuring jazz and blues. Tunes' agreement with
Maher Publications makes Tunes the exclusive licensee on the Internet of
selected content of Down Beat, including covers, photos, feature stories,
reviews, editorials and access to the archives of Down Beat. Tunes also
sublicenses this content to third parties in conjunction with Maher
Publications. Under this agreement, Tunes also obtained the right to use the
Downbeatjazz.com domain name and the right to use

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the "DownBeat" and "DownBeat.com" trademarks and their derivatives in
connection with the Internet. Tunes' agreement with Maher Publications remains
in effect until February 2001. Maher Publications is required to promote
Downbeatjazz.com in Down Beat magazine. Tunes is not required to pay any fixed
licensing fees to Maher Publications. Rather, the agreement provides for Tunes'
payment of 50% percent commissions to Maher Publications with respect to
advertising revenue generated at Downbeatjazz.com website or on the Internet
through the sublicensing of Down Beat content or the sale of related
merchandise.

Distribution Network

A key element of Tunes' strategy is to generate consumer awareness of its
websites and brand names and to increase traffic to its websites. One way that
Tunes is seeking to accomplish these goals is, in part, by establishing
contractual relationships through which Tunes' content is distributed on the
Web by third parties. Some of these relationships provide for links from third
party websites to Tunes' websites. During the three months ended November 30,
1999, traffic from Tunes' four largest distribution channels accounted for 8%
of traffic to Tunes' sites and no single distribution channel accounted for
more than 5% of traffic to Tunes' sites. In most cases, Tunes' relationship is
not exclusive and Tunes' competitors may also distribute their content through
these parties. In addition, these distribution outlets compete with Tunes for
traffic. See "Business--Competition."

Infrastructure, Operations And Technology

Tunes has developed an operating infrastructure based upon an architecture
designed to be reliable, secure and scalable. Tunes maintains twenty active Web
application servers, ten database servers and ten application servers. Tunes'
servers use a variety of Microsoft products, including the Microsoft Windows NT
4.0 operating system. Tunes tries to maximize the performance of its servers by
directing traffic to the least busy server. Tunes also uses third-party Web-
based applications to transmit content to, and provide services on, its
websites.

Tunes' primary Web servers are maintained at Exodus Communications, Inc. in
Jersey City, New Jersey and El Segundo, California. Exodus provides fire
suppression systems, earthquake-bracing systems, physical security, 24 hours a
day, seven days a week on-site systems monitoring and administration, and
multi-level redundant power, connectivity and backup systems. Tunes depends
upon Exodus' ability to protect Tunes' systems against damage from fire,
hurricanes, power loss, telecommunications failure, break-ins, vandalism and
other events. See "Risk Factors-- Tunes may have capacity constraints and may
be subject to system disruptions, which could reduce Tunes' revenue."

Tunes' operations are also dependent upon timely installations of lines and
feeds and computer downloads from Tunes' webcast venues and content providers.
See "Risk Factors--Tunes depends upon timely installations of lines, feeds and
downloads, and their failures may result in disruptions in Tunes' services."
Tunes also depends upon Web browsers, Internet service providers and online
service providers to provide users access to Tunes' websites. Any substantial
increase in the volume of traffic on Tunes' websites or the number of
simultaneous users will require Tunes to expand and upgrade Tunes' technology,
systems and network infrastructure. See "Risk Factors--Tunes may have capacity
constraints and may be subject to system disruptions, which could reduce Tunes'
revenue."

Tunes keeps all of its back-up production and development servers, located in
Chicago, behind firewalls for security purposes and does not allow outside
access to Tunes' operating systems, except through special channels which Tunes
believes are secure. Tunes has implemented strict password management and
physical security measures. Tunes also has a computer security response team to
address security risks and vulnerabilities and respond to security alerts.

Competition

The market for online music content, communities and commerce is new, rapidly
changing and intensely competitive. The number of websites on the Internet
competing for consumers' attention and spending has

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proliferated. In addition, the broader entertainment industry is intensely
competitive. Tunes expects that competition will continue to intensify. Tunes
believes that the primary competitive factors in building a network that is
attractive to advertisers and for e-commerce are functionality, brand
recognition, quality and variety of content, member loyalty, demographic focus,
variety of value-added services, ease-of-use, quality of service, reliability
and critical mass. Tunes competes, directly and indirectly, for advertisers,
viewers, members, customers and content providers with the following categories
of companies:

. publishers and distributors of traditional media, such as television,
radio and print, including MTV, VH1, CMT, SPIN and their Internet
affiliates;

. online services or websites targeted at music consumers, such as
SonicNet, ARTISTdirect/ Ultimate Band List and Launch;

. general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to music and
entertainment-related content and services;

. Web search and retrieval services and other online services such as
Excite, Infoseek, Lycos and Yahoo!;

. online music retailers such as CDnow and Amazon.com;

. Internet radio services such as Spinner Networks and NetRadio;

. traditional music companies, including BMG Entertainment, EMI Group, Sony
Music Entertainment, Time Warner and Universal Music Group;

. companies offering digital music compression formats, such as those of
IBM, Liquid Audio, Microsoft and RealNetworks;

. companies focused on digitally distributed music, including MP3.com,
eMusic, formerly Good Noise, and various private companies; and

. online services or websites targeted to enthusiasts of particular artists
or bands, including websites maintained by their labels.

Tunes anticipates that the number of direct and indirect competitors will
increase in the future. This could result in greater and intensified
competition for users, price reductions for Tunes' advertising, reduced
margins, greater operating losses or loss of market share, any of which would
materially adversely affect Tunes' business, results of operations and
financial condition.

Tunes believes its programming and content compete favorably with its
competitors, as some of them lack brand recognition, depth and breadth of
content and quality entertainment experience. However, many of Tunes' current
and potential competitors have longer operating histories, significantly
greater financial, technical and marketing resources, significantly greater
name recognition and substantially larger user and/or membership bases than
Tunes does and, therefore, have a significantly greater ability to attract
advertisers and users. New technologies and the expansion of existing
technologies may increase the competitive pressures on Tunes. In addition, many
of Tunes' competitors may be able to respond more quickly than Tunes to new or
emerging technologies and changes in Internet user requirements and to devote
greater resources than Tunes can to the development, promotion and sale of
their services. See "Risk Factors--Tunes' market is highly competitive which
may adversely affect Tunes' revenue and business."

Intellectual Property

The music, music videos and live and archived webcasts featured on Tunes' sites
include copyrighted works of third parties, including record labels, artists
and songwriters. Each piece of music or music video content may have multiple
copyright owners, some with rights in the sound recording covering the
particular performance, others with rights in the musical composition covering
the lyrics and music, and in the case of music videos, others with rights to
the visual content. Tunes has different licensing arrangements with these
parties depending

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on Tunes' use of the song or music video and the length of portion of the song
included. In some cases, Tunes uses content without a license because it does
not believe a license is required; however, this area of the law is uncertain.
Tunes' arrangements range from binding written contracts to informal
arrangements based on the promotional nature of the content. In some cases
Tunes pays a fee to the licensor for use of the music or music video and in
other cases Tunes' use is free. Tunes also uses other content, including images
that are copyrighted works of others. Tunes relies on its working relationships
with copyright owners to obtain licenses on favorable terms. Any changes in the
nature or terms of these arrangements, including any requirement for Tunes to
pay significant fees for the use of the content, could have a negative impact
on the availability of content for Tunes' business. See "Risk Factors--Tunes
depends on the music industry and others for content and Tunes may not be able
to attract visitors to Tunes' websites if Tunes cannot obtain that content,"
"--Tunes does not have licenses for a substantial amount of music and
associated artwork available on Tunes' websites, which may subject Tunes to
infringement damages and significant license fees or loss of access to that
content" and "--Tunes will be required to pay additional statutory royalties
for the broadcast of music on the Web which may significantly increase Tunes'
operating costs."

Pursuant to Tunes' respective agreements with Tunes' magazine content
providers, Tunes licenses from Rolling Stone and Down Beat their names,
trademarks and content. These agreements could terminate and involve a number
of other risks. See "--Strategic Relationships--Content Providers" and "Risk
Factors-- Tunes depends on Tunes' exclusive relationships with the publishers
of Rolling Stone and Down Beat magazines for content and their brand name
recognition and may not be able to attract visitors to Tunes' websites if these
relationships terminate."

Copyrighted material that Tunes develops internally, as well as trademarks and
domain names relating to the Tunes.com brands and the brands of Rolling Stone
and Down Beat and other proprietary rights are important to Tunes' success and
Tunes' competitive position. Tunes seeks to protect Tunes' copyrights,
trademarks and other proprietary rights, but these actions may be inadequate.
See "Risk Factors--Tunes may be unable to protect Tunes' trademarks and
copyrights which could result in the loss of Tunes' rights or increased costs"
and "--Tunes may not be able to prevent third parties from using Tunes' domain
names which could decrease the value of these domain names."

Government Regulation

There are an increasing number of laws and regulations pertaining to the
Internet, including laws or regulations relating to user privacy, liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and domain name registration. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, patent, trademark,
trade secret, obscenity, libel employment and personal privacy is uncertain and
developing.

Privacy Concerns. Legislatures and government agencies have adopted and are
considering adopting laws and regulations restricting the collection and use of
personal information obtained from individuals when accessing websites, which
could limit Tunes' ability to use its databases to generate revenue. See "Risk
Factors--Tunes may be subject to liability for misuse of users' private
information."

Internet Taxation. A number of legislative proposals would impose additional
taxes on the sale of goods and services over the Internet, which may
substantially impair the growth of commerce on the Internet and, as a result,
adversely affect Tunes' opportunity to derive financial benefit from these
activities. See "Risk Factors--Tunes may be liable for sales and other taxes
which could adversely affect Tunes' ability to generate revenue from e-
commerce."

Domain Names. Domain names are addresses on the Internet, namely the World Wide
Web. The current system for registering, allocating and managing domain names
has been the subject of litigation and proposed regulatory reform. Although
Tunes and its magazine content providers assert trademark rights in Tunes'
domain names, third parties may bring claims for infringement against Tunes for
the use of these trademarks.

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There can be no assurance that these domain names will not lose their value, or
that Tunes will not have to obtain entirely new domain names in addition to or
in lieu of Tunes' current domain names if reform efforts result in a
restructuring in the current system. See "Risk Factors--Tunes may not be able
to prevent third parties from using Tunes' domain names which could decrease
the value of these domain names."

Jurisdiction. Due to the global nature of the Internet, it is possible that,
although transmissions by Tunes over the Internet originate primarily in New
Jersey and California and Tunes principally operates Tunes' business in
Illinois, the governments of other states and foreign countries might attempt
to regulate Tunes' business activities. In addition, as Tunes' service is
available over the Internet in multiple states and foreign countries, these
jurisdictions may require Tunes to qualify to do business as a foreign
corporation in each of these states or foreign countries, which could subject
Tunes to taxes and other regulations.

Employees

As of December 31, 1999, Tunes had 96 full-time employees, including 55 in
operations and development, 26 in sales and marketing and 16 in general and
administrative, as well as eight part-time employees. Tunes also hires
independent contractors and other temporary employees in Tunes' editorial,
operations and administrative functions. Tunes has never had a work stoppage
and none of Tunes' personnel are represented under collective bargaining
agreements. Tunes considers Tunes' employee relations to be good.

Properties

Tunes' principal administrative, marketing and development facilities are
located in approximately 16,238 square feet of office space in Chicago,
Illinois. Tunes' lease for Tunes' Chicago facilities expires in May 2002. Tunes
also subleases approximately 4,500 square feet of office space in New York City
for use as Tunes' national sales office headquarters. The New York City
sublease expires in September 2004. In addition, Tunes leases approximately 220
square feet of office space in San Francisco for use as Tunes' west coast sales
office. The San Francisco lease expires in June 2000. Tunes believes that
additional space may be required as its business expands and believes that
Tunes will be able to obtain suitable space as needed.

Legal Proceedings

From time to time, Tunes may be involved in litigation relating to claims
arising out of Tunes' operations. As of the date of this prospectus, Tunes is
not engaged in any legal proceedings that are expected to have a material
adverse effect on Tunes' business, financial condition or results of
operations.

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Principal Stockholders

The table below sets forth information with respect to the beneficial ownership
of Tunes' common stock as of December 31, 1999 by: (1) each person who Tunes
knows beneficially owns more than 5% of its common stock, (2) each director,
(3) each of Tunes' four most highly compensated executive officers whose salary
and bonus during 1999 were in excess of $100,000, and (4) all directors and
executive officers as a group.

<TABLE>
<CAPTION>
Percent of common
Number of shares stock
beneficially beneficially
Name of Beneficial Owner (1) owned (2) owned (2)
---------------------------- ---------------- -----------------
<S> <C> <C>
Robert R. Gheewalla(3)..................... 1,933,665 26.9
Joseph H. Gleberman(3)..................... 1,933,665 26.9
The Goldman, Sachs Group Inc.(3)........... 1,933,665 26.9
85 Broad Street,
New York, New York
Jann S. Wenner(4).......................... 3,674,621 33.8
Straight Arrow Publishers Company,
L.P.(4)................................... 3,674,621 33.8
1290 Avenue of the Americas
New York, New York
Doerge-Internet, L.P....................... 774,971 10.8
30 S. Wacker Drive, Suite 2112
Chicago, Illinois
Burton B. Goldstein, Jr.(5)................ 750,000 10.4
netWorth Partners I, LLC(5)................ 750,000 10.4
One Buckhead Plaza, Suite 780
3060 Peachtree Road
Atlanta, Georgia
Howard A. Tullman(6)....................... 508,960 6.7
Jerry Mickelson(7)......................... 429,690 5.8
207 West Goethe Street
Chicago, Illinois
Jam Enterprises Corp.(7)................... 429,690 5.8
207 West Goethe Street
Chicago, Illinois
SBIC Partners II, L.P. .................... 400,000 5.6
201 Main Street, Suite 2302
Fort Worth, Texas
Stuart B. Frankel(8)....................... 135,000 1.8
Howard J. Katz(9).......................... 135,070 1.8
Scott Mitchell(10)......................... 65,000 *
Matthew S. Kaplan.......................... 24,028 *
Scott Mednick(11).......................... 11,142 *
All directors and executive officers as a
group (13 persons)........................ 7,402,486 62.6
</TABLE>
- ------------------
*Less than one percent

(1) Unless otherwise indicated, (a) the persons in the table above have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, and (b) the address for each beneficial owner
of more than 5% of Tunes' common stock is c/o Tunes.com Inc., 640 North
LaSalle Street, Suite 560, Chicago, Illinois 60610.

(2) The number of shares includes common stock to be issued upon conversion of
preferred stock prior to the completion of the merger and common stock that
may be issued upon exercise of options and warrants that are currently
exercisable or that may become exercisable within 60 days of December 31,
1999. The number of outstanding shares used in calculating percentage
ownership for each person includes shares underlying options and warrants
that they hold, but excludes shares underlying options and warrants held by
others.

(3) Consists of 4,706 shares issuable upon exercise of warrants and 1,928,959
shares owned by the following investment partnerships, of which affiliates
of The Goldman Sachs Group are the general partner, managing general
partner or investment manager:

.63,200 shares held of record by Bridge Street Fund 1997, L.P.;

.44,743 shares held of record by Goldman Sachs & Co. Verwaltungs GmbH;

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.1,208,535 shares and warrants to purchase 5,883 shares held of record
by GS Capital Partners II, L.P.;

.482,315 shares held of record by GS Capital Partners II Offshore,
L.P.; and

.130,166 shares held of record by Stone Street Fund 1997, L.P.

The Goldman Sachs Group disclaims beneficial ownership of the shares owned
by such investment partnerships to the extent attributable to partnership
interests therein held by persons other than The Goldman Sachs Group and
its affiliates. Each of such investment partnerships shares voting and
investment power with its respective affiliates.

Mr. Gleberman is a managing director and Mr. Gheewalla is a Vice President
of Goldman, Sachs & Co., a wholly owned subsidiary of The Goldman Sachs
Group. Mr. Gleberman and Mr. Gheewalla disclaim beneficial ownership of the
shares owned by The Goldman Sachs Group, except to the extent of their
pecuniary interests therein.

(4) Consists of shares issuable upon exercise of warrants held by Straight
Arrow Publishers Company, L.P. Mr. Wenner serves as Chief Executive Officer
of Wenner Media, the general partner of Straight Arrow. Mr. Wenner
disclaims beneficial ownership of all securities held by Straight Arrow.

(5) Represents shares held by netWorth Partners I, LLC. Mr. Goldstein serves as
President of netWorth Partners, L.P., the managing partner of netWorth
Partners I, LLC, and disclaims beneficial ownership of these shares.

(6) Consists of 57,530 shares and options to purchase 451,430 shares.

(7) Consists of 160,710 shares held by Jam Enterprises Corp. and options to
acquire 268,980 shares held by Jam Enterprises. Mr. Mickelson is a
principal shareholder, executive officer and director of Jam Enterprises.
Mr. Mickelson is Tunes' former Chairman.

(8) Represents options to purchase 135,000 shares held by Mr. Frankel.

(9) Represents options to purchase 135,070 shares held by Mr. Katz.

(10) Represents options to purchase 65,000 shares held by Mr. Mitchell.

(11) Represents 10,142 shares and a warrant to purchase 1,000 shares held by
The Mednick Living Trust, a revocable grantor trust. Mr. Mednick is a co-
trustee of The Mednick Living Trust.

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TUNES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and the notes thereto of Tunes and the other financial information
included elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain forward-
looking statements that involve risks and uncertainties. Tunes' actual results
could differ materially from those anticipated by this forward-looking
information due to the factors discussed in "Risk Factors," "Information About
Tunes" and elsewhere in this joint proxy statement/prospectus.

Overview

Tunes is an online music network, providing music fans with extensive and
exclusive music content, community features and e-commerce services. Tunes' hub
website, Tunes.com, is a "one-stop shop" designed to appeal to a broad spectrum
of music fans by covering a wide range of genres, from urban to rock to
classical. The Tunes.com website is supported by and integrated with Tunes'
network of genre-specific websites: Rollingstone.com--rock and pop and
Downbeatjazz.com--jazz and blues. Tunes has built these websites through its
exclusive relationships with leading music industry magazines, Rolling Stone
and Down Beat. Tunes' websites provide advertisers and retailers with an
attractive channel to reach consumers across both broad and targeted
demographic groups. Tunes generates revenue from a number of sources, including
advertising, e-commerce and content syndication.

Tunes began its business in July 1996 and started operating its websites in
March 1997--Jamtv.com, March 1998--Rollingstone.com, July 1998--Tunes.com,
December 1998--Thesource.com and February 1999-- Downbeatjazz.com. In July
1998, Tunes acquired Tunes Network, Inc., now Tunes Acquisition Corp., which
had operated the Tunes.com website since November 1996. By mutual agreement,
Tunes has terminated its exclusive license of content from The Source magazine,
a hip-hop magazine, and will discontinue operation of its Thesource.com website
as of December 31, 1999.

Advertising Revenue. Tunes generates advertising revenue from the sale of
integrated marketing campaigns, banner advertisements and sponsorships on its
websites and on co-branded websites under content distribution agreements.
Advertising revenue also includes barter revenue, which represents an exchange
of advertising space on Tunes' network of sites for reciprocal advertising
space on the websites of third parties or for other goods or services. Barter
revenue and the corresponding expense is recognized in the period the
advertising is displayed and the corresponding services are received at the
fair value of the consideration received or provided, whichever is more readily
determinable. Barter revenue represented approximately 6% of Tunes' total
revenue during 1998 and 20% of total revenue during the nine months ended
September 30, 1999. During the quarter ended September 30, 1999, barter revenue
declined to approximately 10% of total revenue. During the fourth quarter of
1999, Tunes expects barter revenue to continue to decline as a percentage of
total revenue compared to the level of barter revenue recognized during the
nine months ended September 30, 1999, as Tunes focuses on generating additional
cash-based advertising revenue. Advertising revenue is generally recognized in
the period in which the advertisement is displayed or campaign is run, provided
that Tunes has no significant remaining obligations and its collection of the
resulting receivable is probable. Tunes' obligations typically include
guarantees of a minimum number of advertising impressions delivered, or times
that advertisements appear in pages viewed by users. Tunes sells advertisements
on a cost per thousand impressions, or CPM, basis, a cost per click-through, or
CPC, basis or a cost per action, or CPA, basis. Advertisements billed on a CPM
basis require advertisers to pay Tunes an agreed-upon amount for the
advertising impressions delivered. Advertisements billed on a CPC and CPA basis
require advertisers to pay Tunes an agreed-upon amount when users click through
to the advertiser's website or take a required action in response to the
advertisements, respectively. In a CPC contract, Tunes recognizes revenue as
members click-through to the advertiser's website or otherwise respond to the
advertisement. In the case of a CPA contract, Tunes may experience delays in
recognizing revenue pending receipt of data from the advertiser.

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Other Revenue. Tunes generates other revenue from content licensing, e-commerce
and product development. Revenue from licensing or sublicensing Tunes' content
to third parties, such as other websites, is recognized over the period of the
license agreement with the third party. Tunes expects revenue from content
licensing to decrease as a percentage of total revenue as a result of projected
growth in advertising and e-commerce revenue. E-commerce revenue generated from
the sale of CDs and other music-related merchandise through Tunes' websites is
recognized when the products are shipped to customers, net of allowances for
returns. Tunes generates product development revenue from the development of
content for multimedia CDs under third-party contracts and the development of
microsites and other Web-based services. This revenue is generally recognized
when the product is delivered, except for services provided under longer-term
contracts where revenue is recognized on a percentage-of-completion basis over
the life of the project. Tunes expects revenue from product development
activities and content licensing to decrease in the future as Tunes focuses its
resources on generating advertising and e-commerce revenue.

Cost of Revenue. Tunes' cost of revenue consists primarily of expenses required
to publish and present its websites, produce and present streaming video and
audio concerts and support and deliver its content services. Examples of costs
of revenue include content, royalty and license fees, revenue sharing fees,
telecommunications expenses and employee compensation. To date, Tunes has
entered into a number of license agreements and strategic relationships in
order to obtain content, generate additional traffic and registered users and
establish additional sources of revenue. For example, Tunes pays a portion of
the advertising and e-commerce revenue Tunes generates from its genre-specific
websites, Rollingstone.com, and Downbeatjazz.com, to the publishers of the
affiliated magazines. See "Business Strategic Relationships."

Operations and Development Expense. Operations and development expense consists
primarily of expenses required to design, develop and maintain Tunes' websites
and underlying technology, including technology-related expenses, outside
service expenses and employee compensation and related expenses. Tunes believes
that significant future investments in website development will be required for
Tunes to remain competitive. Therefore, Tunes expects to continue to increase
its operations and development expenses in absolute dollars for the foreseeable
future.

Sales and Marketing Expense. Sales and marketing expense consists of expenses
required to promote Tunes' websites and generate advertising and e-commerce
revenue. Examples of sales and marketing expenses include salaries and related
expenses, advertising, marketing, promotional and public relations expenses.
Tunes believes that increasing its sales and marketing efforts will be critical
to increasing its revenue and, therefore, Tunes expects sales and marketing
expense to continue to increase as additional sales personnel are hired and
Tunes pursues an increased branding and marketing campaign.

General and Administrative Expense. General and administrative expense consists
primarily of salary and related costs for general corporate functions including
finance and accounting, legal, human resources and administration as well as
professional service fees and facilities costs. Tunes expects general and
administrative expenses to increase in absolute dollars in future periods as
Tunes continues to develop and maintain the executive and administrative
infrastructure necessary to support the growth of its business.

Net Losses. Tunes has incurred significant losses and negative cash flows since
its inception. Through September 30, 1999, Tunes has incurred cumulative losses
of $36.9 million. As of September 30, 1999, Tunes had an accumulated deficit of
$41.4 million, including the accretion of redeemable convertible preferred
stock of $4.5 million. These losses have been funded primarily through the
issuance of preferred stock and convertible promissory notes. Since Tunes
believes that its success will depend largely upon its ability to increase
traffic to its websites, build brand names superior to its competition,
integrate developing technologies and increase advertising and other revenue
opportunities, Tunes intends to invest heavily in marketing and brand
promotion, technological resources, sales, content development and strategic
relationships. Tunes anticipates that it will incur significant losses for the
foreseeable future and that the rate at which losses will be incurred may
increase from current levels.

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In light of the evolving nature of Tunes' business and Tunes' limited operating
history, Tunes believes that period-to-period comparisons of its revenue and
operating results are not meaningful and should not be relied upon as
indicative of future performance. Tunes believes that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Tunes' revenue is also affected by seasonal patterns in
advertising, which would become more noticeable if its revenue growth does not
continue at its recent rate. Tunes does not believe that its historical growth
rates are indicative of future results.

Results of Operations

From July 2, 1996, Tunes' inception, through the first quarter of 1997, Tunes'
operations were limited and consisted primarily of start-up activities. Tunes
did not generate any revenue until April 1997 and only started to significantly
expand its operations beginning in June 1997. Advertising and other revenue
from CDnow accounted for approximately 33% of Tunes' total revenue in 1998 and
22% for the nine months ended September 30, 1999. Tunes expects that revenue
from CDnow will decline and will account for a smaller percentage of Tunes'
total revenue in the future.

Nine Months Ended September 30, 1998 and 1999

Revenue

For the nine months ended September 30, 1998 and 1999, total revenue increased
$1.6 million, from $1.7 million to $3.3 million.

Advertising Revenue. For the nine months ended September 30, 1998 and 1999,
advertising revenue increased by $2 million, from $502,000 to $2.5 million, and
accounted for approximately 29% and 74% of total revenue, respectively. For the
nine months ended September 30, 1998 and 1999, Tunes generated advertising
revenue from barter transactions of $89,000 and $672,000, respectively. The
increase in advertising revenue from period to period was due primarily to
traffic growth driven by the launch of the Rollingstone.com website in March
1998 and the launch of the redesigned Tunes.com hub site on March 1, 1999, as
well as a higher number of ad impressions and sponsorships sold to new and
existing advertisers. For the nine months ended September 30, 1998 and 1999,
total ad impressions were 44.7 million and 421.0 million, respectively. In
addition, Tunes expanded its sales force in the fourth quarter of 1998 from one
to five employees and from five to 20 employees in the first nine months of
1999. During the nine months ended September 30, 1999, no one advertiser
accounted for more than 10% of total advertising revenue.

Other Revenue. For the nine months ended September 30, 1998 and 1999, other
revenue decreased by $366,000, from $1,200,000 to $847,000, and accounted for
approximately 71% and 26% of total revenue, respectively. The decrease in other
revenue was primarily the result of a $317,000 decrease in product development
revenue due to Tunes' continued emphasis on generating increased advertising
and e-commerce revenue and a decreased emphasis on product development revenue.
Content licensing revenue decreased by $188,000 due to the amendment of Tunes'
agreement with CDnow. The decrease in product development and content licensing
revenue was partially offset by a $55,000 increase in e-commerce revenue and
$100,000 of other revenue related to Tunes' agreement with CDnow. Prior to
Tunes' July 1998 acquisition of Tunes Network, Tunes generated nominal e-
commerce revenue. Although Tunes expects to continue generating product
development revenue and content licensing revenue in future periods, Tunes
expects to experience a continued decrease in product development revenue and
content licensing revenue as a percentage of total revenue due to Tunes'
emphasis on generating increased advertising and e-commerce revenue.

Cost of Revenue

For the nine months ended September 30, 1998 and 1999, cost of revenue
increased by $200,000, from $2.9 million to $3.1 million, but decreased as a
percentage of revenue, from 167% to 94%, respectively. The

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decrease in cost of revenue as a percentage of revenue is primarily the result
of increased advertising revenue and decreased revenue from the development of
interactive CD products. Cost of revenue remained relatively consistent in
absolute dollars as the decreased product development costs and outside
production costs associated with the production of fewer interactive CD
products were offset by increased telecommunication costs associated with the
expanded bandwidth required to support the increased traffic on Tunes'
websites, increased license fees and revenue sharing fees associated with the
increased advertising revenue, increased editorial and operations staff
necessary for the production of music-related information and programming on
Tunes' websites, and increased costs associated with e-commerce revenue.

Operating Expenses

Operations and Development Expense. For the nine months ended September 30,
1998 and 1999, operations and development expense increased by $1.8 million,
from $1.0 million to $2.8 million. The increase was primarily due to wages and
costs arising from Tunes' employment of an additional 14 technology employees
during the second half of 1998 and first nine months of 1999 as well as the
expanded use of consultants, for the development of additional websites and
enhancement of existing websites in late 1998 and the first nine months of
1999.

Sales and Marketing Expense. For the nine months ended September 30, 1998 and
1999, sales and marketing expense increased by $5.2 million, from $2.3 million
to $7.5 million. The increase in sales and marketing expense was primarily the
result of Tunes' increased advertising on radio stations, other websites and in
print publications as well as fees associated with website tenancy agreements.
In addition, from March 31, 1998 to September 30, 1999, Tunes increased its
sales and marketing departments from two to 28 employees.

General and Administrative Expense. For the nine months ended September 30,
1998 and 1999, general and administrative expense increased by $1.1 million,
from $1.9 million to $3.0 million. The increase was primarily attributable to
salary and related expenses for additional personnel and increased professional
fees. From March 31, 1998 to September 30, 1999, Tunes expanded its combined
finance and accounting, legal, human resources and administrative departments,
from four to 16 employees.

Depreciation and Amortization Expense. Depreciation and amortization expense
consists of the depreciation of property and equipment and the amortization of
goodwill and other intangible assets acquired in connection with Tunes'
acquisition of Tunes Network. For the nine months ended September 30, 1998 and
1999, depreciation and amortization expense increased by $1.6 million, from
$1.0 million to $2.6 million. Depreciation expense increased due to purchases
of property and equipment, and amortization expense increased due to the
amortization of goodwill and intangible assets resulting from Tunes'
acquisition of Tunes Network. The acquisition of Tunes Network resulted in
goodwill and other intangible assets of $5.6 million, which is being amortized
over an estimated useful life of 24 months, or $2.8 million annually.

Stock Compensation Expense. Stock compensation expense includes the non-cash
amortization of the fair value of warrants and stock options issued to non-
employees. In connection with agreements with its magazine content providers,
Tunes issued warrants to purchase its common stock. The estimated fair value of
the warrants at each date of issuance is amortized over the initial terms of
the agreements or earlier as they become fully exercisable. The estimated fair
value of stock options held by non-employees is amortized over the remaining
life of the option or until vested in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." For
the nine months ended September 30, 1998 and 1999, stock compensation expense
increased by $4.1 million, from $413,000 to $4.5 million. The increase was
primarily the result of Tunes' sale of preferred stock in May 1999, which
triggered an increase in the number of shares issuable upon exercise of the
Straight Arrow warrant and the vesting of the outstanding warrants issued to
Straight Arrow and Source Enterprises. Additional stock compensation expense
will be recorded as a result of an additional warrant issued to Straight Arrow
in December 1999. See "Management Stock Option Plans."

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Other Income

Interest income primarily represents interest earned on cash and cash
equivalents, marketable securities and a restricted escrow account relating to
Tunes' agreement with Straight Arrow, the publisher of Rolling Stone. See
"Liquidity and Capital Resources" and "Business Strategic Relationships Content
Providers." For the nine months ended September 30, 1998 and 1999, interest
income decreased by $56,000 from $340,000 to $284,000, due to lower balances in
cash and cash equivalents. Interest expense for the nine months ended September
30, 1998 and 1999 increased by $72,000, from $5,000 to $77,000. Interest
expense in 1999 primarily represents interest incurred on the $4.0 million
convertible promissory notes that were issued in March and April 1999 and were
converted into preferred stock in May 1999.

Income Taxes

Tunes has incurred net operating losses from its inception through September
30, 1999. No benefit for federal and state income taxes is reported in Tunes'
financial statements as the deferred tax assets generated by these losses and
other temporary differences have been fully reserved because of uncertainty
regarding its ability to generate taxable income prior to the expiration of the
carryforward period. At December 31, 1998, Tunes had net operating loss
carryforwards totaling approximately $14.7 million which expire beginning in
2011. Based on the Internal Revenue Code and changes in Tunes' ownership,
utilization of the net operating loss carryforward may be subject to
significant annual limitations. See note 11 to Tunes' consolidated financial
statements.

Net Losses

Since its inception, Tunes has incurred net losses totaling $36.9 million.
Tunes anticipates that it will incur significant losses for the foreseeable
future and that the rate at which losses will be incurred may increase.

Inception Period and Years Ended December 31, 1997 and 1998

Revenue

For the years ended December 31, 1997 and 1998, revenue increased by $1.9
million from $565,000 to $2.5 million. Tunes did not generate any revenue from
July 2, 1996, Tunes' inception, to December 31, 1996, the inception period, and
first generated revenue in April 1997.

Advertising revenue. For the years ended December 31, 1997 and 1998,
advertising revenue increased by $686,000 from $284,000 to $970,000 and
accounted for 50% and 39% of total revenue, respectively. The increase in
advertising revenue was due primarily to the launch of the Rollingstone.com
website in March 1998 and a higher number of ad impressions and sponsorships
sold. During 1997 and 1998, total ad impressions were 4.8 million and 90.9
million, respectively. During 1997 and 1998, Tunes generated advertising
revenue from barter transactions of $174,000 and $157,000, respectively. During
1998, no one advertiser accounted for more than 18% of total advertising
revenue.

Other revenue. For the years ended December 31, 1997 and 1998, other revenue
increased by $1.2 million, from $281,000 to $1.5 million and accounted for
approximately 50% and 61% of total revenue, respectively. This increase was due
to increases in content licensing revenue, product development revenue and e-
commerce revenue. During 1998, Tunes generated $625,000 of content licensing
revenue from one customer. Prior to April 1998, Tunes did not generate any
revenue from content licensing and related services. Product development
revenue increased by $410,000, from $241,000 during 1997 to $651,000 during
1998. Revenue associated with longer-term contracts for the development of
interactive CD products accounted for approximately 84% and 75% of total
product development revenue during 1997 and 1998, respectively. During 1998,
one customer accounted for approximately 75% of total product development
revenue. During 1998, e-commerce revenue was $193,000 and accounted for 8% of
total revenue. The primary source of e-commerce revenue in 1998 was CD sales
generated through Tunes' Tunes.com website following the acquisition of Tunes
Network in July 1998. Tunes generated virtually no e-commerce revenue during
1997.

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Cost of Revenue

For the years ended December 31, 1997 and 1998, cost of revenue increased by
$2.7 million from $1.3 million to $4.0 million. Tunes did not recognize any
cost of revenue during the inception period, as Tunes did not begin generating
revenue until April 1997. The increase in cost of revenue from period to period
was primarily the result of increased content licensing fees, revenue sharing
fees and costs associated with increases in editorial and operations staff
necessary for the production of music-related information and programming on
Tunes' websites. In addition, telecommunication costs increased as Tunes
expanded its capacity to support and deliver its services to the increased
traffic on its websites.

Operating Expenses

Operations and Development Expense. For the years ended December 31, 1997 and
1998, operations and development expense increased by $1.4 million from
$458,000 to $1.9 million. Operations and development expense was $32,000 for
the inception period. The increases in operations and development expense from
period to period were primarily the result of increased costs incurred in
connection with the development of additional websites and systems.

Sales and Marketing Expense. For the years ended December 31, 1997 and 1998,
sales and marketing expense increased by $2.9 million from $1.1 million to $4.0
million. Sales and marketing expense was $37,000 for the inception period. The
increases in sales and marketing expense for each period were primarily the
result of increased advertising on other websites and in Rolling Stone magazine
and the hiring of additional sales and marketing personnel and related costs.
Advertising and promotion expenses increased by $2.0 million from $460,000 in
1997 to $2.5 million in 1998. From December 31, 1997 to December 31, 1998,
Tunes expanded its sales and marketing department from two to 10 employees.

General and Administrative Expense. For the years ended December 31, 1997 and
1998, general and administrative expense increased by $1.6 million from $1.2
million to $2.8 million. General and administrative expense was $153,000 for
the inception period. The increases in general and administrative expense in
each period were primarily attributable to salary and related expenses for
additional personnel and increased professional fees. From December 31, 1997 to
December 31, 1998, Tunes expanded its combined finance and accounting, legal,
human resources and administrative departments from four to 12 employees.

Depreciation and Amortization Expense. For the years ended December 31, 1997
and 1998, depreciation and amortization expense increased by $1.6 million from
$157,000 to $1.8 million. Depreciation and amortization expense was $2,000 for
the inception period. The increases in depreciation and amortization expense
were primarily attributable to the amortization of goodwill and intangible
assets resulting from its acquisition of Tunes Network in July 1998.

Stock Compensation Expense. For the years ended December 31, 1997 and 1998,
stock compensation expense increased by $1.5 million from $10,000 to $1.5
million. The increase was due to a charge of $913,000 in 1998 for the
accelerated vesting of stock options held by former employees as well as the
inclusion of 12 months of warrant compensation expense in 1998 compared to one
month in 1997. Tunes did not recognize any stock compensation expense during
the inception period.

Other Income

For the years ended December 31, 1997 and 1998, interest income increased by
$333,000, from $100,000 to $433,000. Other income was $7,000 for the inception
period. The increases in interest income for each period are primarily
attributable to higher average balances in cash and cash equivalents and,
during the years ended December 31, 1997 and 1998, the restricted escrow
account established to pay Tunes' quarterly license fee under Tunes' agreement
with Straight Arrow. See "Liquidity and Capital Resources."

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Selected Quarterly Operating Results

The table below sets forth unaudited quarterly statements of operations data
for Tunes.com for the seven most recent quarters. This information has been
prepared on substantially the same basis as the audited financial statements.
Tunes believes this data includes all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. This
information should be read in conjunction with the audited financial statements
of Tunes.com and the related notes thereto included elsewhere in this joint
proxy statement/prospectus. Historical operating results for any quarter are
not necessarily indicative of the operating results for any future period.
Tunes believes that advertising sales in traditional media, such as television
and radio, generally are lower in the first calendar quarter of each year. The
same may be true with Internet advertising, which is new and rapidly evolving.
Tunes' revenue is also affected by seasonal patterns in advertising, which
could become more evident depending on the extent to which the Internet is
accepted as an advertising medium.

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
June Sept. Dec. Mar. June Sept.
March 31, 30, 30, 31, 31, 30, 30,
1998 1998 1998 1998 1999 1999 1999
--------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Advertising............ $ 145 $ 126 $ 232 $ 467 $ 620 $ 752 $ 1,084
Other.................. 309 552 352 302 357 269 221
------- ------- ------- ------- ------- ------- -------
Total revenue......... 454 678 584 769 977 1,021 1,305
------- ------- ------- ------- ------- ------- -------
Cost of revenue......... 991 1,049 824 1,181 984 1,019 1,106
------- ------- ------- ------- ------- ------- -------
Gross profit (deficit).. (537) (371) (240) (412) (7) 2 199
Operating expenses...... 1,205 1,779 3,666 5,407 3,971 9,202 7,165
------- ------- ------- ------- ------- ------- -------
Loss from operations... $(1,742) $(2,150) $(3,906) $(5,819) $(3,978) $(9,200) $(6,966)
======= ======= ======= ======= ======= ======= =======
</TABLE>

Liquidity and Capital Resources

Since inception in July 1996, Tunes has financed its operations primarily
through private sales of convertible preferred stock and convertible promissory
notes. Net proceeds from these sales in 1997 and 1998 totaled $19.7 million. At
September 30, 1999, Tunes' primary source of liquidity consisted of $7.5
million of cash and cash equivalents. In November 1999, Tunes entered into a
lease facility that allows for borrowings of up to $1.0 million for equipment
purchases made on or prior to July 31, 2000. Borrowings made under this lease
facility are payable by Tunes over a 36-month term. At November 30, 1999, Tunes
had outstanding borrowings of approximately $400,000 under this lease facility.

Net cash used in operating activities was $9.3 million, $3.2 million and
$131,000 for the years ended December 31, 1998 and 1997 and the inception
period, respectively. For the nine-month period ended September 30, 1999, net
cash used in operating activities was $13.2 million. Net cash used in operating
activities in all such periods was primarily attributable to net losses and
increases in accounts receivable, prepaid expenses and other current assets,
which were partially offset by increases in noncash charges, accounts payable
and other accrued expenses. Sources of cash for the years ended December 31,
1998 and 1997 also included deferred revenue increases related primarily to
advances from CDnow. In June 1999, the advances required under the original
contract with CDnow were reduced.

Net cash used for investing activities was $93,000, $2.7 million and $58,000
for the years ended December 31, 1998 and 1997 and the inception period. For
the nine-month period ended September 30, 1999, net cash used for investing
activities was $2.0 million. The principal uses of cash for investing
activities for all periods were purchases of property and equipment, the
acquisition of Tunes Network in July 1998 and Tunes' payment in November 1997
of $2.0 million into a restricted escrow account to pay the $250,000 quarterly
license fee under the agreement with Straight Arrow, publisher of Rolling
Stone, which is described more fully in "Business

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Strategic Relationships." This payment was partially offset in 1998 and 1999 by
the reduction of the restricted escrow account as these funds were used to pay
the quarterly license fee. Additionally, in June 1999 Tunes paid Straight Arrow
a $1.5 million license fee, which was triggered by the issuance of convertible
preferred stock in May 1999. This fee will be amortized over the remaining term
of Tunes' agreement with Straight Arrow, as extended.

Net cash provided by financing activities was $11.0 million, $8.0 million and
$750,000 for the years ended December 31, 1998 and 1997 and the inception
period, respectively. For the nine-month period ended September 30, 1999, net
cash provided by financing activities was $18.5 million. Financing activities
consisted principally of the issuance of preferred stock and convertible
promissory notes. In June 1997, Tunes issued shares of Series A-I preferred
stock for $4.5 million of cash and the retirement of $500,000 of then
outstanding Tunes.com notes. During October 1997, Tunes issued shares of Series
A-II preferred stock for an aggregate of $1.0 million. During November and
December 1997, Tunes issued shares of Series B preferred stock for $2.3 million
of cash and $20,000 of professional services. During February and March 1998,
Tunes issued shares of Series C preferred stock for an aggregate of $4.0
million of cash. During May and June 1998, Tunes raised an additional $8.2
million through the issuance of shares of Series A-III preferred stock and
shares of Series D preferred stock. In March and April 1999, Tunes issued $4.0
million of convertible promissory notes and warrants. In May 1999, Tunes issued
shares of Series A-IV preferred stock and shares of Series E preferred stock
for aggregate consideration of $20.3 million, which includes the conversion of
the $4.0 million of convertible promissory notes issued in March and April
1999. During 1997 and 1998 and for the nine months ended September 30, 1999,
Tunes incurred costs in connection with the issuance of equity securities of
$238,000, $100,000 and $1.2 million, respectively. During the nine months ended
September 30, 1999, Tunes incurred approximately $1.3 million in costs in
connection with its planned initial public offering that was delayed in August
1999 due to unfavorable market conditions. These costs were charged to general
and administrative expenses in October 1999.

Tunes currently has no material commitments for capital expenditures. However,
Tunes anticipates a substantial increase in its capital expenditures and lease
commitments consistent with projected growth in operations, infrastructure and
personnel. Tunes also plans to increase its advertising and marketing
expenditures to promote its websites and increase the number of visitors to its
websites. Under its agreement with Straight Arrow, Tunes is required to
purchase $1.1 million of advertising and other services annually in Rolling
Stone magazine until February 2011 and to pay Straight Arrow an annual license
fee of $1.0 million, which increases to $1.3 million in 2001 and $1.5 million
in 2006 subject to annual increases based on the consumer price index for the
immediately preceding year. In addition, Tunes has entered into various Web
tenancy agreements, or agreements under which Tunes pays to place its content
on a website, that require Tunes to pay fees of up to $1.5 million during 1999,
of which $1.2 million has been paid through September 30, 1999. Tunes expects
to make Web tenancy fee payments in similar or greater amounts during years
subsequent to 1999.

Tunes believes that existing cash balances, the collection of outstanding
accounts receivable, and the proceeds from projected revenue will be sufficient
to meet Tunes' anticipated cash requirements until the closing of the merger
with EMusic. The closing is expected in February of 2000, although the merger
agreement does not expire until March 28, 2000. Pursuant to the merger
agreement, EMusic has committed to loan Tunes $3 million at an annual interest
rate of 2% above the prime rate, which loan is expected to be completed on or
about January 10, 2000. In the event that the merger does not take place in the
first quarter of 2000 Tunes would require additional equity or debt financing
to support its operations. Although Tunes has no firm commitment for additional
financing and there can be no assurance that any financing will be available in
amounts or on terms acceptable to Tunes, if at all, Tunes' believes that it has
the ability to obtain the additional financing required to support its
operations for at least the next 12 months. In the event the merger is not
consummated and Tunes is unable to obtain sufficient additional financing to
fund its planned operations, Tunes will be required to reduce the scope of its
operations or its anticipated expansion.

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Year 2000 Readiness Disclosure

Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to be ready for such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.

Tunes' business could suffer if the systems on which Tunes depends to conduct
its operations are not Year 2000 ready. Tunes' potential areas of exposure
include:

. information technology, including computers and software that Tunes has
developed internally or purchased or licensed from third parties or that
Tunes may purchase or license in the future;

. non-information technology, including telephone systems and other
equipment that Tunes uses internally; and

. external, third party systems, particularly the systems that comprise the
Internet and those products and services that allow Tunes' users to
access the Internet.

Tunes has formed an internal Year 2000 evaluation committee and has engaged in
an evaluation and the testing of Tunes' software and hardware for Year 2000
readiness. Tunes has completed its initial assessment of Year 2000 readiness
for both Tunes' information and non-information technology. Based on its
initial assessment, Tunes believes all non-information technology, including
phone systems, upon which Tunes is materially dependent, is Year 2000 ready.
Tunes intends to resolve any Year 2000 readiness issues relating to material
information technology that Tunes uses internally primarily through normal
upgrades or, when necessary, through replacement of existing software with Year
2000 ready products.

Tunes relies to a large extent on third parties for the maintenance and
operations of its hardware and software systems. Even if Tunes' internal
systems are Year 2000 ready, the failure of Exodus or Tunes' other key vendors
to be Year 2000 ready could substantially disrupt and damage Tunes' operations.
To date, we have not experienced Year 2000 readiness issues with material
third-party software, hardware or service providers. At this time, Tunes cannot
estimate the effect, if any, that non-ready systems at these entities could
have on its business, results of operations or financial condition, and there
can be no assurance that the impact, if any, would not be material. If Tunes'
software systems do not function properly as to dates starting in the year 2000
and beyond either because of its own or third party systems, this may result in
a material adverse effect on Tunes' business, results of operations or
financial condition. See "Risk Factors-- Year 2000 problems for Tunes, Tunes'
suppliers or Tunes' customers could increase Tunes' liabilities or expenses and
impact Tunes' profitability."

To date, Tunes has not incurred any material expenditure in connection with
identifying, evaluating or addressing Year 2000 readiness issues. Most of
Tunes' expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 readiness matters in general. At this time, Tunes does
not have the information necessary to estimate the potential costs of revisions
to its systems should such revisions be necessary or of the replacement of
third-party software, hardware or services that are determined not to be Year
2000 ready. If significant revisions are necessary, Tunes may be required to
expend large financial and other resources to address the situation.

Tunes does not currently have a contingency plan to deal with the worst-case
scenario involving Year 2000-related failures of technologies on which Tunes is
dependent, nor does Tunes intend to develop a plan for this scenario. Potential
Year 2000 problems will vary in significance, ranging from minor software
errors to network failures. Tunes' services would not be available under Tunes'
worst-case scenario, potentially resulting in loss of revenue and reputation,
especially since Tunes is an Internet based company, and a decrease in the
number of visitors to Tunes' websites. In addition, Year 2000 problems may
result in termination of Tunes'

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agreement with Straight Arrow. See "Risk Factors Year 2000 problems for Tunes,
Tunes' suppliers or Tunes' customers could increase Tunes' liabilities or
expenses and impact Tunes' profitability." Although Tunes does not anticipate
the occurrence of this worst-case scenario, Tunes' contingency plan will
include procedures to follow if it occurs. If Tunes' present efforts to address
the Year 2000 readiness issues are not successful, or if partners,
manufacturers, suppliers and other third parties do not successfully address
these issues, Tunes' business, operating results and financial position could
be materially and adversely affected.

Interest Rate Risk

Tunes is exposed to changes in interest rates primarily from investments in
overnight money-market accounts, certificates of deposit and commercial paper.
Under Tunes' current policies, Tunes does not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical one-
percentage point adverse change in interest rates would not materially affect
the fair value of interest sensitive financial instruments at September 30,
1999.

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LEGAL MATTERS

The validity of the EMusic common stock to be issued in connection with the
merger has been passed upon by Gray Cary Ware & Freidenrich LLP, Palo Alto,
California. As of the date of this joint proxy statement/prospectus, an
investment partnership of Gray Cary Ware & Freidenrich owned an aggregate of
8,300 shares of EMusic common stock.

Certain legal matters in connection with the merger will be passed on for Tunes
by Freeborn & Peters, Chicago, Illinois.

EXPERTS

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

Ernst & Young LLP, independent auditors, have audited the Tunes.com Inc.
consolidated financial statements and related financial statement schedule at
December 31, 1997 and 1998, and for the years then ended and for the period
from July 2, 1996, inception, to December 31, 1996, and the financial
statements of Tunes Network, Inc. at December 31, 1996 and 1997 and for the
years then ended, as set forth in their reports. We have included these
financial statements in the prospectus and registration statement in reliance
on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.

Richard A. Eisner & Company, LLP, independent auditors, have audited Group K
Inc.'s financial statements as of December 31, 1997 and 1998, for the year
ended December 31, 1998, the period from June 16, 1997 (inception) through
December 31, 1997 and the period from June 16, 1997 (inception) through
December 31, 1998. We have included these financial statements in this joint
proxy statement/prospectus and registration statement in reliance upon Richard
A. Eisner & Company, LLP's reports, given on their authority as experts in
accounting and auditing.

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 EMusic's 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 EMusic's 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, EMusic did not consult with
PricewaterhouseCoopers LLP regarding the application of accounting principles
or the type of audit opinion that might be rendered on EMusic's financial
statements.

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STOCKHOLDER PROPOSALS

Proposals of stockholders intended to be presented at the next annual meeting
of stockholders of EMusic (i) must be received by EMusic at its offices at 1991
Broadway, 2nd Floor, Redwood City, California 94063, not later than July 25,
2000; and (ii) must satisfy the conditions established by the Securities and
Exchange Commission for stockholder proposals to be included in EMusic's proxy
statement for that meeting and the other requirements contained in EMusic's
bylaws.

OTHER MATTERS

As of the date of this proxy statement/prospectus, the Tunes board of directors
and the EMusic board of directors know of no matters that will be presented for
consideration at the Tunes special meeting or the EMusic special meeting other
than as described in this joint proxy statement/prospectus. If any other
matters shall properly come before either the Tunes special meeting or the
EMusic special meeting or any adjournment or postponement of either special
meeting and be voted upon, the enclosed proxies will be deemed to confer
discretionary authority on the individuals named as proxies therein to vote the
shares represented by such proxies as to any such matters. The individuals
named as proxies intend to vote or not to vote in accordance with the
recommendation of the respective managements of Tunes and EMusic.

WHERE YOU CAN FIND MORE INFORMATION

EMusic has filed with the SEC a registration statement under the Securities Act
that registers the distribution to Tunes stockholders of the shares of EMusic
common stock to be issued in connection with the merger. The registration
statement, including the attached exhibits and schedules, contains additional
relevant information about EMusic and EMusic common stock.

In addition, EMusic files reports, proxy statements and other information with
the SEC under the Exchange Act. You may read and copy this information at the
SEC's Public Reference Room, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling 1-800-SEC-0330.

You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.

The SEC also maintains an Internet site that contains reports, proxy statements
and other information about issuers, like EMusic, who file electronically with
the SEC. The address of that site is http://www.sec.gov.

The SEC allows EMusic to incorporate by reference information into this joint
proxy statement/prospectus. This means that the companies can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this joint proxy statement/prospectus, except for
any information that is superseded by information that is included directly in
this document.

EMusic incorporates by reference additional documents that it may file with the
SEC between the date of this joint proxy statement/prospectus and the date of
the Tunes and EMusic special meetings. These documents include periodic
reports, such as annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, as well as proxy statements.

EMusic common stock is quoted on the Nasdaq National Market. Accordingly, you
may inspect the information in the company's file with the SEC at the offices
of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

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EMusic has supplied all information contained or incorporated by reference in
this joint proxy statement/prospectus relating to EMusic, as well as all pro
forma financial information, and Tunes has supplied all information relating to
Tunes.

You can obtain any of the documents incorporated by reference in this document
through EMusic or from the SEC through the SEC's web site at the address
described above. Documents incorporated by reference are available from the
companies without charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference as an exhibit in this joint
proxy statement/prospectus. You can obtain documents incorporated by reference
in this proxy statement/prospectus without charge by requesting them in writing
or by telephone from EMusic at the following address:

EMusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, California 94063
Telephone: (650) 216-0200

If you would like to request documents, please do so by January 31, 2000 to
receive them before the special meetings. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.

Information contained in EMusic's and Tunes' websites is not a part of this
joint proxy statement/prospectus.

We have not authorized anyone to give any information or make any
representation about the merger or Tunes' companies that is different from, or
in addition to, that contained in this proxy statement/prospectus or in any of
the materials that we have incorporated into this document. Therefore, if
anyone does give you information of this sort, you should not rely on it. If
you are in a jurisdiction where offers to exchange or sell, or solicitations of
offers to exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
document does not extend to you. The information contained in this document
speaks only as of the date of this document unless the information specifically
indicates that another date applies.

135
<PAGE>

Index to Financial Statements

Index to Financial Statements--EMusic.com

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-3
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Operations..................................... F-5
Consolidated Statements of Stockholders' Equity........................... F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes To Consolidated Financial Statements................................ F-8

Index to Pro Forma Financial Statements

<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Combining Balance Sheet Data................ F-23
Unaudited Pro Forma Condensed Combining Statement of Operations Data...... F-25
Notes to Unaudited Pro Forma Condensed Combining Financial Data........... F-27

Index to Financial Statements--Creative Fulfillment, Inc.

<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-30
Balance Sheets............................................................ F-31
Statements of Operations.................................................. F-32
Statements of Stockholders' Equity (Deficit).............................. F-33
Statements of Cash Flows.................................................. F-34
Notes To Financial Statements............................................. F-35

Index to Financial Statements--IUMA

<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-39
Balance Sheets............................................................ F-40
Statements of Operations.................................................. F-41
Statements of Stockholders' Deficit....................................... F-42
Statements of Cash Flows.................................................. F-43
Notes To Financial Statements............................................. F-44

Index to Financial Statements--Group K Inc.

<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-49
Balance Sheets............................................................ F-50
Statements of Operations.................................................. F-51
Statements of Shareholders' Equity (Capital Deficiency)................... F-52
Statements of Cash Flows.................................................. F-53
Notes to Financial Statements............................................. F-54
</TABLE>

F-1
<PAGE>

Index to Financial Statements--Tunes.com

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-62
Consolidated Balance Sheets................................................ F-63
Consolidated Statements of Operations...................................... F-64
Consolidated Statements of Stockholders' Equity (Deficit).................. F-65
Consolidated Statements of Cash Flows...................................... F-66
Notes to Consolidated Financial Statements................................. F-67

Index to Financial Statements--Tunes Network, Inc.

<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-78
Balance Sheets............................................................. F-79
Statements of Operations................................................... F-80
Statements of Stockholders' Equity (Deficit)............................... F-81
Statements of Cash Flows................................................... F-82
Notes to Financial Statements.............................................. F-83
</TABLE>

F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
EMusic.com Inc. (formerly GoodNoise Corporation) (a development stage
enterprise) and its subsidiaries at June 30, 1998 and 1999, and the results of
their operations and cash flows for the period January 8, 1998 (Inception) to
June 30, 1998, the year ended June 30, 1999 and the period January 8, 1998
(Inception) to June 30, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 26, 1999

F-3
<PAGE>

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

CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
June
30, June 30, September 30,
1998 1999 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................... $ 510 $ 19,002 $ 78,904
Accounts receivable.......................... -- 51 168
Prepaid expenses and other assets............ 21 224 9,531
------- -------- --------
Total current assets....................... 531 19,277 88,603
Property and equipment, net.................... 34 1,076 1,989
Music content, net............................. -- 8,758 11,746
Trade names, net............................... -- 24,680 22,397
Other assets................................... 17 430 430
------- -------- --------
Total assets............................... $ 582 $ 54,221 $125,165
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable............................. 67 637 406
Accrued liabilities.......................... 51 1,679 1,828
Dividends payable on preferred stock......... -- -- 1,062
Accrued compensation and related benefits.... 17 368 430
------- -------- --------
Total current liabilities.................. 135 2,684 3,726
------- -------- --------
Commitments Note 8
Redeemable Convertible Preferred Series B
Stock......................................... -- 31,981 --
Dividends payable on preferred stock........... -- 569 --
Stockholders' Equity:
Preferred Stock, $0.001 par value............ -- -- --
Common Stock, $0.001 par value............... 15 17 34
Additional paid-in capital................... 1,618 67,827 184,498
Notes receivable from employees.............. (6) -- --
Deficit accumulated during the development
stage....................................... (1,180) (48,857) (63,093)
------- -------- --------
Total stockholders' equity................. 447 18,987 121,439
------- -------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders'
equity.................................. $ 582 $ 54,221 $125,165
======= ======== ========
</TABLE>

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

F-4
<PAGE>

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

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

<TABLE>
<CAPTION>
Three months Three months January 8, 1998
January 8, 1998 January 8, 1998 ended ended (Inception) to
(Inception) to Year ended (Inception) to September 30, September 30, September 30,
June 30, 1998 June 30, 1999 June 30, 1999 1998 1999 1999
--------------- ------------- --------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 92 $ 92 $ 12 $ 180 $ 272
Cost of revenues........ -- 27 27 -- 25 52
---------- ---------- ---------- ---------- ---------- ----------
Gross loss.............. -- 65 65 12 155 220
Operating expenses:
Product development.... 961 11,690 12,651 667 6,011 18,662
Selling and
marketing............. -- 556 556 -- 4,771 5,327
General and
administrative........ 219 1,599 1,818 197 812 2,630
Amortization of trade
names................. -- 1,682 1,682 -- 2,283 3,965
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 1,180 15,527 16,707 864 13,877 30,584
---------- ---------- ---------- ---------- ---------- ----------
Operating loss.......... (1,180) (15,462) (16,642) (852) (13,722) (30,364)
Interest income, net.... -- 322 322 3 203 525
---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (1,180) $ (15,140) $ (16,320) $ (849) $ (13,519) $ (29,839)
---------- ---------- ---------- ---------- ---------- ----------
Accretion of Series A
and B preferred to
redemption value....... -- (247) (247) -- (224) (471)
Beneficial conversion
charge, Series A and B
preferred stock........ -- (31,721) (31,721) -- -- (31,721)
Dividend on Series B
preferred stock........ -- (569) (569) -- (493) (1,062)
---------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to
common shares.......... $ (1,180) $ (47,677) $ (48,857) $ (849) $ (14,236) $ (63,093)
========== ========== ========== ========== ========== ==========
Net loss per common
share--basic and
diluted................ $ (0.12) $ (3.52) $ (4.87) $ (0.06) $ (1.09) $ (5.03)
========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding--
basic and diluted...... 10,234,055 13,563,606 10,027,231 14,591,336 13,057,809 12,542,537
========== ========== ========== ========== ========== ==========
</TABLE>

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

F-5
<PAGE>

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Deficit
Note Accumulated
Receivable During the Total
Number of Common Additional From Development Stockholders'
Shares Stock Paid Capital Employee Stage Equity
---------- ------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at inception of the
company................ 8,378,000 $ 8 $ (8) $ -- $ -- $ --
Issuance of common stock
on March 30, 1998...... 1,191,800 1 9 (10) -- --
Issuance of common stock
in exchange for
services on March 30,
1998................... 672,600 1 5 -- -- 6
Issuance of common stock
in exchange for
services on April 12,
1998................... 271,400 -- 7 -- -- 7
Conversion of notes
payable into common
stock on May 1, 1998... 501,500 1 169 -- -- 170
Payment on note
receivable............. -- -- -- 4 -- 4
Issuance of shares in
connection with
merger................. 3,700,000 4 684 -- -- 688
Issuance of options to
advisors............... -- -- 752 -- -- 752
Net loss for the period
from January 8, 1998
(inception) through
June 30, 1998.......... -- -- -- -- (1,180) (1,180)
---------- --- -------- ---- -------- --------
BALANCE, June 30, 1998.. 14,715,300 15 1,618 (6) (1,180) 447
Issuance of common stock
for acquisition of
Creative Fulfillment,
Inc.................... 630,179 1 5,557 -- -- 5,558
Issuance of common stock
related to Nordic
Entertainment
transaction............ 665,188 1 11,083 -- -- 11,084
Issuance of common stock
for acquisition of
IUMA, Inc.............. 448,000 -- 7,771 -- -- 7,771
Issuance of warrants in
conjunction with the
purchase of music
content ............... -- -- 1,327 -- -- 1,327
Issuance of warrants
with Series A preferred
stock.................. -- -- 343 -- -- 343
Accretion of Series A
preferred stock to
redemption value....... -- -- -- -- (25) (25)
Beneficial conversion
charge, Series A
preferred stock........ -- -- 144 -- (144) --
Accretion of Series B
preferred stock to
redemption value....... -- -- -- -- (222) (222)
Beneficial conversion
charge, Series B
preferred stock........ -- -- 31,577 -- (31,577) --
Dividends on Series B
preferred stock........ -- -- -- -- (569) (569)
Exercise of warrants to
purchase common stock.. 300,000 -- 300 -- -- 300
Exercise of options to
purchase common stock.. 45,400 -- 1 -- -- 1
Payment on note
receivable from
employee............... -- -- -- 6 -- 6
Issuance of common stock
for services........... 170 -- -- -- --
Issuance of options to
advisors............... -- -- 2,379 -- -- 2,379
Issuance of warrants for
product development.... -- -- 5,682 -- -- 5,682
Issuance of common stock
options in exchange for
assets................. -- -- 45 -- -- 45
Net loss for the year
ended June 30, 1999.... -- -- -- -- (15,140) (15,140)
---------- --- -------- ---- -------- --------
BALANCE, June 30, 1999.. 16,804,237 17 67,827 -- (48,857) 18,987
Issuance of common stock
through offering....... 5,270,000 5 79,677 -- -- 79,682
Issuance costs
associated with public
offering............... -- -- (1,136) -- -- (1,136)
Accretion of Series B
preferred stock to
redemption value....... -- -- -- -- (224) (224)
Dividends on Series B
preferred stock........ -- -- -- -- (493) (493)
Exercise of options to
purchase common stock.. 170,585 -- 5 -- -- 5
Conversion of Series B
preferred stock into
common stock........... 11,757,000 12 32,194 -- -- 32,206
Issuance of options to
advisors............... -- -- 1,273 -- -- 1,273
Issuance of warrants for
product development.... -- -- 4,658 -- -- 4,658
Net loss for the three
months ended September
30, 1999............... -- -- -- -- (13,519) (13,519)
---------- --- -------- ---- -------- --------
BALANCE, September 30,
1999 (unaudited)....... 34,001,822 $34 $184,498 $ -- $(63,093) $121,439
========== === ======== ==== ======== ========
</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)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Three months
January 8, 1998 January 8, 1998 ended January 8, 1998
(Inception) to Year ended (Inception) to Three months ended September 30, (Inception) to
June 30, 1998 June 30, 1999 June 30, 1999 September 30, 1998 1999 September 30, 1999
--------------- ------------- --------------- ------------------ ------------- ------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(1,180) $(15,140) $(16,320) $(849) $(13,519) $(29,839)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation.......... 3 93 96 5 200 296
Amortization of trade
names................ -- 1,682 1,682 -- 2,283 3,965
Loan interest
converted into Series
B preferred stock.... -- 34 34 -- -- 34
Amortization of music
content.............. -- 2 2 -- -- 2
Issuance of common
stock for services... 13 -- 13 -- -- 13
Fair value of warrants
issued for product
development.......... -- 5,682 5,682 -- 2,687 8,369
Fair value of options
issued to advisors... 752 2,379 3,131 96 1,273 4,404
Changes in assets and
liabilities, net of
effects of merger:
Accounts receivable.. -- (51) (51) (12) (117) (168)
Prepaid expenses and
other assets........ (38) (616) (654) (47) (7,336) (7,990)
Accounts payable..... 67 149 216 93 (231) (15)
Accrued liabilities.. 51 652 703 -- (946) (243)
Accrued payroll and
related benefits.... 17 152 169 (2) 62 231
------- -------- -------- ----- -------- --------
Net cash used in
operating
activities......... (315) (4,982) (5,297) (716) (15,644) (20,941)
------- -------- -------- ----- -------- --------

Cash flows from
investing activities:
Purchase of trade
names................ -- (468) (468) -- -- (468)
Purchase of music
content.............. -- (7,317) (7,317) -- (2,988) (10,305)
Purchase of property
and equipment........ (37) (1,091) (1,128) (21) (1,113) (2,241)
------- -------- -------- ----- -------- --------
Net cash used in
investing
activities......... (37) (8,876) (8,913) (21) (4,101) (13,014)

Cash flows from
financing activities:
Proceeds from issuance
of common stock
through public
offering............. -- -- -- -- 79,682 79,682
Issuance costs
associated with
public offering...... -- -- -- -- (40) (40)
Proceeds from issuance
of common stock...... -- 301 301 300 -- 301
Common stock issued in
connection with
merger............... 688 -- 688 -- -- 688
Proceeds from issuance
of Series A Preferred
Stock and warrants... -- 500 500 -- -- 500
Proceeds from issuance
of Series B Preferred
Stock................ -- 29,800 29,800 -- -- 29,800
Proceeds from issuance
of convertible
notes................ 170 1,743 1,913 -- -- 1,913
Exercise of stock
options.............. -- -- -- -- 5 5
Proceeds from
repayment of employee
notes receivable..... 4 6 10 -- -- 10
------- -------- -------- ----- -------- --------

Net cash provided by
financing
activities......... 862 32,350 33,212 300 79,647 112,859
------- -------- -------- ----- -------- --------

Net increase (decrease)
in cash............... 510 18,492 19,002 (437) 59,902 78,904
Cash at beginning of
period................ -- 510 -- 510 19,002 --
------- -------- -------- ----- -------- --------
Cash at end of period.. $ 510 $ 19,002 $ 19,002 $ 73 $ 78,904 $ 78,904
======= ======== ======== ===== ======== ========
Supplemental disclosure
of non-cash
transactions:
Conversion of notes
payable into common
stock................ $ 170 $ -- $ 170 $ -- $ -- $ 170
Issuance of common
stock for notes
receivable........... 10 -- 10 -- -- 10
Accretion of Series A
preferred stock to
redemption value...... -- 25 25 -- -- 25
Beneficial conversion
charge, Series A
preferred stock....... -- 144 144 -- -- 144
Conversion of notes
payable and interest
to Series B preferred
stock................ -- 1,777 1,777 -- -- 1,777
Accretion of Series B
preferred stock to
redemption value..... -- 222 222 -- 224 446
Beneficial conversion
charge, Series B
preferred stock...... -- 31,577 31,577 -- -- 31,577
Conversion of Series A
preferred stock into
series B preferred
stock................ -- 182 182 -- -- 182
Issuance of common
stock options for
assets............... -- 44 44 -- -- 44
Issuance of warrants
for music content.... -- 1,327 1,327 -- -- 1,327
Issuance of common
stock in conjunction
with acquisitions.... -- 13,329 13,329 -- -- 13,329
Issuance of common
stock to Nordic...... -- 11,084 11,084 -- -- 11,084
Accrued dividend
payable on Series B
preferred stock...... -- 569 569 -- 493 1,062
Conversion of Series B
preferred stock into
common stock......... -- -- -- -- 32,206 32,206
Accrual for amount due
on content license... $ -- $ 116 $ 116 $ -- $ -- $ 116
</TABLE>

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

F-7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of September 30, 1999 and/or for three months ended September
30, 1999 and 1998 is unaudited)

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

The Company, its Recapitalization and Liquidity

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

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

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

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Risks and Uncertainties

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

Fair Value of Financial Instruments

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

F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Music Content and Advance Royalty Payments

In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to acquire music content are recorded as an asset. Advances
are then expensed as subsequent royalties are earned. Any portion of advances
that subsequently appear not to be fully recoverable from future royalties are
subjected to an impairment reserve and charged to expense during the period in
which the loss becomes evident.

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

Property and Equipment

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

Revenue Recognition

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

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

Stock-Based Compensation

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

Income Taxes

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

F-9
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Net Loss per Common Share

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

<TABLE>
<CAPTION>
Three months Three months January 8, 1998
January 8, 1998 January 8, 1998 ended ended (Inception) to
(Inception) to Year ended (Inception) to September 30, September 30, September 30,
June 30, 1998 June 30, 1999 June 30, 1999 1998 1999 1999
--------------- ------------- --------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net loss................ $ (1,180) $ (15,140) $ (16,320) $ (849) $ (13,519) $ (29,839)
---------- ---------- ---------- ---------- ---------- ----------
Accretion of Series A
and B preferred to
redemption value....... -- (247) (247) -- (224) (471)
Beneficial conversion
charge, Series A and B
preferred stock........ -- (31,721) (31,721) -- -- (31,721)
Dividend on Series B
preferred stock........ -- (569) (569) -- (493) (1,062)
---------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to
common shares.......... $ (1,180) $ (47,677) $ (48,857) $ (849) $ (14,236) $ (63,093)
========== ========== ========== ========== ========== ==========
Net loss per common
share--basic and
diluted................ $ (0.12) $ (3.52) $ (4.87) $ (0.06) $ (1.09) $ (5.03)
========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding--
basic and diluted...... 10,234,055 13,563,606 10,027,231 14,591,336 13,057,809 12,542,537
========== ========== ========== ========== ========== ==========
Options to purchase
common stock.......... 908,297 2,183,091 1,710,861 2,347,150 6,460,558 2,052,984
Common stock subject to
repurchase............ 508,056 1,596,492 1,257,344 483,473 4,549,500 1,662,800
Series B Preferred
Stock................. -- 3,167,858 2,271,771 -- 10,022,859 3,617,538
Warrants............... -- 35,267 21,471 -- 2,232,388 465,557
---------- ---------- ---------- ---------- ---------- ----------
1,416,353 6,982,708 5,261,447 2,830,623 23,265,305 7,798,879
========== ========== ========== ========== ========== ==========
</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, for each of these
respective periods.

Segment information

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

F-10
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are deposited with two major banks in
the United States. Deposits in these banks may exceed the amount of insurance
provided on such deposits. The Company has not experienced any losses on its
deposits of its cash and cash equivalents.

Reclassifications

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

Recent Accounting Pronouncements

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

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

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

Note 2--Acquisitions

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

On June 18, 1999, the Company completed the acquisition of Internet Underground
Music Archive, Inc. ("IUMA") for a combination of cash and stock, at which time
IUMA became a wholly owned subsidiary of the Company. The results of IUMA have
been included in the Consolidated Statement of Operations since the date of
acquisition. The total purchase price of $8,990,000 consisted of 448,000 shares
of the Company's common stock valued at $7,771,000, net liabilities assumed of
$1,119,000 and professional fees of approximately $100,000. The acquisition has
been accounted for using the purchase method of accounting and,

F-11
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

based on a preliminary review, the Company has allocated substantially all of
the purchase price to the tradename "IUMA". The Company has engaged an
independent valuations consultant to perform a review of the Company's
preliminary allocation of the purchase price. Any adjustments arising as a
result of their review will be recorded upon its completion. The Company is
amortizing this intangible asset over its estimated life of three years using
the straight-line method.

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

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

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

Note 3--Music Content, net

Music content and advanced royalty balances are comprised of payments for the
following (in thousands):

<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
-------- --------
<S> <C> <C>
Acquired sound recordings..................................... $-- $2,343
Digital distribution rights................................... -- 6,417
--- ------
-- 8,760
Earned royalty................................................ -- (2)
--- ------
$-- $8,758
=== ======
</TABLE>

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

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

F-12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Note 4--Property and Equipment

Property and equipment balances comprise the following (in thousands):

<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
-------- --------
<S> <C> <C>
Computer equipment............................................ $27 $ 495
Software...................................................... 5 81
Furniture and fixtures........................................ 5 584
--- ------
37 1,160
Less: Accumulated depreciation................................ (3) (84)
--- ------
$34 $1,076
=== ======
</TABLE>

Note 5--Trade Names

Trade names consist of the following (in thousands):

<TABLE>
<CAPTION>
June June
30, 30,
1998 1999
------ -------
<S> <C> <C>
EMusic trade and domain name:
From Creative Fullfillment acquisition (see note 2)........... $ -- $ 6,018
Purchased from Nordic Entertainment........................... -- 11,354
------ -------
Total......................................................... -- 17,372
IUMA trade and domain name (see note 2)......................... -- 8,990
Less: Accumulated amortization.................................. -- (1,682)
------ -------
$ -- $24,680
====== =======
</TABLE>

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

Note 6--Notes Payable

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

F-13
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Note 7--Mandatorily Redeemable Convertible Preferred Stock

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

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

Series A

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

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

Series B

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

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

During the year ended June 30, 1999, the Company has recorded a charge to
accumulated deficit for the "in-the-money" conversion feature attached to the
Series B stock. The amount of this charge is limited to the aggregate amount of
the net proceeds received of $31.6 million. The remaining difference between
the Series B carrying value and its redemption value, resulting from issuance
costs associated with the transaction, will be accreted through March 2004, the
earliest redemption date, using the effective interest rate method, as a charge
to deficit accumulated during the development stage. Charges related to this
accretion for the year ended June 30, 1999 and the three months ended September
30, 1999 were $222,000 and $224,000 (unaudited), respectively.

On September 24, 1999, the Company completed an underwritten public offering.
In connection with this offering the 117,570 shares of Series B were
automatically converted to 11,757,000 shares of common stock. In conjunction
with this conversion, we recorded an addition to common stock of $12,000 and an
increase to additional paid in capital of $32,194,000. As of September 30,
1999, dividends on the Series B shares of $1,062,000 (unaudited) were
reclassified to accrued liabilities.

F-14
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

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

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

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

Dividends. The Series B stockholders are entitled to cumulative dividends at an
annual rate of 6% of the Series B Preference Amount. The payment of such
amounts may be deferred until the Company completes an initial underwritten
public offering, is sold, or until March 31, 2004. During the year ended June
30, 1999 and the three months ended September 30, 1999, the Company recorded
charges of approximately $569,000 and $493,000 (unaudited), respectively, for a
total of $1,062,000 (unaudited) to deficit accumulated during the development
stage, representing the accrued dividends on the Series B.

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

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

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

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

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

Note 8--Commitments:

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

F-15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Rent expense, net of sublease income, was $13,000, $231,000, $244,000 and
$276,000 (unaudited) for the period from January 8, 1998 (Inception) to June
30, 1998, the year ended June 30, 1999, the period from January 8, 1998
(Inception) to June 30, 1999 and the three months ended September 30, 1999,
respectively.

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

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

Note 9--Stockholders' Equity

Restricted Common Stock

A total of 8,378,000 shares of common stock were issued to the Company's
founders, of which 1,062,000 were issued subject to a restricted stock purchase
agreement with one of the founders. The agreement provides the Company with the
right to repurchase 590,000 of these shares at $0.01 per share subject to
ratable vesting over three years. As of June 30, 1999 and September 30, 1999,
total shares of 311,389 and 262,222 (unaudited), respectively, were subject to
repurchase by the Company under this agreement. In March 1999, pursuant to the
stockholders' agreement entered into in conjunction with the Series B preferred
stock issuance (Note 6), an additional 4,897,650 shares of the common stock
originally issued to the Company's two other founders, were designated as newly
restricted shares, subject to repurchase by the Company at $0.01 per share. The
shares vest ratably over three years from the date of the Series B preferred
stock issuance. As of June 30, 1999 and September 30, 1999, 4,465,679 and
4,059,708 (unaudited), respectively, of these shares remained subject to
repurchase by the Company.

Stock Option Plans

On March 30, 1998, the Company adopted the 1998 Stock Option Plan and on
December 31, 1998 the Company adopted the 1998 Non-Statutory Stock Option Plan
(the "Plans") that provides for the granting of either incentive or
nonqualified stock options to purchase shares of the Company's common stock,
and for stock-based awards to officers, directors key employees of the Company
and to non-employee consultants. Options granted to employees generally vest
ratably over a period of three or four years, and expire ten years from the
date of grant. On June 30, 1999 and September 30, 1999, there were total shares
of 1,656,850 and 4,163,650 (unaudited), respectively, of common stock available
for grant under the Plans.

F-16
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Option activity under the Plans is as follows:

<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number of Exercise Price Per
Shares Price Share
--------- ------------- ---------
<S> <C> <C> <C>
Granted................................... 2,437,550 $ 0.01-$5.00 $ 0.85
---------
Balance at June 30, 1998.................... 2,437,550 $ 0.85
Granted................................... 4,216,000 $ 5.75-$13.63 $10.76
Exercised................................. (45,400) $ 0.03 $ 0.03
Canceled.................................. (310,400) $ 11.00 $11.00
---------
Balance at June 30, 1999.................... 6,297,750 $ 7.12
Granted................................... 537,800 $14.38-$15.00 $14.29
Exercised................................. (170,585) $ 0.03 $ 0.03
Cancelled................................. (44,600) $ 5.75-$13.63 $12.15
---------
Balance at September 30, 1999 (unaudited)... 6,620,365 $ 7.93
=========
</TABLE>

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

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

Fair Value Disclosures

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

F-17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

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

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

Pro forma stock compensation

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

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

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

Warrants

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

In conjunction with the acquisition of music content on June 30, 1999 (Note 2),
the Company issued warrants to purchase 35,000 shares of the Company's common
stock at a price of $13.63 per share. The warrants, which expire on June 10,
2001, were valued at $143,000 and were recorded as an addition to paid in
capital. These warrants remained outstanding at June 30, 1999 and September 30,
1999 (Unaudited).

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

F-18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

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

During the three months ended September 30, 1999, the Company issued warrants
for the purchase of 612,000 (Unaudited) common shares in exchange for product
development activities by various individuals operating in the music industry.
The warrants were issued with exercise prices ranging from $13.625 to $18.00
and have two-year terms. The fair value of these warrants, estimated using the
Black-Scholes Model, of $2,687,000 (Unaudited) has been recorded as a charge to
Product Development expense in the Consolidated Statement of Operations. All
the warrants remained outstanding as of September 30, 1999.

During the three months ended September 30, 1999 and pursuant to a marketing
agreement, the Company issued warrants for the purchase of 549,000 (Unaudited)
common shares at exercise prices of $20.19 with two-year terms. The fair value
of these warrants, estimated using the Black-Scholes Model, of $1,971,000
(Unaudited) has been recorded as prepaid marketing expense and is being
amortized over the term of the agreement. During the three months ended
September 30, 1999, $286,000 (Unaudited) of the above balance was amortized to
Marketing expense in the Consolidated Statement of Operations. All these
warrants remained outstanding as of September 30, 1999.

Note 10--Income Taxes

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

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

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

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

F-19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of September 30, 1999 and/or for
three months ended September 30, 1999 and 1998 is unaudited)

Note 11--Subsequent Events

Investment in Crunch Music Ltd

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

Approval of Name Change

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

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

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

Approval of Employee Stock Purchase Plan

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

Increase in authorized capital

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

Intention to Sell Additional Shares

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

Note 12--Subsequent Events (unaudited)

On September 24, 1999, the Company completed an underwritten public offering.
In connection with this offering, the Company sold 5,270,000 shares of common
stock raising $79,682,400 in proceeds net of underwriting discounts.

F-20
<PAGE>

Unaudited Pro Forma Condensed Combining Financial Information

The following Unaudited Pro Forma Combined Condensed Financial Statements
give effect to proposed business combination between EMusic.com Inc. (the
"Company"), and Tunes.com Inc. ("Tunes.com"). 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-K for the
fiscal year ended June 30, 1999 and the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, the historical financial statements and notes
thereto of Group K, Inc. ("Cductive") included on the Form 8K/A filed with the
Securities and Exchange Commission on December 21, 1999 and the historical
financial statements and the notes thereto of Tunes.com included herein.

On January 31, 1999, EMusic completed the acquisition of Creative
Fulfillment, Inc. ("Creative Fulfillment"). EMusic issued 630,000 shares of its
common stock and provided cash consideration of $313,000 for all of the
outstanding stock of Creative Fulfillment. EMusic accounted for the transaction
as a purchase business combination. Accordingly, Creative Fulfillment's results
of operations are included in EMusic's historical results of operations for the
period beginning from the date of consummation of the acquisition.

On June 18, 1999, EMusic completed the acquisition of Internet Underground
Music Archive, Inc. ("IUMA"). EMusic issued 448,000 shares of its common stock
and accounted for the transaction as a purchase business combination.
Accordingly, IUMA's results of operations are included in EMusic's historical
results of operations for the period beginning from the date of consummation of
the IUMA acquisition.

On December 10, 1999, EMusic completed the acquisition of Cductive. EMusic
issued 2,136,000 shares of its common stock and, in addition, assumed all of
Cductives then outstanding common stock options and warrants. Total
consideration amounted to approximately $36.8 million.

The Unaudited Pro Forma Combined Condensed Balance Sheet combines the
Company's September 30, 1999 balance sheet with Tunes.com's and Cductive's
balance sheets dated September 30, 1999, giving effect to the Mergers with
Tunes.com and Cductive as if they had occurred on September 30, 1999.

The Unaudited Pro Forma Combined Condensed Statement of Operations for the
three months ended September 30, 1999 gives effect to each merger as if they
had occurred on July 1, 1999 and combine the Company's historical condensed
statement of operations for the three months ended September 30, 1999 and the
condensed consolidated statement of operations of Cductive and Tunes.com for
the three months ended September 30, 1999.

The Unaudited Pro Forma Combined Condensed Statement of Operations for the
twelve months ended June 30, 1999 gives effect to each of the above mergers as
if they had occurred on July 1, 1998. The Unaudited Pro Forma Combined
Statement of Operations combines EMusic's statement of operations for the
twelve months ended June 30, 1999 with

. the condensed consolidated statement of operations of Tunes.com and
Cductive for the twelve months ended June 30, 1999;

. the condensed statement of operations of Creative Fulfillment for the
six months ended January 31, 1999; and

. the condensed statement of operations of IUMA for the nine months ended
April 30, 1999.

The unaudited 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 each 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.

F-21
<PAGE>

The Company expects to incur direct transaction costs of approximately
$3,800,000 associated with the Merger that will be included in the purchase
price allocated to acquired net assets. There can be no assurance that 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 Unaudited 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-K and Form 10-Q filed with
the Securities and Exchange Commission, and the financial statements and the
notes thereto of the Company included herein.

F-22
<PAGE>

UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA
(In thousands)

<TABLE>
<CAPTION>
EMusic.com Cductive Pro Forma
------------- ------------- -----------------------
September 30, September 30,
1999 1999 Adjustments Combined
------------- ------------- ------------ --------
(see note 5)
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash..................... $ 78,904 $ 888 $ -- $ 79,792
Accounts receivable...... 168 -- -- 168
Prepaid expenses and
other assets............ 9,531 17 -- 9,548
-------- ------- ------- --------
Total current assets... 88,603 905 -- 89,508
-------- ------- ------- --------
Property and equipment,
net....................... 1,989 219 2,208
Music content, net......... 11,746 239 11,985
Trade names, net........... 22,397 -- 35,867 (J) 58,264
Other intangible assets,
net....................... -- -- --
Other assets............... 430 73 -- 503
-------- ------- ------- --------
Total assets........... $125,165 $ 1,436 $35,867 $162,468
-------- ------- ------- --------
Liabilities and
Stockholders' Equity
Current Liabilities:
Accounts payable......... $ 406 $ 272 $ -- $ 678
Accrued liabilities...... 1,829 28 100 (J) 1,957
Accrued payroll and
related benefits........ 430 -- -- 430
Deferred revenue......... -- -- -- --
Dividends payable on
preferred stock......... 1,061 92 -- 1,153
Current portion of long
term debt............... -- 69 -- 69
-------- ------- ------- --------
Total current
liabilities........... 3,726 461 100 4,287
-------- ------- ------- --------
Long term debt............. -- 60 -- 60
Redeemable convertible
preferred stock........... -- 1,217 (1,217)(K) --
-------- ------- ------- --------
Total Liabilities.......... 3,726 1,738 (1,117) 4,347
-------- ------- ------- --------
Stockholders' Equity
(Deficit):
Preferred Stock.......... -- -- -- --
Common Stock............. 34 3 (3)(K) 2,170
2,136 (J)
Additional paid-in 184,498 2,008 (2,008)(K) 219,044
capital................. 34,546 (J)
Common stock to be issued.. -- -- -- --
Deficit accumulated
during the development
stage................... (63,093) (2,313) 2,313 (K) (63,093)
-------- ------- ------- --------
Total stockholders'
equity................ 121,439 (302) 36,984 158,121
-------- ------- ------- --------
Total liabilities and
stockholders' equity.. $125,165 $ 1,436 $35,867 $162,468
======== ======= ======= ========
</TABLE>

See accompanying notes.

F-23
<PAGE>

UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA--(Continued)
(In thousands)

<TABLE>
<CAPTION>
Tunes.com Pro Forma
------------- -----------------------
September 30,
1999 Adjustments Combined
------------- ----------- --------
(see Note 5)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................... $ 7,528 $ -- $ 87,320
Accounts receivable.................... 882 -- 1,050
Prepaid expenses and other assets...... 2,777 -- 12,325
-------- -------- --------
Total current assets................. 11,187 -- 100,695
-------- -------- --------
Property and equipment, net.............. 1,593 -- 3,801
Music content, net....................... -- -- 11,985
Trade names, net......................... 1,423 137,933 (L) $197,620
Other intangible assets, net............. 2,044 (2,044)(L) --
Other assets............................. 52 -- 555
-------- -------- --------
Total assets......................... $ 16,299 $135,889 $314,656
-------- -------- --------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................... $ 1,327 -- 2,005
Accrued liabilities.................... 1,783 3,893 (L) 7,633
Accrued payroll and related benefits... 537 -- 967
Deferred revenue....................... 96 -- 96
Dividends payable on preferred stock... -- -- 1,153
Current portion of long term debt...... -- -- 69
-------- -------- --------
Total current liabilities............ 3,743 3,893 11,923
-------- -------- --------
Long term debt........................... 82 -- 142
Deferred tax liability................... -- 9,435 (L) 9,435
Redeemable convertible preferred stock... 43,135 (43,135)(M) --
-------- -------- --------
Total liabilities........................ 46,960 (29,807) 21,500
-------- -------- --------
Stockholders' Equity (Deficit):
Preferred Stock
Common Stock........................... 15 (15)(M) 2,176
6 (L)
Additional paid-in capital............. 10,673 (10,673)(M) 354,073
135,029 (L)
Common stock to be issued................ 55 (55)(M) --
Deficit accumulated during the
development stage..................... (41,404) 41,404 (M) (63,093)
-------- -------- --------
Total stockholders' equity........... (30,661) 165,696 293,156
-------- -------- --------
Total liabilities and stockholders'
equity.............................. $(16,299) $135,889 $314,656
======== ======== ========
</TABLE>

See accompanying notes.

F-24
<PAGE>

UNAUDITED PROFORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA
(In thousands except per share amounts)

<TABLE>
<CAPTION>
EMusic.com Cductive Pro Forma
------------- ------------- ----------------------
Three Months Three Months
Ended Ended
September 30, September 30,
1999 1999 Adjustments Combined
------------- ------------- ----------- --------
(see note
5)
<S> <C> <C> <C> <C>
Revenues................... $ 180 $ 22 $ -- $ 202
Cost of revenues........... 25 32 -- 57
-------- ------ ------- --------
Gross profit (loss)....... 155 (10) -- 145
-------- ------ ------- --------
Operating expenses:
Product development....... 6,011 226 -- 6,237
Selling and marketing..... 4,771 111 -- 4,882
General and
administrative........... 812 531 -- 1,343
Amortization of trade
names.................... 2,283 -- $ 2,989 (B) 5,272
-------- ------ ------- --------
Total operating expenses.. 13,877 868 2,989 17,734
-------- ------ ------- --------
Operating loss............. (13,722) (878) (2,989) (17,589)
Interest and other income
(expense), net............ 203 (6) -- 197
-------- ------ ------- --------
Net income (loss).......... $(13,519) $ (884) $(2,989) $(17,392)
Accretion of Series B
Preferred to redemption
value..................... (224) -- -- (224)
Dividend on Series B
Preferred Stock........... (493) -- -- (493)
-------- ------ ------- --------
Net loss applicable to
common stockholders....... $(14,236) $ (884) $2,989 $(18,109)
======== ====== ======= ========
Net loss per share, basic
and diluted............... $ (1.09) $ (1.19)
======== ========
Weighted average common
shares outstanding, basic
and diluted............... 13,058 2,136 (A) 15,194
======== ======= ========
</TABLE>

<TABLE>
<CAPTION>
Tunes.com Pro Forma
------------- ----------------------
Three Months
Ended
September 30,
1999 Adjustments Combined
------------- ----------- --------
<S> <C> <C> <C>
Revenues................................. $ 1,305 $ -- $ 1,507
Cost of revenues......................... 1,106 (340)(E) 823
------- ------- --------
Gross profit (loss)..................... 199 -- 684
------- ------- --------
Operating expenses:
Product development..................... 1,006 340 (E) 7,583
Selling and marketing................... 4,343 -- 9,225
General and administrative.............. 1,135 -- 2,478
Amortization of trade names............. 681 8,789 (D) 14,742
------- ------- --------
Total operating expenses................ 7,165 9,129 34,028
------- ------- --------
Operating loss........................... (6,966) (8,789) (33,344)
Interest and other income (expense),
net..................................... 126 -- 323
------- ------- --------
Net income (loss)........................ $(6,840) $(8,789) $(33,021)
Accretion of Series B Preferred to
redemption value........................ -- -- (224)
Dividend on Series B Preferred Stock..... -- -- (493)
------- ------- --------
Net loss applicable to common
stockholders............................ $ 6,840 $(8,789) $(33,738)
======= ======= ========
Net loss per share, basic and diluted.... $ (1.60)
========
Weighted average common shares
outstanding, basic and diluted.......... -- 5,892 (C) 21,086
======= ======= ========
</TABLE>

See accompanying notes.

F-25
<PAGE>

UNAUDITED PROFORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA--
(Continued)
(In thousands except per share amounts)

<TABLE>
<CAPTION>
EMusic.com
------------- Creative IUMA Cductive.com
Twelve Months Fulfillment Nine Twelve
Ended Six Months Ended Months Ended Months Ended
June 30, 1999 January 31, 1999 April 30, 1999 June 30, 1999
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $ 92 $103 $ 299 $ 105
Cost of revenues........ 27 32 -- 108
-------- ---- ------- -------
Gross profit (loss).... 65 71 299 (3)
-------- ---- ------- -------
Operating expenses:
Product development.... 11,690 57 255 496
Selling and marketing.. 556 -- -- 183
General and
administrative........ 1,599 13 1,120 551
Amortization of trade
names................. 1,682 -- -- --
-------- ---- ------- -------
Total operating
expenses.............. 15,527 70 1,375 1,230
-------- ---- ------- -------
Operating loss.......... (15,462) 1 (1,076) (1,233)
Interest and other
income (expense), net.. 322 -- -- (14)
-------- ---- ------- -------
Net income (loss)....... $(15,140) $ 1 $(1,076) $(1,247)
Accretion of Series A
Preferred to redemption
value.................. (25) -- -- --
Beneficial conversion
charge, Series A
Preferred Stock........ (144) -- -- --
Accretion of Series B
Preferred to redemption
value.................. (222) -- -- --
Beneficial conversion
charge, Series B
Preferred Stock........ (31,577) -- -- --
Dividend on Series B
Preferred Stock........ (569) -- -- --
-------- ---- ------- -------
Net loss applicable to
common stockholders.... $(47,677) $ 1 $ 1,076 (1,247)
======== ==== ======= =======
Net loss per share,
basic and diluted...... $ (3.52)
========
Weighted average common
shares outstanding,
basic and diluted...... 13,564
========
</TABLE>

<TABLE>
<CAPTION>
Tunes.com
Twelve Months
Ended
June 30, 1999 Adjustments Combined
------------- ----------- ---------
(see Note 5)
<S> <C> <C> <C>
Revenues................................ $ 3,351 $ (50)(G) $ 3,900
Cost of revenues........................ 4,008 (1,271)(H) 2,904
-------- -------- ---------
Gross profit (loss).................... (657) 1,221 6,804
-------- -------- ---------
Operating expenses:
Product development.................... 9,600 1,233 (H) 23,331
Selling and marketing.................. 6,055 -- 6,794
General and administrative............. 3,754 -- 7,037
Amortization of trade names............ 2,836 50,849 (I) 55,367
-------- -------- ---------
Total operating expenses............... 22,245 52,082 92,529
-------- -------- ---------
Operating loss.......................... (22,902) (50,861) (85,725)
Interest and other income (expense),
net.................................... 280 -- 588
-------- -------- ---------
Net income (loss)....................... $(22,622) $(50,861) $ (85,137)
Accretion of Series A Preferred to
redemption value....................... -- -- (25)
Beneficial conversion charge, Series A
Preferred Stock........................ -- -- (144)
Accretion of Series B Preferred to
redemption value....................... -- -- (222)
Beneficial conversion charge, Series B
Preferred Stock........................ -- -- (31,577)
Dividend on Series B Preferred Stock.... -- -- (569)
-------- -------- ---------
Net loss applicable to common
stockholders.......................... (22,622) (50,861) $(117,674)
======== ======== ---------
Net loss per share, basic and diluted... $ (5.26)
=========
Weighted average common shares
outstanding, basic and diluted......... -- 8,806 (F) 22,370
======== ======== =========
</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 indentifiable
tangible and intangible assets was based on a preliminary assessment of the
fair market value of those assets. The Company is amortizing the intangible
assets over their estimated useful life of three and ten years using the
straight line method. For the purposes of the unaudited proforma condensed
combining financial data we allocated 30% of intangible assets obtained through
the acquisition of Tunes.com to Rollingstone.com, to be amortized over ten
years. Rollingstone.com is a trade name that Tunes.com acquired pursuant to an
agreement that has a life of ten years but contains provisions for a five year
extension based on certain contingencies. The Company has engaged an
independent valuations consultant to perform an allocation of the purchase
price based on generally accepted valuation techniques. To the extent the
purchase price is allocated to Rollingstone.com or a longer life is determined,
the adjustment will be made to the amortization which could be material in
amount. Any adjustments arising as a result of the valuation work will be
recorded upon its completion.

2. Below is a table of the estimated acquisition cost, estimated purchase
price allocation and estimated amortization of intangible assets of Tunes.com
and Cductive as of September 30, 1999 (in thousands):

<TABLE>
<CAPTION>
September 30, 1999: Tunes.com Cductive
------------------- --------- --------
<S> <C> <C>
Estimated acquisition price:
Value of securities issued............................... $135,035 $36,682
Acquisition costs........................................ 3,893 100
-------- -------
Total acquisition costs................................ 138,928 36,782
Deferred tax liability................................... 9,435 --
-------- -------
Total.................................................. 148,363 36,782
======== =======
Estimated purchase price allocation:
Tangible net assets acquired............................. $ 9,007 $ 915
Goodwill and other intangibles........................... 139,356 35,867
-------- -------
Total.................................................. 148,363 36,782
======== =======
Estimated amortization (based on composite amortization
period of approximately four years)
Annual..................................................... $ 35,156 $11,956
======== =======
</TABLE>

The tangible net assets of Tunes.com and Cductive include cash, accounts
receivable, other current assets and property and equipment net of liabilities.
Liabilities include accounts payable and other accrued liabilities.

3. The unaudited pro forma combined loss per share is based on the weighted
average number of common and common equivalent shares of EMusic, 630,000 shares
issued to Creative Fulfillment, 448,000 shares issued to IUMA, 2,136,000 shares
issued to Cductive and 5,892,000 shares to be issued to Tunes.com for the three
month period ended September 30, 1999 and the year ended June 30, 1999. The
dilutive effect of stock options has been excluded since the unaudited pro
forma condensed statement of operations results in a net loss for the three-
months ended September 30, 1999 and the year ended June 30, 1999.

The pro-forma combined basic and diluted loss per share information was
determined as follows for the three-months ended September 30, 1999 (in
thousands):

<TABLE>
<S> <C>
EMusic shares used for net loss per share calculation............... 13,058
EMusic shares issued for the acquisition of Cductive................ 2,136
EMusic shares issued for the acquisition of Tunes.com............... 5,892
------
Pro forma combined EMusic shares used for loss per share
calculation........................................................ 21,086
======
</TABLE>

F-27
<PAGE>

The pro forma combined basic and diluted loss per share information was
determined as follows for the year ended June 30, 1999 (in thousands):

<TABLE>
<S> <C>
EMusic shares used for net loss per share calculation............... 13,564
Adjustment to give full period effect of EMusic shares issued for
Creative Fulfillment............................................... 367
Adjustment to give full period effect of EMusic shares issued for
acquisition of IUMA................................................ 411
EMusic shares issued for the acquisition of Cductive................ 2,136
EMusic shares issued for the acquisition of Tunes.com............... 5,892
------
Pro forma combined EMusic shares used for loss per share
calculation........................................................ 22,370
======
</TABLE>

4. These unaudited pro forma combined condensed financial statements reflect
the issuance of 5,891,712 shares of EMusic common stock in exchange for all of
the outstanding shares of common stock of Tunes.com as of September 30, 1999.

The following table details the pro forma share issuance in connection with
the acquisition as of September 30, 1999 (in thousands):

<TABLE>
<S> <C>
Number of shares of EMusic common stock issued for Cductive net
tangible assets.................................................... 2,136
Number of shares of EMusic common stock issued for Tunes.com net
tangible assets.................................................... 5,892
Number of shares of EMusic common stock outstanding as of September
30, 1999........................................................... 34,002
------
Number of shares of EMusic common stock outstanding after the
completion of acquisition.......................................... 42,030
======
</TABLE>

5. 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, IUMA, Cductive and Tunes.com based on their fair
value:

Adjustments reflecting the acquisition of Cductive and Tunes.com for the
three months ended September 30, 1999:

(A) Reflects the issuance of 2,136,000 shares of Common Stock in exchange
for all outstanding common shares of Cductive.

(B) Reflects the amortization of intangible assets associated with the
purchase of Cductive 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. Any adjustments
arising as a result of the completion of valuation work to be performed
by the independent valuation consultant, may have a material effect on
the amortization for the period reported.

(C) Reflects the issuance of 5,892,000 shares of Common Stock in exchange
for all the outstanding common stock of Tunes.com.

(D) Reflects the amortization of intangible assets associated with the
purchase of Tunes.com 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. Any adjustments arising as a
result of the completion of valuation work to be performed by the
independent valuation consultant, may have a material effect on the
amortization for the period reported.

(E) Reflects the adjustment to Tunes.com to conform expense classifications
for reporting with respect to the allocation of expense to cost of
revenues versus product development.

F-28
<PAGE>

Adjustments reflecting the acquisition of Creative Fulfillment, IUMA,
Cductive and Tunes.com for the twelve months ended June 30, 1999:

(F) Reflects the issuance of 367,000 shares for Creative Fulfillment,
411,000 shares for IUMA, 2,136,000 shares for Cductive and 5,892,000
shares for Tunes.com.

(G) Reflects the elimination of inter-company development consulting
revenue paid by EMusic.com to Creative Fulfillment.

(H) Reflects the adjustment to Tunes.com to conform expense classifications
for reporting and the elimination of expense related to inter-company
development consulting revenue paid by EMusic.com to Creative
Fulfillment.

(I) Reflects the amortization of intangible assets associated with the
purchase of Creative Fulfillment, IUMA, Cductive and Tunes.com as if
the acquisition was completed as of July 1, 1998. Amortization for
Cductive and Tunes.com is over the estimated useful lives of the assets
acquired. Any adjustments arising as a result of the completion of
valuation work to be performed by the independent valuations
consultant, may have a material effect on the amortization for the
period reported.

Adjustments reflecting the acquisition of Cductive and Tunes.com on September
30, 1999:

(J) Reflects the allocation of the Cductive purchase price of approximately
$36,782,000, which consisted of the issuance of 2,136,000 shares of
Common Stock valued at $14.85 per share, assumption of fully-vested
warrants and options for 471,000 shares of Common Stock, net assets
assumed of approximately $915,000 and direct acquisition related
expenses of $100,000.

(K) Reflects the elimination of Cductive's equity accounts.

(L) Reflects the allocation of the Tunes.com purchase price of
approximately $138,928,000, which consisted of the issuance of
5,892,000 shares of Common Stock valued at $14.29 per share, assumption
of fully-vested warrants and options for 4,708,000 shares of Common
Stock, net assets assumed of approximately $9,007,000 and direct
acquisition related expenses of $3,893,000.

(M) Reflects the elimination of Tunes.com's equity accounts.

F-29
<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-30
<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-31
<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-32
<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-33
<PAGE>

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

STATEMENTS OF CASH FLOWS

<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-34
<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-35
<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

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-36
<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-37
<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-38
<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-39
<PAGE>

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

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

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

LIABILITIES AND SHAREHOLDERS' DEFICIT

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

Commitments (Note 4)

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

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

F-40
<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-41
<PAGE>

INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")

STATEMENT OF SHAREHOLDERS' DEFICIT

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

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

F-42
<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>

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

F-43
<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-44
<PAGE>

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

Cash Equivalents and Fair Value of Financial Instruments

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 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-45
<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-46
<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-47
<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-48
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Group K Inc.
New York, New York

We have audited the accompanying balance sheets of Group K Inc. (a development
stage company) (Note L[1]) as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the period
from June 16, 1997 (inception) through December 31, 1998, the year ended
December 31, 1998 and the period June 16, 1997 (inception) through December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Group K Inc. (Note L[1]) as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the period from June 16, 1997 (inception) through December 31, 1998,
the year ended December 31, 1998 and the period June 16, 1997 (inception)
through December 31, 1997 in conformity with generally accepted accounting
principles.

Richard A. Eisner & Company, LLP

New York, New York
November 19, 1999

F-49
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1998 1997 1999
----------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 849,000 $ 36,000 $ 888,000
Subscription receivable (collected in
1999).................................. 283,000 -- --
Prepaid and other current assets........ 25,000 21,000 256,000
----------- -------- ----------
Total current assets.................. 1,157,000 57,000 1,144,000
Property and equipment, net............... 169,000 45,000 219,000
Other assets.............................. 42,000 -- 73,000
----------- -------- ----------
$ 1,368,000 $102,000 $1,436,000
=========== ======== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses... $ 75,000 $ 2,000 $ 300,000
Loans payable........................... -- 50,000 --
Current portion of capital lease
obligations.............................. 60,000 9,000 69,000
Dividends payable--preferred stock........ 38,000 -- 92,000
----------- -------- ----------
Total current liabilities............. 173,000 61,000 461,000
Capital lease obligations, less current
portion.................................. 92,000 29,000 60,000
----------- -------- ----------
265,000 90,000 521,000
----------- -------- ----------
Redeemable Preferred Stock (liquidation
preference $1,500,000)................... -- -- 1,217,000
----------- -------- ----------
Commitments and contingency
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock--$.10 par value; 2,000,000
shares authorized;
Series B issued and outstanding 269,933
shares (liquidation preference
$810,000).............................. 27,000 -- --
Common stock--$.001 par value; 18,500,000
shares authorized;
3,154,002, 2,499,999 and 3,440,602 shares
issued and outstanding,
respectively............................. 3,000 2,000 3,000
Additional paid-in capital................ 1,766,000 58,000 2,008,000
Deficit accumulated during the development
stage.................................... (693,000) (48,000) (2,313,000)
----------- -------- ----------
1,103,000 12,000 (302,000)
----------- -------- ----------
$1,368,000 $102,000 $1,436,000
=========== ======== ==========
</TABLE>

See notes to financial statements

F-50
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
June 16, June 16,
1997 1997 June 16, 1997
(Inception) Year (Inception) Nine months ended (Inception)
Through Ended Through September 30, Through
December 31, December 31, December 31, ----------------------- September 30,
1998 1998 1997 1999 1998 1999
------------ ------------ ------------ ----------- ---------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 61,000 $ 60,000 $ 1,000 $ 80,000 $ 31,000 $ 141,000
Cost of sales........... 55,000 55,000 109,000 21,000 164,000
--------- --------- -------- ----------- --------- -----------
Gross profit (loss)..... 6,000 5,000 1,000 (29,000) 10,000 (23,000)
Expenses:
Selling, general and
administrative
expenses (excluding
equity
compensation)........ (570,000) (506,000) (64,000) (1,577,000) (285,000) (2,147,000)
Noncash compensation
charge............... (150,000) (150,000) -- (11,000) -- 161,000
Interest expense...... (13,000) (12,000) (1,000) (16,000) (6,000) (29,000)
Interest income......... 6,000 6,000 13,000 4,000 19,000
Other income............ 28,000 12,000 16,000 -- 12,000 28,000
--------- --------- -------- ----------- --------- -----------
Net loss................ $(693,000) $(645,000) $(48,000) $(1,620,000) $(265,000) $(2,313,000)
========= ========= ======== =========== ========= ===========
</TABLE>

See notes to financial statements

F-51
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

STATEMENTS OF STOCKHOLDERS' EQUITY (Capital Deficiency)

<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Total Stockholders'
------------------ ---------------- Paid-in Development Equity
Shares Amount Shares Amount Capital Stage (Capital Deficiency)
-------- -------- --------- ------ ---------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at inception of the
Company................ 2,499,999 $2,000 $ 58,000 $ 60,000
Net loss................ $ (48,000) (48,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--December 31,
1997................... 2,499,999 2,000 58,000 (48,000) 12,000
Conversion of loans
payable into Series A
convertible preferred
stock at $0.90 per
share in April 1998.... 66,670 $ 7,000 53,000 60,000
Issuance of Series A
convertible preferred
stock at $1.00 per
share in April 1998.... 504,000 50,000 454,000 504,000
Issuance of Series B
convertible preferred
stock at $3.00 per
share in December
1998................... 269,933 27,000 783,000 810,000
Issuance of common stock
and 213,000 warrants in
December 1998.......... 83,333 250,000 250,000
Conversion of Series A
preferred stock into
common stock in
December 1998.......... (570,670) (57,000) 570,670 1,000 56,000 0
Value of options
granted................ 150,000 150,000
Dividends declared in
December 1998.......... (38,000) (38,000)
Net loss................ (645,000) (645,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--December 31,
1998................... 269,933 $ 27,000 3,154,002 $3,000 $1,766,000 $ (693,000) $ 1,103,000
======== ======== ========= ====== ========== =========== ===========
Conversion of Series B
preferred stock into
common stock in August
1999................... (269,933) (27,000) 269,933 27,000
Issuance of common stock
through preferred stock
financing.............. 16,667 75,000 75,000
Issuance of common stock
warrants through
preferred stock
financing.............. 188,000 188,000
Accretion of Series C
preferred stock to
redemption value....... (5,000) (5,000)
Dividends declared in
August 1999............ (54,000) (54,000)
Value of options granted
to investors........... 11,000 11,000
Net loss................ (1,620,000) (1,620,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--September 30,
1999 (unaudited)....... -- $ -- 3,440,602 $3,000 $2,008,000 $(2,313,000) $ (302,000)
======== ======== ========= ====== ========== =========== ===========
</TABLE>

See notes to financial statements

F-52
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
June 16,
June 16, 1997 1997 June 16, 1997
(Inception) (Inception) (Inception)
Through Year Ended Through Through
December 31, December 31, December 31, September 30,
1998 1998 1997 1999 1999 1998
------------- ------------ ------------ ------------- ----------- ----------
(Unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (693,000) $ (645,000) $(48,000) $(2,313,000) $(1,620,000) $ (265,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 46,000 42,000 4,000 111,000 65,000 24,000
Compensation expense
attributable to
options................ 150,000 150,000 161,000 11,000
Changes in:
Other assets............ (67,000) (46,000) (21,000) (329,000) (262,000) (30,000)
Accounts payable and
accrued expenses....... 75,000 73,000 2,000 300,000 225,000 9,000
---------- ---------- -------- ----------- ----------- ----------
Net cash used in
operating activities... (489,000) (426,000) (63,000) (2,070,000) (1,581,000) (262,000)
---------- ---------- -------- ----------- ----------- ----------
Cash flows from
investing activities:
Additions to property
and equipment.......... (34,000) (24,000) (10,000) (122,000) (88,000) (46,000)
---------- ---------- -------- ----------- ----------- ----------
Cash flows from
financing activities:
Payment of capital lease
obligations............ (29,000) (28,000) (1,000) (79,000) (50,000) (15,000)
Loans payable........... 60,000 10,000 50,000 60,000 10,000
Proceeds from sale of
stock and warrants..... 1,341,000 1,281,000 60,000 3,099,000 1,758,000 504,000
---------- ---------- -------- ----------- ----------- ----------
Net cash provided by
financing activities... 1,372,000 1,263,000 109,000 3,080,000 1,708,000 499,000
---------- ---------- -------- ----------- ----------- ----------
Net increase in cash and
cash equivalents....... 849,000 813,000 36,000 888,000 39,000 191,000
Cash and cash
equivalents at
beginning of period.... 36,000 849,000 36,000
---------- ---------- -------- ----------- ----------- ----------
Cash and cash
equivalents at end of
period................. $ 849,000 $ 849,000 $ 36,000 $ 888,000 $ 888,000 $ 227,000
========== ========== ======== =========== =========== ==========
Cash paid for:
Interest................ $ 12,000 $ 11,000 $ 1,000 $ 28,000 $ 16,000 $ 6,000
Taxes................... $ 1,000 $ 1,000 $ 5,000 $ 4,000 $ 1,000

Supplemental disclosures
of noncash financing
activities:
Equipment purchased
under capital leases... $ 181,000 $ 142,000 $ 39,000 $ 208,000 $ 27,000 $ 74,000
Dividends declared not
yet paid............... $ 38,000 $ 38,000 $ 92,000 $ 54,000
Conversion of loans into
preferred stock........ $ 60,000 $ 60,000 $ 60,000 $ $ 60,000
</TABLE>

See notes to financial statements

F-53
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

Note A--The Company

Group K Inc. (the "Company") (Note L[1]) incorporated on June 16, 1997 in the
State of New York and is doing business as CDuctive. The Company is an online
aggregator and distributor of independent label music. The Company offers its
catalog in digital download and custom CD compilation formats from its web site
www.cductive.com. The Company also provides distribution and e-commerce
services to a number of online partners. In May 1999, the Company expanded into
direct digital downloads with the launch of its MP3 digital download web site.

Since its inception the Company has been in the development stage devoting its
efforts primarily to organizing itself, recruiting management and technical
staff, developing its business, acquiring operating assets and raising capital.

Note B--Significant Accounting Policies

[1]Cash and cash equivalents:

For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.

[2]Property and equipment:

Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of three years.

[3]Revenue recognition:

The Company generates revenues from custom compact disc sales through
affiliated partners and direct sales or from the Company's web site. Sales
are recognized when compact disc are shipped or when music is downloaded.

[4]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 the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.

[5]Stock-based compensation:

The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option incentive plan. As such,
compensation expense would be recorded on the date of grant if the current
market price of the underlying stock exceeded the exercise price of the
option.

F-54
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

[6]Unaudited interim financial statements:

The financial information presented as of September 30, 1999 and for the
nine month periods ended September 30, 1999 and 1998 is unaudited, but in
the opinion of management contains all adjustments (consisting only of
normally recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.

Note C--Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of
credit risk consist of cash and cash equivalents. At December 31, 1998, the
Company held its cash and cash equivalents at one bank primarily in money
market accounts.

Note D--Property and Equipment

Property and equipment consists of:

<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1998 1997 1999
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Computer hardware.......................... $201,000 $49,000 $314,000
Furniture.................................. 1,000 1,000
Leasehold improvements..................... 13,000 15,000
-------- ------- --------
215,000 49,000 330,000
Less accumulated depreciation.............. 46,000 4,000 111,000
-------- ------- --------
$169,000 $45,000 $219,000
======== ======= ========
</TABLE>

Depreciation and amortization expense for the period June 16, 1997 (inception)
through December 31, 1997 was $4,000 and for the year ended December 31, 1998
it was $42,000 and for the nine months ended September 30, 1999 and 1998 was
$65,000 and $24,000, respectively.

Assets under capital leases with a net book value of approximately $127,000 and
$118,000 are included in property and equipment at December 31, 1998 and
September 30, 1999, respectively.

Note E--Income Taxes

The Company files its United States income tax returns on the cash basis of
accounting. Deferred taxes represent the expected future tax consequences of
the differences between (i) the carrying amounts of the assets and liabilities
(principally accounts payable and accrued expenses which are stated for
financial reporting purposes on the accrual basis) and (ii) their income tax
basis.

At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $414,000 to reduce future taxable income. The
net operating loss carryforwards expire in 2018.

F-55
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

At December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $296,000 and $18,000, respectively, representing the benefits of
its net operating loss carryforwards and certain expenses not currently
deductible for tax purposes. The Company has not recorded a benefit for such
items because realization of the benefit is uncertain and therefore a valuation
allowance has been fully provided against the deferred tax assets.

The difference between the statutory federal rate of 34% and the Company's
effective tax rate of 0% is due to an increase in valuation allowance of
$278,000 and $18,000 in 1998 and 1997.

Note F--Commitments

[1]Capital leases:

Certain equipment and computer software were acquired pursuant to capital
leases expiring through 2002. Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.............................................................. $72,000
2000.............................................................. 62,000
2001.............................................................. 37,000
2002.............................................................. 1,000
-------
Total minimum lease payments...................................... 172,000
Less deferred interest............................................ (20,000)
-------
Present value of net minimum lease payments....................... 152,000
Current portion................................................... 60,000
-------
Noncurrent portion................................................ $92,000
=======
</TABLE>

The noncurrent portion of such leases is due as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000............................................................. $56,000
2001............................................................. 35,000
2002............................................................. 1,000
-------
Noncurrent portion............................................... $92,000
=======
</TABLE>

Certain of these leases are collateralized by personal guarantees and
securities of the Company's principal stockholders.

F-56
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note F--Commitments (continued)

[2]Leases of office premises:

Office space is leased through the year 2002 at the following minimum
annual rentals.

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................ $ 81,000
2000............................................................ 109,000
2001............................................................ 91,000
2002............................................................ 46,000
--------
$327,000
========
</TABLE>

Rent expense was approximately $13,000 and $21,000 for the period from June
16, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998, respectively and for the nine months ended September 30,
1999 and 1998 was $51,000 and $14,000, respectively. The 1997 expense
represents payments to three directors of the Company who provided office
space during the initial stages (June through December 1997).

[3]Royalty and licensing agreements:

The Company has entered into various license agreements which provide for
the payment of royalties at various percentages of the selling price of
each title sold. These royalty fees are accrued by the Company on a
quarterly basis. Certain of these agreements included a provision for the
Company to make nonrefundable advances. Royalty fees incurred under these
agreements are first applied to the advance. Once the advance is
liquidated, the Company pays fees as incurred.

In addition, these agreements require the payment of mechanical royalties,
$0.07 per track, to be paid to the party that has publishing rights to the
title.

[4]Employment agreements:

Effective January 1, 1999, the Company entered into employment and
consulting agreements with several employees. The agreements continue at
the will of the Company, are not for a specific period and provide for
various levels of annual compensation. Certain of the employment agreements
have guarantees upon termination. The Company issued 4,667 shares of common
stock valued at approximately $14,000 to one stockholder in connection with
a signing bonus offered at time of employment with the Company.

Note G--Related Party Transactions

Other income includes consulting fees received for services provided by a
director of the Company to his previous employer. See Notes F, I and L for
additional related party transactions.

F-57
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

Note H--Stockholders' Equity

[1]Series A preferred stock:

The Company issued 504,000 shares of Series A perpetual convertible
preferred stock, par value $.10, in April 1998 at $1.00 per share. In
addition, loans of $60,000 were converted into 66,670 Series A convertible
preferred stock. These shares automatically converted to common stock in
December 1998 when the Company issued shares of Series B convertible
preferred stock. Immediately prior to the automatic conversion, a 10%
dividend was declared on Series A convertible preferred stock.

[2]Series B preferred stock:

The Company issued 269,933 shares of Series B perpetual convertible
preferred stock, par value $.10, in December 1998. The proceeds of this
offering amounted to $810,000. The shares are automatically

Note H--Stockholders' Equity (continued)

convertible into common stock at the option of the holder or by the
corporation on the completion of an equity financing as defined. Series B
shares are entitled to one vote per share, have a liquidated preference of
$3.00 per share and entitled to a dividend of 10% per annum. In August
1999, the Series B preferred stock automatically converted into common
stock upon the issuance of Series C preferred stock (see Note L[2]). In
addition, a dividend of $.20 per share was declared to the holders of
Series B preferred stock on August 18, 1999.

Note I--Warrants

In December 1998, in connection with the sale of 83,333 shares of common stock
at $2.97 per share the Company sold 213,000 redeemable warrants to an investor
for $2,130. The warrants are exerciseable into common stock at a price of $3.00
per share through December 2008.

During 1999, 145,918 warrants were issued (see Note L[2]).

Note J--Stock Options

In December 1998, the Board of Directors approved, subject to stockholders'
approval, a stock option plan under which options to acquire up to 700,000
shares of common stock may be granted to employees and select board members.
Options generally vest in eight quarterly installments commencing three months
from the date of grant or as otherwise determined by the board. The exercise
price for each option granted may not be less than 100% of the fair market
value of the stock on the grant date or such other amount as determined by the
board from time to time. No option granted under the plan may be exercised in
whole or in part more than ten years after its grant date. The plan is to be
administered by the board or a committee appointed by the board, comprised of
not less than one member of the board. The shareholders ratified the plan at
the annual meeting on August 31, 1999.

F-58
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

Stock option activity under the plan including options granted to employees
outside the plan is summarized as follows:

<TABLE>
<CAPTION>
June 16, 1997
(Inception)
Year Ended Through Nine months
December 31, December 31, ended September
1998 1997 30, 1999
---------------- --------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period........ 27,000 $1.00 165,533 $1.30
Granted..................... 138,533 1.36 27,000 $1.00 259,764 $3.04
------- ------ -------
Options outstanding at end
of period.................. 165,533 1.30 27,000 1.00 425,297 $1.30
======= ====== =======
Options exercisable at end
of period.................. 102,250 1.02 0 254,495
======= ====== =======
</TABLE>

Note J--Stock Options (continued)

At December 31, 1998 and September 30, 1999, there were 605,217 and 355,153
options, respectively, for the purchase of shares available for future grants
under the plan.

In December 1998, the Company issued options to three stockholders to purchase
25,000 shares of stock each at an exercise price of $2.00 below fair value at
date of grant. As a result, a noncash compensation charge of $150,000 was
recorded in 1998.

The following table presents information relating to stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
-------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
$1.00 135,750 $1.00 9.62 100,583 $1.00
2.00 10,000 2.00 9.67 1,667 2.00
3.00 19,783 3.00 10.00
------- ----- ----- ------- -----
165,533 1.30 9.67 102,250 1.02
======= ===== ===== ======= =====
</TABLE>

F-59
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)

The fair value of options at date of grant was estimated using the Black-
Scholes option pricing model utilizing the following assumptions:

<TABLE>
<CAPTION>
June 16, 1997
(Inception)
Year Ended Through
December 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Risk-free interest rates...................... 4.64% to 5.61% 5.71%
Expected option life in years................. 5 5
Expected stock price volatility............... 40% 40%
Expected dividend yield....................... 0% 0%
</TABLE>

Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant as prescribed by SFAS No. 123, the
Company's net loss would have been as presented in the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
June 16,
1997 June 16, 1997
(Inception) (Inception)
Through Year Ended Through
December December 31, December 31,
31, 1998 1998 1997
----------- ------------ -------------
<S> <C> <C> <C>
Net loss:
As reported....................... $(693,000) $(645,000) $(48,000)
Pro forma......................... (698,000) (650,000) (48,000)

Weighted average fair value of
options granted.................... .52 .53 .44
</TABLE>

Note K--Contingency

The Company has received cease and desist letters regarding the sale of certain
songs recorded by a musical group. Such letters were sent on behalf of the
group and the record label, asserting that two record labels do not hold the
rights to the music licensed to the Company. The Company has signed agreements
with the record labels which indemnify the Company from the accusations being
levied against the Company in the aforementioned letters. However, one of the
record labels is attempting to repudiate its agreement with the Company
claiming lack of authority of its signator. The Company is currently attempting
to resolve the matter with the parties involved, however, should it become
necessary, the Company will vigorously defend its rights.

Note L--Subsequent Events

[1]Sale of company:

In November 1999, the Company entered into an agreement with EMusic.com,
Inc. ("EMusic") whereby EMusic would acquire the Company for stock. The
agreement provides for shares of the Company to be exchanged for the right
to receive an equivalent value of EMusic stock at a predetermined exchange
ratio. At the closing of this agreement, the separate corporate existence
of the Company would cease.

F-60
<PAGE>

GROUP K INC.
(A Development Stage Company)
(Note L[1])

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note L--Subsequent Events (continued)

[2]Series C convertible preferred stock:

From August to November 1999, the Company sold an aggregate of 477,005
shares of Series C convertible preferred stock for aggregate proceeds of
$2,146,550. In conjunction therewith, the Company issued warrants to
purchase 119,251 shares of common stock, exercisable at a price of $5.40
per share from August through November 2009.

The Series C convertible preferred stock is convertible into common stock
on a one for one basis and is entitled to one vote per share. Such shares
have preferential liquidation rights of $4.50 per share. This series of
shares may be converted at the option of the holder in its entirety at any
time after issuance, unless otherwise subject to mandatory conversion by
the Company. The preferred stock automatically convert into common stock
upon the completion of an initial public offering as defined. The shares
have no dividend rights. The shares are redeemable at $4.50 per share upon
the earlier of a change in control as defined or their fifth anniversary
date and have a liquidation preference of $4.50 per share. In connection
with this series of preferred stock, the Company paid the placement agent
$25,000 and issued 16,667 shares of common stock and warrants to purchase
26,667 shares of common stock at an exercise price of $5.40.

At September 30, 1999 the Company valued the warrants and common stock
issued in connection with the Series C at a fair value of $263,000.
Accordingly, the preferred stock has been recorded at its fair value
including the value of the common stock, warrants and expenses related to
the preferred stock offering as a preferred stock discount, which is to be
accreted against the preferred stock until the fifth anniversary date.

[3]Stock options:

In January 1999, the Company granted stock options under the plan to
purchase 40,000 shares of common stock at an exercise price of $3.00 per
share to a director of the Company.

In February 1999, the Company granted stock options to purchase 4,667
shares of common stock at an exercise price of $3.60 per share to an
employee as a signing bonus under the plan.

In July 1999, the Company granted the three founding stockholders 14,000
options each to purchase shares of common stock in consideration for
guaranties of 1999 capital leases. The Company also issued each of the
founding stockholders 13,167 options to purchase shares of common stock as
deferred compensation from December 1, 1998 to June 30, 1999. Both grants
were at an exercise price of $3.00.

The Company granted an additional 196,496 stock options authorized under
the Company's stock option plan during 1999.

At various times during 1999, the Company granted options outside of the
plan to purchase 13,866 shares of common stock at exercise prices ranging
from $3.60 to $4.50 to fourteen various music labels in connection with the
licensing of electronic download rights.

F-61
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Tunes.com Inc.

We have audited the accompanying consolidated balance sheets of Tunes.com
Inc. as of December 31, 1997 and 1998 and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the period
from July 2, 1996 (inception) to December 31, 1996 and the years ended December
31, 1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tunes.com Inc. at
December 31, 1997 and 1998, and the consolidated results of its operations and
its cash flows for the years ended December 31, 1997 and 1998 and for the
period from July 2, 1996 (inception) to December 31, 1996, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois
January 26, 1999

F-62
<PAGE>

TUNES.COM INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------- Sept. 30,
1997 1998 1999
----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 2,674,236 $ 4,251,082 $ 7,527,896
Accounts receivable, net of
allowance of $17,000 in 1998 and
$12,000 in 1999.................... 130,016 368,720 881,462
Prepaid expenses and other current
assets............................. 88,156 374,195 2,527,387
Restricted investment............... 1,000,000 1,000,000 250,000
----------- ------------ ------------
Total current assets.............. 3,892,408 5,993,997 11,186,745
Equipment and leasehold improvements.. 840,430 1,712,802 2,379,327
Less: Accumulated depreciation........ (131,185) (498,636) (786,371)
----------- ------------ ------------
709,245 1,214,166 1,592,956
Restricted investment, less current
portion.............................. 1,000,000 -- --
Goodwill, net......................... -- 3,488,570 1,744,280
Other intangibles, net................ -- 682,498 299,990
License agreement, net................ -- -- 1,423,077
Other................................. -- 33,941 51,587
----------- ------------ ------------
Total assets...................... $ 5,601,653 $ 11,413,172 $ 16,298,635
=========== ============ ============
Liabilities and Stockholders' Deficit
Liabilities:
Accounts payable.................... $ 186,084 $ 743,344 $ 1,327,267
Accrued compensation................ 34,690 410,331 536,958
Acquisition liability............... -- 404,000 --
Deferred revenue.................... 110,831 541,246 95,969
Other accrued expenses and current
liabilities........................ 181,895 655,271 1,783,008
----------- ------------ ------------
Total current liabilities......... 513,500 2,754,192 3,743,202
Long-term obligations................. -- 160,507 82,182
Redeemable convertible preferred
stock................................ 8,430,108 22,116,439 43,134,794
Stockholders' deficit:
Common stock, par value $0.01;
11,500,000 shares authorized;
issued and outstanding: 1,469,782
in 1999, 1,340,530 in 1998 and
1,150,530 in 1997.................. 11,505 13,405 14,698
Additional paid-in capital.......... 748,195 4,174,029 10,672,790
Common stock to be issued........... -- 1,055,420 55,420
Accumulated deficit................. (4,101,655) (18,860,820) (41,404,451)
----------- ------------ ------------
Total stockholders' deficit....... (3,341,955) (13,617,966) (30,661,543)
----------- ------------ ------------
Total liabilities and
stockholders' deficit............ $ 5,601,653 $ 11,413,172 $ 16,298,635
=========== ============ ============
</TABLE>

See accompanying notes.

F-63
<PAGE>

TUNES.COM INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
July 2, 1996 Nine Months Ended
(Inception) to Year Ended December 31 September 30
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising........... $ -- $ 283,807 $ 970,189 $ 502,439 $ 2,456,151
Other................. -- 280,887 1,514,466 1,212,793 846,876
--------- ----------- ------------ ----------- ------------
Total revenue....... -- 564,694 2,484,655 1,715,232 3,303,027
Cost of revenue......... -- 1,267,521 4,045,056 2,863,312 3,108,355
--------- ----------- ------------ ----------- ------------
Gross margin (deficit).. -- (702,827) (1,560,401) (1,148,080) 194,672
Operating expenses:
Operations and
development.......... 32,003 458,381 1,880,480 1,058,809 2,778,321
Sales and marketing... 36,769 1,064,502 4,034,115 2,282,191 7,486,287
General and
administrative....... 152,859 1,244,676 2,836,678 1,935,134 2,990,253
Depreciation and
amortization......... 2,319 156,529 1,777,931 961,020 2,555,504
Stock compensation.... -- 9,700 1,527,734 413,373 4,526,844
--------- ----------- ------------ ----------- ------------
Total operating
expenses........... 223,950 2,933,788 12,056,938 6,650,527 20,337,211
--------- ----------- ------------ ----------- ------------
Loss from operations.... (223,950) (3,636,615) (13,617,339) (7,798,607) (20,142,539)
Other income (expense):
Interest income....... 7,353 99,540 432,566 340,276 284,277
Interest expense...... -- -- (9,438) (5,121) (76,812)
Other income
(expense)............ -- 15,040 4,568 4,568 (35,451)
--------- ----------- ------------ ----------- ------------
Net loss................ $(216,597) $(3,522,035) $(13,189,643) $(7,458,884) $(19,970,525)
========= =========== ============ =========== ============
</TABLE>

See accompanying notes.

F-64
<PAGE>

TUNES.COM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Members' Units Common Stock Additional
------------------- ------------------- Common Stock Paid-in Accumulated
Units Amount Shares Par Value To Be Issued Capital Deficit Total
-------- --------- --------- --------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization,
July 2, 1996........... 115,053 $ 750,000 -- $ -- $ -- $ -- $ -- $ 750,000
Net loss for the period
from July 2, 1996
to December 31, 1996... -- -- -- -- -- -- (216,597) (216,597)
-------- --------- --------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1996................... 115,053 750,000 -- -- -- -- (216,597) 533,403
Conversion of Members'
units to shares of
common stock........... (115,053) (750,000) 1,150,530 11,505 -- 738,495 -- --
Stock compensation
expense................ -- -- -- -- -- 9,700 -- 9,700
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- -- -- (363,023) (363,023)
Net loss................ -- -- -- -- -- -- (3,522,035) (3,522,035)
-------- --------- --------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1997................... -- -- 1,150,530 11,505 -- 748,195 (4,101,655) (3,341,955)
Common stock to be
issued................. -- -- -- -- 2,955,420 -- -- 2,955,420
Common stock issued in
connection with
acquisition............ -- -- 190,000 1,900 (1,900,000) 1,898,100 -- --
Stock compensation
expense................ -- -- -- -- -- 1,527,734 -- 1,527,734
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- -- -- (1,569,522) (1,569,522)
Net loss................ -- -- -- -- -- -- (13,189,643) (13,189,643)
-------- --------- --------- ------- ---------- ----------- ------------ ------------
Balance at December 31,
1998................... -- -- 1,340,530 13,405 1,055,420 4,174,029 (18,860,820) (13,617,966)
Issuance of warrants
(unaudited)............ -- -- -- -- -- 713,011 -- 713,011
Stock compensation
expense (unaudited).... -- -- -- -- -- 4,526,845 -- 4,526,845
Accretion of redeemable
convertible preferred
stock (unaudited)...... -- -- -- -- -- -- (2,573,106) (2,573,106)
Exercise of stock
options and warrants
(unaudited)............ -- -- 29,252 293 -- 259,905 -- 260,198
Common stock issued in
connection with
acquisition
(unaudited)............ -- -- 100,000 1,000 (1,000,000) 999,000 -- --
Net loss (unaudited).... -- -- -- -- -- -- (19,970,525) (19,970,525)
-------- --------- --------- ------- ---------- ----------- ------------ ------------
Balance at September 30,
1999 (unaudited)....... -- $ -- 1,469,782 $14,698 $ 55,420 $10,672,790 $(41,404,451) $(30,661,543)
======== ========= ========= ======= ========== =========== ============ ============
</TABLE>

See accompanying notes.

F-65
<PAGE>

TUNES.COM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
July 2, 1996
(inception) Nine Months Ended
to Year Ended December 31, September 30,
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss................ $(216,597) $(3,522,035) $(13,189,643) $(7,458,884) $(19,970,525)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 2,319 156,529 1,777,931 961,020 2,632,427
Stock compensation
expense............... -- 9,700 1,527,734 413,373 4,526,845
Other noncash items.... -- (82,500) 100,000 100,000 37,785
Changes in operating
assets and
liabilities, excluding
effects from
acquisitions:
Accounts receivable.... -- (130,016) (234,864) (384,805) (512,742)
Prepaid expenses and
other current assets.. (17,458) (70,698) (292,486) (266,848) (870,580)
Accounts payable....... 49,980 136,104 172,035 252,383 583,923
Accrued compensation... 4,827 29,863 58,520 192,573 126,627
Deferred revenue....... -- 110,831 430,415 558,398 (445,277)
Other accrued expenses
and current
liabilities........... 45,856 136,039 353,598 150,942 676,377
--------- ----------- ------------ ----------- ------------
Net cash used in
operating activities... (131,073) (3,226,183) (9,296,760) (5,481,848) (13,215,140)
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of equipment
and leasehold
improvements........... (29,857) (708,073) (584,761) (506,322) (845,281)
Payment of license fee.. -- -- -- -- (1,500,000)
Decrease (increase) in
restricted investment.. -- (2,000,000) 1,000,000 750,000 750,000
Acquisitions, net of
cash acquired (Note
4)..................... (27,663) -- (507,783) (507,783) (404,000)
--------- ----------- ------------ ----------- ------------
Net cash used in
investing activities... (57,520) (2,708,073) (92,544) (264,105) (1,999,281)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from notes
payable................ -- 500,000 -- -- 3,995,000
Payments on notes
payable and capital
leases................. -- -- (1,150,659) (10,436) (126,704)
Proceeds from issuance
of members' units...... 750,000 -- -- -- --
Proceeds from issuance
of preferred stock, net
of issue costs......... -- 7,547,085 12,116,809 12,116,809 15,103,000
Proceeds from exercise
of stock options and
warrants............... -- -- -- -- 260,198
Payment of deferred
financing costs........ -- -- -- -- (740,259)
--------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities... 750,000 8,047,085 10,966,150 12,106,373 18,491,235
--------- ----------- ------------ ----------- ------------
Net increase in cash and
cash equivalents....... 561,407 2,112,829 1,576,846 6,360,420 3,276,814
Cash and cash
equivalents, beginning
of period.............. -- 561,407 2,674,236 2,674,236 4,251,082
--------- ----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period................. $ 561,407 $ 2,674,236 $ 4,251,082 $ 9,034,656 $ 7,527,896
--------- ----------- ------------ ----------- ------------
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
ACTIVITIES
Common stock issued or
to be issued in
acquisition............ $ -- $ -- $ 2,955,420 $ 2,955,420 $ --
Liabilities assumed in
acquisition............ $ -- $ -- $ 1,940,000 $ 1,940,000 $ --
Notes payable exchanged
for shares of preferred
stock.................. $ -- $ 500,000 $ -- $ -- $ 3,995,000
Capital leases for
computer equipment..... $ -- $ -- $ 182,993 $ 42,506 $ --
</TABLE>

See accompanying notes.

F-66
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the nine-month periods ended
September 30, 1998 and 1999 is unaudited)

1. NATURE OF OPERATIONS

Tunes.com Inc. (the Company) is an Internet-based music media, marketing, and
promotion company that provides interactive music content, live and archived
music performances and interviews, current news and information, audio and
video samples and other programming, as well as the opportunity for music fans
worldwide to purchase music-related merchandise directly through the
www.tunes.com, www.rollingstone.com, www.thesource.com, www.downbeatjazz.com
and www.jamtv.com Web sites, and radio and Internet content affiliates.

Effective February 26, 1999, the Company changed its name from JAMtv
Corporation to Tunes.com Inc.

2. BASIS OF PRESENTATION

The financial statements of the Company as of September 30, 1999 and for the
nine-month periods ended September 30, 1998 and 1999 contain all adjustments
and accruals (consisting of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the financial position
and operating results of the interim periods presented.

As detailed in Note 6, on June 2, 1997, holders of members' units in Digital
Entertainment Network, L.L.C. (DEN), a limited liability company, exchanged
such units for shares of common stock of the Company, a newly formed Delaware
corporation. All of the assets and liabilities of DEN were transferred to the
Company at book value and DEN was dissolved. The accompanying financial
statements reflect the operations of DEN for the period prior to June 2, 1997,
and the Company thereafter.

3. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts and transactions
of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances are eliminated.

Cash and Cash Equivalents

Cash and cash equivalents include cash which is unrestricted as to use and
highly liquid investments having a maturity of three months or less at the time
of purchase.

Restricted Investment

The restricted investment represents the future license payments held in
escrow pursuant to a third-party agreement (see Note 9).

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets, generally three to five years. Assets under capital leases are
amortized using the straight-line method over the shorter of the estimated
useful lives or the remaining lease terms, generally three years.

F-67
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Intangible Assets

Intangible assets represent the excess of cost over the fair market value of
tangible net assets acquired and primarily consist of purchased technology and
goodwill related to the acquisition of Tunes Network, Inc. (Tunes Network--see
Note 4). Intangible assets are amortized on a straight-line basis over the
useful lives of the assets, currently two years. If there are indicators such
assets may be impaired, the Company assesses recoverability from future
operations using undiscounted cash flows of the related business as a measure.
Under this approach, the carrying value of the intangible would be reduced to
fair value if the Company's best estimate for expected undiscounted future cash
flows of the related business would be less than the carrying amount of the
intangible over its remaining amortization period.

Intangible assets consisted of the following at December 31, 1998:

<TABLE>
<S> <C>
Goodwill........................................................ $ 4,651,430
Developed technology............................................ 800,000
Assembled work force............................................ 110,000
-----------
5,561,430
Less: Accumulated amortization.................................. (1,390,362)
-----------
$ 4,171,068
===========
</TABLE>

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
the reported amount of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Revenue Recognition

Advertising Revenue

Advertising revenue is derived from the sale of banner advertisements and
sponsorships on the Company's Web sites as well as integrated marketing
campaigns sold by the Company and the Company's share of revenue on co-branded
Web sites of affiliates under certain agreements. Advertising revenue is
recognized in the period the advertisement is displayed or campaign is run,
provided no significant Company obligations remain and collection of the
resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of advertising impressions delivered or times
that any advertisement is viewed by users of the Company's Web sites. To the
extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until guaranteed levels are achieved.

The Company also recognizes advertising revenue as a result of barter
transactions with certain other internet-related companies. Such revenue is
recognized based on the fair value of the consideration received or provided,
whichever is more determinable. This primarily consists of advertising
displayed on other companies' Web sites in exchange for advertising on the
Company's Web site. Barter revenue and the corresponding expense is recognized
in the period the advertising is displayed. Advertising revenue from barter
transactions during 1997 and 1998 was $174,000 and $156,800, respectively. In
the nine months ended September 30, 1999 the Company recorded barter revenue of
$672,000.

F-68
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Other Revenue

Other revenue is derived from content licensing, commerce and product
development. Content license fee revenue is recognized over the period of the
license agreement under which the Company delivers its content. Commerce
revenue from the sale of CDs and other music-related merchandise is recognized
when the products are shipped to customers, net of allowances for returns.
Product development revenue is derived from the development of content for
interactive CDs under third-party contracts and the development of other Web
based services. Product development revenue is generally recognized when the
product is delivered, except for services provided under longer-term contracts
where the revenue is recognized on a percentage-of-completion basis over the
life of the project. Two customers accounted for 52% of total revenue in 1998
and three customers accounted for 68% of total revenue in 1997.

Fair Value of Financial Instruments

All financial instruments are held for purposes other than trading. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accruals are a reasonable estimate of their fair value due to the
short-term nature of these instruments. The estimated fair value of long-term
obligations at December 31, 1997 and 1998 was approximately equal to the
carrying amounts at those dates.

Advertising Costs

The Company expenses advertising and promotion costs when the advertising and
promotion occurs. Advertising and promotion expense for 1996, 1997, and 1998,
was $6,020, $460,132, and $2,454,366 respectively.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," established a fair value method of
accounting for stock-based compensation. As permitted by SFAS No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options. No compensation
expense is recognized under APB 25 if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
measurement date. As required by SFAS No. 123, the Company discloses the pro
forma effect of the fair value method on operations in Note 7 to the financial
statements. Stock options and warrants held by non-employees are accounted for
under the fair value method of accounting.

Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use," which provides guidance on accounting
for the costs 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 has adopted the provisions of SOP 98-1 during
the nine months ended September 30, 1999 with no material effect.

4. ACQUISITIONS

Effective July 1, 1998, the Company acquired all of the capital stock of
Tunes Network. The purchase consideration, including direct costs of
acquisition of $315,000, was $5,815,000, consisting of 295,542 shares of common
stock with a fair value of $10 per share, approximately $1,940,000 of assumed
liabilities, and

F-69
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$604,000 in cash of which $404,000 was paid subsequent to December 31, 1998. At
September 30, 1999, 5,542 shares of common stock have not been issued; such
shares will be issued in 1999. In addition up to an additional 100,000 shares
of common stock may be issuable based upon reaching minimum equity market
capitalization thresholds soon after the completion of an initial public
offering by the Company. The current fair value of these contingent shares will
be recorded as additional goodwill when the contingency is resolved and the
shares become issuable and will be amortized over the remaining estimated
useful life of the goodwill.

The acquisition was accounted for as a purchase and, accordingly, the results
of operations have been included in the consolidated financial statements from
July 1, 1998, the effective date of the acquisition.

Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming Tunes Network had
been consolidated since January 1, 1997:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
Revenue........................................... $ 863,810 $ 2,725,641
Net loss.......................................... (8,029,869) (15,587,790)
</TABLE>

The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition been made as of
January 1, 1997.

The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:

<TABLE>
<S> <C>
Cash............................................................ $ 7,217
Accounts receivable and other assets............................ 21,616
Equipment....................................................... 124,737
Developed technology............................................ 800,000
In-process research and development............................. 100,000
Assembled work force............................................ 110,000
Goodwill........................................................ 4,651,430
-----------
5,815,000
Less: Liabilities assumed....................................... (1,940,000)
-----------
Cash and common stock purchase consideration.................... $ 3,875,000
===========
</TABLE>

The acquired in-process research and development includes the value of
products in the development stage not considered to have reached technological
feasibility. In accordance with applicable accounting rules, the acquired in-
process research and development was expensed in the third quarter of 1998. The
capitalized intangible assets acquired in the acquisition of Tunes Network
including developed technology, assembled work force, and goodwill are being
amortized on a straight-line basis over the estimated useful life of two years.

In November 1997, the Company formed a wholly owned subsidiary, JAMtv
Interactive Services Corporation (JIS) and acquired certain assets from
Imagination Pilots Entertainment Inc. (IPEI) and assumed certain IPEI
liabilities (see Note 12).

F-70
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following:

<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment.................................... $ 394,500 $1,014,741
Software.............................................. 341,187 379,828
Furniture and equipment............................... 69,001 233,148
Leasehold improvements................................ 18,500 61,202
Other................................................. 17,242 23,883
--------- ----------
840,430 1,712,802
Less: Accumulated depreciation........................ (131,185) (498,636)
--------- ----------
Net equipment and leasehold improvements.............. $ 709,245 $1,214,166
========= ==========
</TABLE>

Depreciation expense was approximately $2,319, $156,529 and $387,569, for the
period from July 2, 1996 (inception) to December 31, 1996, and for the years
ended December 31, 1997 and 1998, respectively.

6. CAPITALIZATION

At September 30, 1999, the authorized capital stock of the Company consisted
of 11,500,000 shares of common stock, $.01 par value per share, and 7,000,000
shares of preferred stock, $.01 par value per share. The Company is prohibited
from declaring or paying dividends for as long as there remains any outstanding
shares of preferred stock.

Reorganization

On July 2, 1996, DEN was initially capitalized through the issuance of
115,053 Members' units for total proceeds of $750,000. In early 1997, the
Company adopted a Unit Option Plan and an aggregate of 28,760 options to
purchase Member units were granted at an option price of $10 per unit. In March
1997, the Company received $500,000 in bridge financing in the form of notes
payable from various investors.

On June 2, 1997, DEN was reorganized (Reorganization) into the Company,
whereby all of the Members of DEN received 10 shares of the Company's common
stock for each unit of DEN. Concurrent with the Reorganization, the $500,000
bridge financing notes payable were exchanged for 166,666 shares of Series A-I
preferred stock and each option granted under the Unit Option Plan was
exchanged for 10 stock options under the Company's 1997 Stock Option Plan.

Preferred Stock

The Company's preferred stock is convertible at any time into common stock on
a 1-for-1 basis, subject to certain anti-dilution adjustments, and has the same
voting rights as common stock. On June 3, 2007, or the first date thereafter
that redemption is permitted under Delaware law, the Company is required to
redeem all of the outstanding shares of the preferred stock at the following
amounts: Series A-I (1,666,666 shares) at $6.00 per share; Series A-II (200,000
shares) at $10.00 per share; Series A-III (150,000 shares) at $20.00 per share;
Series A-IV (76,165 shares) at $20.00 per share; Series B (472,000 shares) at
$10.00 per share; Series C (533,334 shares) at $15.00 per share; and Series D
(666,136 shares) at $20.00 per share and Series E shares (1,955,661 shares) at
$20.00 per share. All shares of the preferred stock automatically convert into
shares of common stock in the event of a public offering of common stock, which
generates gross proceeds of at least

F-71
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$30,000,000 with a price per share of at least $20.00. The aggregate redemption
amount is approximately $81,679,000.

In May 1999, the Company issued 76,165 shares of Series A-IV and 1,955,661
shares of Series E redeemable convertible preferred stock for aggregate
consideration of $20,318,260, including $3,995,000 of notes payable and related
accrued interest of $60,260.

The carrying amount of the preferred stock is being increased by periodic
accretions to adjust the amount recorded in the balance sheet to the mandatory
redemption amount at the redemption date.

In March and April 1999, the Company issued convertible promissory notes in
the amount of $3,995,000. The notes payable bear interest at 8% per annum and
were due March 2001. The notes payable automatically converted to 405,526
shares of preferred stock upon the May 1999 issuance of preferred stock.

Warrants

In connection with a third-party agreement (the Agreement--see Note 9), the
Company issued a warrant to purchase the Company's common stock at an exercise
price of $3.00 per share, the estimated fair value of the Company's common
stock at the date of the Agreement. The number of shares subject to the warrant
increases in the event of the occurrence of certain dilution criteria, as
defined in the Agreement. At December 31, 1997 and 1998 and September 30, 1999,
a warrant to purchase 419,224, 715,221 and 1,021,904 shares of the Company's
common stock was outstanding. The estimated fair value of the warrant, as
calculated using the Black-Scholes method at each date of issuance, totaled
$2,290,099 at December 31, 1998 and $4,847,385 at September 30, 1999, and is
being amortized over the initial three-year term of the Agreement or earlier as
the warrant becomes exercisable. During 1997 and 1998, $9,700 and $615,124 was
included in stock compensation expense in the Company's statement of
operations, respectively. The warrant may be exercised at any time on or after
certain triggering events, including an initial public offering by the Company
or the closing of a private round of equity financing at a minimum amount as
defined in the Agreement, or upon the occurrence of certain change of control
events. As a result of the May 1999 issuance of redeemable convertible
preferred stock, the warrants became fully exercisable and the remaining fair
value of the warrant ($4,207,457) was recorded as stock compensation expense in
May 1999.

On January 1, 1999, in connection with an affiliation agreement, the Company
issued a warrant to purchase up to 75,000 shares of common stock at an exercise
price of $10.00 per share. As a result of the May 1999 issuance of redeemable
convertible preferred stock, the warrant became fully exercisable. The
estimated fair value at the date of issuance of $292,500, as calculated using
the Black-Scholes method, was recorded as stock compensation expense in
connection with this warrant during the nine months ended September 30, 1999.
On November 12, 1999, this warrant was terminated in connection with the
termination of the affiliate agreement.

In connection with the convertible promissory notes issued in 1999, warrants
to purchase 39,950 shares of common stock at an exercise price of $10.00 per
share were issued. These warrants expire upon the earlier of an initial public
offering or March 2001. The estimated fair value of the warrants, as calculated
using the present value method, is $230,000 and has been recorded in 1999 as a
reduction to the carrying value of the notes payable and an increase to
additional paid-in capital.

In May 1999, in connection with the issuance of the redeemable convertible
preferred stock, a warrant to purchase 81,315 shares of common stock at an
exercise price of $10.00 per share was issued. The estimated fair value of the
warrant, as calculated using the Black-Scholes method at the date of issuance,
was $483,011

F-72
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and was recorded as a reduction to the redeemable convertible preferred stock
and an increase to additional paid-in capital. The warrant is exercisable until
May 2004.

In applying the Black-Scholes method, the Company has used an expected
dividend yield of zero, a risk-free interest rate of 5% and a volatility factor
of 66%. The lives used to value each of the warrants was based on the term of
each warrant as described above.

7. STOCK OPTION PLAN

Under the Company's 1997 Stock Option Plan (the 1997 Plan), 1,550,000 shares
of common stock are authorized for granting of options to employees, directors
and consultants of the Company as determined by the Compensation Committee of
the Board of Directors.

At December 31, 1998, 224,220 shares were available for future grants.
Options granted generally vest over four years. All options expire 10 years
from date of grant. Vesting generally accelerates upon the Company's initial
public offering or a change in control.

The following table summarizes activity under the 1997 Plan during the years
ended December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year...... -- $ -- 863,660 $2.64
Granted............................. 863,660 $2.64 480,020 $7.31
Canceled............................ -- $ -- (17,900) $6.25
------- ---------
Outstanding, end of year............ 863,660 $2.64 1,325,780 $4.28
======= =========
Exercisable, end of year............ 390,780 $1.53 819,063 $3.19
======= =========
</TABLE>

The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:

<TABLE>
<CAPTION>
Weighted-
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life (years) Exercisable
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$ 1.00 287,600 8.4 287,600
3.00 445,410 8.5 252,673
5.00 277,000 8.9 208,790
7.50 197,420 9.2 70,000
10.00 118,350 9.8 --
--------- -------
1,325,780 8.8 819,063
========= =======
</TABLE>

For the nine months ended September 30, 1999, 252,420 options were granted
under the 1997 Plan.

Pursuant to a severance agreement at December 31, 1998, 45,730 stock options
were transferred to a company controlled by a former employee and are accounted
for under the fair value method.

F-73
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options. During 1998 compensation expense of
$912,610 for the accelerated vesting of stock options held by terminated
employees was included in stock compensation expense. Had the provisions of
SFAS 123 been used in accounting for employee stock options (calculated using
the minimum value method for nonpublic companies), pro forma net loss
attributable to common stockholders and pro forma net loss per common share
(basic and dilutive) would have been approximately $4,132,000 and $3.58 and
$14,339,000 and $12.12 for the years ended December 31, 1997 and 1998,
respectively.

The weighted-average fair value of options granted during 1997 and 1998 is
estimated at $.61 and $1.66, respectively. The pro forma 1997 and 1998 net loss
impact and the weighted-average fair value of options granted during 1997 and
1998 was estimated using the minimum value option pricing model with a risk-
free interest rate of 6%, an expected life of 4.5 years (5 years in 1997), and
assuming no dividends.

In February 1999 the Company adopted the 1999 Stock Option Plan (the 1999
Plan). The number of shares of common stock subject to the 1999 Plan is
1,300,000 shares. As of September 30, 1999 there were 430,150 options
outstanding under the 1999 Plan. In 1999 all options were granted with an
exercise price of $10.00, the estimated fair value of the Company's common
stock on each date of grant.

8. RETIREMENT PLAN

Effective June 1, 1998, the Company established a defined contribution plan
that includes an employee 401(k) contribution provision covering substantially
all employees. The plan permits eligible employees to make voluntary
contributions on a pretax basis up to a certain limit. The Company does not
currently make contributions to the plan.

9. COMMITMENTS

Operating Leases

The Company leases certain office facilities and equipment under various
operating leases. The future minimum lease payments under noncancelable
operating leases having an initial term longer than one year at December 31,
1998, are as follows:

<TABLE>
<S> <C>
1999................................................................ $281,233
2000................................................................ 223,582
2001................................................................ 227,131
2002................................................................ 96,035
2003................................................................ --
Thereafter.......................................................... --
--------
$827,981
========
</TABLE>

Rent expense for the period July 2, 1996 (inception) to December 31, 1996 and
the years ended December 31, 1997 and 1998, was approximately $5,000, $121,469,
and $245,904, respectively.

License Agreement

In 1997, the Company entered into an agreement with a third party (the
Agreement) pursuant to which the Company was granted certain rights with
respect to brand name, trademarks, URL, historical, current and future content,
advertising and promotion services, and other services. Under the terms of the
Agreement, the

F-74
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company granted warrants (see Note 6) and is required to pay an annual license
fee of $1,000,000 (paid quarterly in equal installments) for a period of three
years. Upon a first and second renewal term as defined in the Agreement, the
Company would have to pay an annual license fee of $1,250,000 and $1,500,000,
respectively. In addition to the license fee, the Company was also required to
pay a $1,500,000 Trigger License Fee as a result of the May 1999 issuance of
redeemable convertible preferred stock.

The rights granted to the Company under the terms of the Agreement extend for
an additional five years upon the successful completion of either a public or
private offering of the Company's securities (trigger events) in which the
amount raised is no less than $15,000,000. The Agreement extends for a further
period of five years based on the Company or its acquirer having publicly
traded securities with a market capitalization of no less than $150,000,000.
The ultimate number of shares issued pursuant to the warrant (see Note 6) will
be determined by: (a) the extent of intervening equity financings prior to
either of the trigger events, and (b) the mutual further agreement of the
parties.

Other

The Company has entered into various Web site tenancy agreements that provide
for the Company to make payments of at least $1,500,000 during 1999, of which
$1,200,000 has been paid through September 30, 1999.

10. CAPITAL LEASES

Total office and computer equipment under capital leases was $240,193, less
accumulated amortization of $36,731, at December 31, 1998. Amortization is
included with depreciation expense. Future minimum lease payments for the
assets under capital leases are as follows:

<TABLE>
<S> <C>
1999............................................................... $115,806
2000............................................................... 96,999
2001............................................................... 63,455
2002............................................................... 13,379
2003............................................................... 4,445
Thereafter......................................................... --
--------
Total minimum lease payments....................................... 294,084
Less: Amount representing interest................................. (39,912)
--------
Present value of net minimum lease payments........................ $254,172
Current portion, included in other accrued expenses................ (93,665)
--------
Long-term obligations at December 31, 1998......................... $160,507
========
</TABLE>

11. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance
has been provided for the net deferred tax asset because of uncertainty
regarding the Company's ability to generate taxable income prior to the
expiration of the carryforward period.

F-75
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Significant components of the Company's deferred income tax assets and
liabilities are as follows at December 31:

<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 5,734,927 $ 941,300
Stock compensation expense......................... 539,853 --
Research and development credit carryforward....... 80,000 --
Accrued compensation............................... 28,863 8,000
Other.............................................. 38,740 45,700
----------- ---------
Gross deferred tax assets.......................... 6,422,383 995,000
Deferred tax liability:
Intangible amortization............................ (266,174) --
----------- ---------
Net deferred tax assets............................ 6,156,209 995,000
----------- ---------
Less: Valuation allowance.......................... (6,156,209) (995,000)
----------- ---------
$ -- $ --
=========== =========
</TABLE>

The valuation allowance for net deferred tax assets increased $5,161,209 as a
result of the net changes in temporary differences including a $529,554
increase related to the acquisition of Tunes Network.

At December 31, 1998, the Company had net operating loss carryforwards
totaling approximately $14,705,000, which expire beginning in 2011. Based on
the Internal Revenue Code regulations relating to changes in the ownership of
the Company, utilization of the net operating loss carryforwards may be subject
to annual limitations. Because the Company operated as a limited liabilty
company until June 2, 1997, no income taxes were provided for as of December
31, 1996.

12. RELATED PARTY TRANSACTIONS

The Company incurred various operating expenses through JAM Productions Ltd.
(JPL). The Company reimbursed JPL for these expenses, which totaled
approximately $24,000, $90,000, and $75,000 in 1996, 1997 and 1998,
respectively. A stockholder of JPL was the Company's Chairman of the Board
through January 1999.

The Company leases office space from an entity in which the Company's chief
executive officer has an ownership interest. The monthly lease payments are
approximately $18,000 and increase approximately 3% per year.

Prior to 1998, the Company was charged for various services by Imagination
Pilots Entertainment Inc. (IPEI), whose majority stockholder is the Company's
chief executive officer. These services included rent of office facilities, use
of personnel, and other various operating activities. Expenses related to these
services were approximately $75,000 and $95,000 in 1996 and 1997, respectively.

During 1997, the Company purchased certain assets, primarily computer and
other equipment, software, certain intellectual property, and the rights to a
contract for the development of CD-ROM titles, from IPEI and Imagination
Pilots, Inc. (IPI), whose majority stockholder is the Company's chief executive
officer, and

F-76
<PAGE>

TUNES.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

assumed certain IPEI and IPI liabilities, for a total cash purchase price of
$370,000. The purchase price was allocated as follows:

<TABLE>
<S> <C>
Computer and other equipment and software.......................... $309,000
In process research and development................................ 95,000
--------
404,000
Less: Liabilities assumed.......................................... (34,000)
--------
Cash............................................................... $370,000
========
</TABLE>

13. SUBSEQUENT EVENTS

In June 1999, the Company filed a registration statement on Form S-1 with the
Securities and Exchange Commission with respect to a proposed initial public
offering. In August 1999, the Company postponed its initial public offering due
to adverse market conditions, and approximately $1,300,000 in related costs
were charged to general and administrative expenses in October 1999.

In November 1999, the Company entered into a lease facility that allows for
borrowings of up to $1.0 million for equipment purchases made on or prior to
July 31, 2000. Borrowings made under this lease facility are payable over a 36-
month term. At November 30, 1999, the Company had outstanding borrowings of
approximately $400,000 under this facility.

In connection with the amendment of a third-party license agreement (see Note
9), the Company issued a warrant to purchase 2,652,717 shares of the Company's
common stock at an exercise price of $3.00 per share in December 1999.

In November 1999, the Company entered into a merger agreement with EMusic.com
Inc. Under the terms of the agreement, each share of the Company's capital
stock outstanding as of the effective date of the merger will be converted into
that number of shares of the EMusic common stock equal to 10,600,000 divided by
the number of shares of the Company's capital stock outstanding on a fully-
diluted basis as of the effective date of the merger. EMusic.com Inc. will also
assume all outstanding options and warrants to purchase shares of the Company's
capital stock. The merger, subject to shareholder approval, is expected to
close in the first quarter of 2000.

F-77
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Tunes Network, Inc.

We have audited the accompanying balance sheets of Tunes Network, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tunes Network, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois
June 22, 1998

F-78
<PAGE>

TUNES NETWORK, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1996 1997 1998
--------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ -- $ -- $ 7,217
Accounts receivable..................... 791 13,852 3,841
Advances to shareholders................ 10,220 -- --
Prepaids and other current assets....... 12,474 -- 922
--------- ----------- -----------
Total current assets...................... 23,485 13,852 11,980
Property and equipment, net............... 186,240 172,365 124,737
Other assets.............................. 5,243 13,615 16,853
--------- ----------- -----------
Total assets.............................. $ 214,968 $ 199,832 $ 153,570
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Bank overdraft.......................... $ 9,305 $ 3,309 $ --
Accounts payable........................ 169,639 251,177 371,799
Accrued compensation.................... 222,383 536,557 317,121
Other accrued expenses.................. 6,586 119,969 129,158
Payables to officers.................... 97,816 271,376 275,146
Current obligations under capital
leases................................. 23,701 40,984 44,123
Current obligations under revolving line
of credit with a related party......... -- 185,000 185,000
Convertible note payable to a related
party.................................. -- 50,000 505,000
Notes payable to related parties........ -- 33,465 33,465
Note payable............................ -- 15,000 31,726
Advances from Tunes.com................. -- -- 260,366
--------- ----------- -----------
Total current liabilities................. 529,430 1,506,837 2,152,904

Obligations under capital leases, net of
current portion.......................... 91,895 78,803 63,005
Obligations under revolving line of credit
with a related party..................... 135,000 -- --
Notes payable to related parties, net of
current portion.......................... 11,490 -- --
Bridge financing.......................... -- 465,000 --

Commitments
Stockholders' equity (deficit):
Common stock, no par value; 10,000,000
shares authorized; 1,884,000, 5,940,500
and 7,875,955 shares issued and
outstanding at December 31, 1996 and
1997 and June 30, 1998, respectively... 21,861 351,019 1,147,277
Accumulated deficit..................... (574,708) (2,201,827) (3,209,616)
--------- ----------- -----------
Total stockholders' equity (deficit)...... (552,847) (1,850,808) (2,062,339)
--------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)................................ $ 214,968 $ 199,832 $ 153,570
========= =========== ===========
</TABLE>

See accompanying notes

F-79
<PAGE>

TUNES NETWORK, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year ended Six months
December 31, ended
---------------------- June 30,
1996 1997 1998
--------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Revenue................................... $ 62,693 $ 299,116 $ 240,986
Cost of revenue........................... 12,048 247,798 229,122
--------- ----------- -----------
50,645 51,318 11,864
Operating expenses:
Operating and development............... 267,257 737,873 440,208
Sales and marketing..................... 203,336 344,155 2,878
General and administrative.............. 190,966 597,033 499,894
--------- ----------- -----------
661,559 1,679,061 942,980
--------- ----------- -----------
Loss from operations...................... (610,914) (1,627,743) (931,116)
Other income, net......................... -- 10,000 (3,591)
Interest expense.......................... (21,137) (41,661) (73,082)
--------- ----------- -----------
Loss from continuing operations........... (632,051) (1,659,404) (1,007,789)
Income from discontinued operations
(income from operations -- $213,773 and
$5,464 in 1996 and 1997, respectively;
income from disposal--$26,821 in 1997)... 213,773 32,285 --
--------- ----------- -----------
Net loss.................................. $(418,278) $(1,627,119) $(1,007,789)
========= =========== ===========
</TABLE>

See accompanying notes

F-80
<PAGE>

TUNES NETWORK, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Total
Common stock shareholders
-------------------- Accumulated equity
Shares Amount deficit (deficit)
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... 1,771,000 $ 18,788 $ (156,430) $ (137,642)
Issuance of common stock to
employees and third parties
in exchange for services..... 113,000 3,073 -- 3,073
Net loss...................... -- -- (418,278) (418,278)
--------- ---------- ----------- -----------
Balance at December 31, 1996.... 1,884,000 21,861 (574,708) (552,847)
Issuance of common stock to
employees and third parties
in exchange for services..... 4,056,500 329,158 -- 329,158
Net loss...................... -- -- (1,627,119) (1,627,119)
--------- ---------- ----------- -----------
Balance at December 31, 1997.... 5,940,500 351,019 (2,201,827) (1,850,808)
Issuance of common stock to
employees and third parties in
exchange for services
(unaudited).................... 989,713 433,810 -- 433,810
Exercise of stock options
(unaudited).................... 660,092 237,448 -- 237,448
Conversion of notes payable to
common stock (unaudited)....... 285,650 125,000 125,000
Net loss (unaudited)............ -- -- (1,007,789) (1,007,789)
--------- ---------- ----------- -----------
Balance at June 30, 1998
(unaudited).................... 7,875,955 $1,147,277 $(3,209,616) $(2,062,339)
========= ========== =========== ===========
</TABLE>

See accompanying notes

F-81
<PAGE>

TUNES NETWORK, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December
31, Six months
---------------------- ended June
1996 1997 30, 1998
--------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................. $(418,278) $(1,627,119) $(1,007,789)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 60,826 105,868 57,736
Common stock issued to employees and
third parties in exchange for
services............................... 3,073 329,158 433,810
Stock compensation expense.............. -- -- 203,628
Changes in operating assets and
liabilities:
Accounts receivable................... (791) (13,061) 10,011
Advances to shareholders.............. (10,220) 10,220 --
Prepaids and other current assets..... (8,536) 12,474 (922)
Other assets.......................... (9,586) (8,372) (3,238)
Accounts payable...................... 106,074 81,538 120,622
Accrued compensation.................. 139,472 314,174 (219,436)
Other accrued expenses................ 2,322 113,383 9,189
--------- ----------- -----------
Net cash used in operating activities..... (135,644) (681,737) (396,389)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........ (28,650) (66,014) (10,108)
--------- ----------- -----------
Net cash used in investing activities..... (28,650) (66,014) (10,108)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft............................ 7,985 (5,996) (3,309)
Proceeds from payables to officers........ 145,385 316,700 3,770
Repayment of payables to officers......... (47,569) (143,140) --
Proceeds from revolving line of credit
with a related party..................... 135,000 50,000 --
Proceeds from convertible note payable to
a related party.......................... -- 50,000 115,000
Proceeds from notes payable to related
parties.................................. -- 25,000 --
Repayment of notes payable to related
parties.................................. (7,260) (3,025) 16,726
Proceeds from notes payable............... -- 15,000 --
Proceeds from bridge financing............ -- 465,000 --
Repayment of lease obligations............ (69,247) (21,788) (12,659)
Proceeds from exercise of stock options... -- -- 33,820
Advances from Tunes.com................... -- -- 260,366
--------- ----------- -----------
Net cash provided by financing
activities............................... 164,294 747,751 413,714
--------- ----------- -----------
Net increase in cash and cash
equivalents.............................. -- -- 7,217
Cash and cash equivalents at beginning of
period................................... -- -- --
--------- ----------- -----------
Cash and cash equivalents at end of
period................................... $ -- $ -- $ 7,217
========= =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.................. $ 15,735 $ 24,571 $ 15,813
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment under
capital lease obligations.............. $ 112,934 $ 25,979 $ --
========= =========== ===========
Notes payable converted to shares of
common stock........................... $ -- $ -- $ 125,000
========= =========== ===========
</TABLE>

See accompanying notes

F-82
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

1. NATURE OF BUSINESS

Tunes Network, Inc. (the "Company"), a California corporation, formerly Surf
Communications, Inc., was incorporated on April 19, 1994 as a provider of
Internet access services. In 1996, the Company expanded its strategy to include
music entertainment. The Company is currently a developer of music-related Web
site technology and content and an online retailer of CDs. The Company
contracts with outside warehouses for fulfillment services to deliver products
to customers and, therefore, the Company maintains no inventories. The Company
sells its products and services primarily to customers in the United States.

In December 1997, the Company discontinued its Internet access services
business and sold this business. The operations of the Internet access services
business have been accounted for as a discontinued operation.

2. BASIS OF PRESENTATION

The financial statements of the Company as of June 30, 1998 and for the six-
month period ended June 30, 1998 contain all adjustments and accruals
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial position and
operating results of the interim period presented.

3. 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
the reported amount of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets, generally
three years. Assets under capital leases are amortized using the straight-line
method over the shorter of the estimated useful lives or the remaining lease
terms, generally three years.

REVENUE RECOGNITION

Revenue from CD sales, which consists primarily of recorded music sold via the
Internet, includes outbound shipping and handling charges and are recognized
when the products are shipped. Allowances for credit losses and for estimated
returns are recorded upon recognition of revenue. Actual credit losses and
returns have been insignificant to date. Revenue from services, including music
encoding, and Web site development services is recognized after the services
have been performed and collection of the related receivable is considered
probable.

Revenue from one customer accounted for 80% of revenues for the year ended
December 31, 1996. Revenue from a different customer accounted for 27% of
revenues for the year ended December 31, 1997.

The Company does not perform credit evaluations and does not require collateral
from customers.

F-83
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS-(Continued)

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

Operating and Development

Costs to develop the Company's products are expensed as incurred in accordance
with Statement of Financial Accounting Standards No. 2, "Accounting for
Research and Development Costs," which established accounting and reporting
standards for research and development costs.

Operating and development expenses consist principally of payroll and related
expenses for development, editorial, and network operations personnel and
consultants and expenses for systems and telecommunications infrastructure.

Internally Developed Systems and Software

The costs to develop internal systems and software, primarily payroll and
related expenses for development and design of software, are charged to expense
as incurred.

Dependence on Suppliers

The Company's primary provider of order fulfillment for recorded music titles
is Valley Record Distributors ("Valley"). The Company has no fulfillment
operation or facility of its own and, accordingly, is dependent upon
maintaining its existing relationship with Valley or establishing a new
fulfillment relationship with one of the few other fulfillment operations.
There can be no assurance that the Company will maintain its relationship with
Valley beyond the term of its existing two-year agreement, which expires in
September 1998, or that it will be able to find an alternative, comparable
vendor capable of providing fulfillment services on terms satisfactory to the
Company, should its relationship with Valley terminate. Valley accounted for
79% of the cost of sales for the years ended 1996 and 1997. The Company has the
right to offset accounts receivable from and accounts payable to Valley. As a
result, the accounts receivable were used to reduce the accounts payable in the
accompanying balance sheet.

4. DISCONTINUED OPERATION

In September 1997, the Company decided to discontinue the Internet access
services line of business and sold that line of business in December 1997 for
$25,000. Income on disposal included the $25,000 cash proceeds and operating
income from September 1997 through December 1997 of $1,821. Revenues from the
Internet access services line of business were $450,000 and $156,618 in 1996
and 1997, respectively. No assets or liabilities were sold as a result of this
disposition. The results of operations of the Internet access services line of
business is shown as a discontinued operation for all periods presented.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Computer software and equipment........................ $241,278 $324,172
Furniture and fixtures................................. 8,915 18,014
-------- --------
250,193 342,186
Less accumulated depreciation and amortization......... (63,953) (169,821)
-------- --------
Property and equipment, net............................ $186,240 $172,365
======== ========
</TABLE>

F-84
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS-(Continued)

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

Total property and equipment under capital leases was $186,877 and $212,856,
less accumulated amortization of $42,268 and $98,616, at December 31, 1996 and
1997, respectively.

6. DEBT

Payables to Officers

Payables to officers represent amounts loaned to the Company by officers for
purposes of sustaining the Company's operations. Payables for $61,664 and
$218,474 at December 31, 1996 and 1997, respectively, bear interest at 15% per
annum. The remaining payables do not bear interest. Payables are repaid as
Company funds are available.

Revolving Line of Credit

In April 1996, the Company entered into a $50,000 revolving line-of-credit
agreement (the "Agreement") with an officer of the Company. This line of credit
was increased to $135,000 in October 1996, $185,000 in January 1997 and
$200,000 in May 1997. The Agreement bears interest at 10.14% and 9.89% at
December 31, 1996 and 1997, respectively, per annum. Interest is payable
monthly. The Agreement expires on June 20, 1998, at which time all outstanding
interest and principal under the Agreement will become due and payable.
Additionally, should the Company receive funding or achieve a significant
income event before June 20, 1998, the balance outstanding under this Agreement
shall become due and payable. Borrowings outstanding under the Agreement are
collateralized by substantially all of the Company's assets not otherwise
encumbered and are personally guaranteed by an officer of the Company.

Convertible Note Payable to a Related Party

In November 1997, the Company entered into an agreement with an investor, who
is an advisory board member of the Company, under which it borrowed $50,000
issued under a convertible promissory note, with interest at 12% per annum.
Under the terms of the agreement, principal and interest are due and payable on
the earlier of 12 months from the date of the agreement, or, in the event of a
default, amounts are declared due and payable by the investor, unless such
amounts are automatically converted into equity securities of the Company
pursuant to the terms of the agreement.

The note will convert into equity upon the closing of the next equity
financing, completed before September 30, 1998, in which the Company receives
aggregate offering proceeds valued by the Company at more than $250,000. At
such time, the investor shall receive, in full satisfaction of amounts owing
under the note, a number of equity securities equal to the quotient of the
amount of the loan divided by 72.5% of the price per equity security paid by
participants in the next equity financing. The investor will be entitled to all
rights granted to participants in the next equity financing.

Additionally, upon the closing of the next equity financing, the investor shall
receive an option to purchase a certain number of shares of common stock of the
Company based on the pre-money valuation of the next equity financing. In no
event shall the number of shares of common stock under the option be less than
50,000. The option will be fully vested upon the closing of the next equity
financing.

In the event of any liquidation, dissolution or winding up of the Company,
prior and in preference to any distribution of any of the assets of the Company
to any investor or to the holders of any equity security, the investors will be
entitled to, at the investors' election, either a repayment of all amounts due
under the loan, or

F-85
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

to convert the principal amount into the most senior equity securities then
authorized by the Articles of Incorporation of the Company at a price per share
that would cause the Company to be valued at $3,500,000.

Notes Payable to Related Parties

In December 1995, the Company entered into a promissory note (the "Note") for
$18,750 with the father of an officer of the Company. The Note bears interest
at 10% per annum. Interest and principal are due monthly in equal monthly
payments of $605 commencing on January 1, 1996. The balance of this Note,
including accrued interest, shall be due and payable in full on or before
December 1, 1998. Borrowings outstanding under the Note are collateralized by
substantially all of the Company's assets not otherwise encumbered (see Note
11).

In December 1997, the Company entered into a promissory note (the "Note") for
$25,000 with an investor. The Note bears interest at 6% per annum. Interest and
principal are due on or before May 22, 1998 (see Note 11).

Notes Payable

In November 1997, the Company entered into a promissory note (the "Note") for
$15,000 with a lender. The Note bears interest at the prime rate plus 2% (10.5%
at December 31, 1997) per annum. Interest and principal are due and payable on
the earlier of the date on which the lender shall purchase all or substantially
all of the assets of the borrower or January 30, 1998 (see Note 11).

Bridge Financing

In 1997, the Company entered into bridge financing agreements with certain
investors under which it borrowed $465,000. Under the terms of the agreements,
upon the closing of the next equity financing as defined in the agreements, in
which the Company receives aggregate offering proceeds valued by the Company at
more than $1,000,000, the investors shall receive a number of equity securities
equal to the quotient of the amount of the funds delivered by the investors
divided by 50% of the price per equity security paid by participants in the
next equity financing. The investors will be entitled to all rights granted to
participants in the next equity financing.

In March 1998, the Company entered into bridge financing agreements with
certain investors under which it borrowed $115,000 issued under convertible
promissory notes, with interest at 6% per annum (see Note 11).

7. LEASE COMMITMENTS

If the investors have not received equity securities pursuant to this agreement
before the closing of a corporate sale transaction, as defined in the
agreement, the investors shall receive from the Company the most senior equity
securities then authorized by the Articles of Incorporation of the Company
valued at an amount equal to 200% of the amount of the funds delivered by the
investors.

The Company leases certain office facilities under noncancelable operating
leases. The Company leases equipment under capital leases. Interest rates on
capital leases range from 12% to 21%.

F-86
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS-(Continued)

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

Future minimum lease payments under capital leases and noncancelable operating
leases with initial terms of one year or more at December 31, 1997, are as
follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1998...................................................... $53,565 $28,200
1999...................................................... 52,481 --
2000...................................................... 34,416 --
2001...................................................... 1,284 --
-------- -------
Total minimum lease payments.............................. 141,746 $28,200
=======
Less amount representing interest......................... 21,959
--------
Present value of net minimum lease payments............... 119,787
Less current portion...................................... 40,984
--------
$ 78,803
========
</TABLE>

Rent expense for the years ended December 31, 1996 and 1997 was $22,953 and
$56,468, respectively.

8. STOCKHOLDERS' EQUITY (DEFICIT)

Common Stock

Common stock represents the deemed fair value of services contributed to the
Company by employees and third parties in 1996 and 1997. In November 1997, all
employee stockholders of the Company entered into restricted common stock
purchase agreements under which all common shares granted to such employee
stockholders through October 1997 were vested 25% on October 20, 1997 and vest
1/48 per month thereafter. Additionally, such shares will vest immediately upon
the sale of substantially all of the Company's assets. At December 31, 1997,
5,336,407 common shares were vested.

9. INCOME TAXES

The Company uses the liability method to account for income taxes as required
by Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.

Significant components of the Company's deferred tax assets are as follows (in
thousands):

<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Net operating loss carryforwards........................... $ 94 $530
Research and development credit carryforwards.............. -- 80
Accrued compensation....................................... -- 215
------ ------
Total deferred tax assets.................................. 94 825
Valuation allowance........................................ (94) (825)
------ ------
Net deferred tax assets.................................... $ -- $ --
====== ======
</TABLE>

F-87
<PAGE>

TUNES NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information with respect to the six-month period ended June 30, 1998
is unaudited)

The valuation allowance increased by $94,000 and $731,000 in the years ended
1996 and 1997, respectively.

At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,300,000 which expire in the tax
years 2011 through 2012. The Company has federal tax credit carryforwards of
approximately $50,000 which expire in the year 2012.

Because of the "change in ownership" provisions of the Internal Revenue Code of
1986, a portion of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce future income tax liabilities.

10. DISPUTE SETTLEMENT

In March 1998, a former consultant of the Company filed a suit against the
Company. In May 1998, the Company entered into a settlement agreement with the
former consultant. In connection with this settlement, the former consultant
received $31,989 for wages earned during employment with the Company from
January 1998 to March 1998, and an option, effective upon the time of the
acquisition of the Company by JAMtv, to purchase 445,834 shares of common stock
of the Company at $.10 per share which was, as required under the terms of the
agreement, automatically exercised in full upon the effective time of the
acquisition (see Note 11).

11. SUBSEQUENT EVENT

Effective July 1, 1998, substantially all of the Company's business was merged
with and into Tunes Acquisition Corp., a wholly owned subsidiary of Tunes.com
Inc, formerly JAMtv Corporation. In connection with this merger, all
outstanding debt was assumed by Tunes.com Inc. and repaid in 1998.

12. RISKS ASSOCIATED WITH THE YEAR 2000 (UNAUDITED)

Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include third-
party software and hardware technology.

F-88
<PAGE>

APPENDIX A

AGREEMENT AND PLAN OF REORGANIZATION

among EMUSIC.COM INC.,

GNB CORPORATION, and

TUNES.COM INC.

November 29, 1999
<PAGE>

AGREEMENT AND PLAN OF REORGANIZATION

This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 29th day of November 1999, by and among EMusic.com Inc., a Delaware
corporation ("Acquiror"), GNB Corporation, a Delaware corporation and wholly-
owned subsidiary of Acquiror ("Sub"), and Tunes.com Inc., a Delaware
corporation ("Target").

RECITALS

A. The parties intend that, subject to the terms and conditions hereinafter
set forth, Sub shall be merged with and into Target, with Target the surviving
corporation (the "Merger"), pursuant to Certificate of Merger substantially in
the form attached hereto as Exhibit A (the "Certificate of Merger") and the
applicable provisions of the laws of the State of Delaware. Upon the Merger,
the Target Stockholders shall be entitled to receive shares of Acquiror common
stock, par value $0.001 per share, at the exchange ratio set forth herein.

B. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended.

AGREEMENT

NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:

1. DEFINITIONS.

1.1 "Acquiror Shares" shall mean 10,600,000 shares of Acquiror common stock,
par value $0.001 per share.

1.2 "Affiliate" shall have the meaning set forth in the rules and regulations
promulgated by the Commission pursuant to the Securities Act.

1.3 "Closing" and "Closing Date" shall have the meanings set forth in Section
2.4.

1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended.

1.5 "Commission" shall mean the Securities and Exchange Commission.

1.6 "Confidential Information" shall mean that information of a party
("Disclosing Party") which is disclosed to another party ("Receiving Party")
pursuant to this Agreement, in written form and marked "Confidential." If
Confidential Information is initially disclosed orally, the Disclosing Party
shall send a written summary of such information to the Receiving Party within
fifteen (15) days of disclosure and mark such summary "Confidential."
Confidential Information shall include, but not be limited to, trade secrets,
know-how, inventions, techniques, processes, algorithms, software programs,
schematics, designs, contracts, customer lists, financial information, sales
and marketing plans and business information.

1.7 "Contaminant" shall mean, without limitation, any pollutants, residues,
infectious materials, flammable, dangerous, toxic or hazardous substances,
hazardous materials or waste of any description whatsoever, except for non-
hazardous waste of the kind generated in the normal course of operations,
including any of the foregoing as defined in or regulated under any
Environmental Law, including but not limited to polychlorinated biphenyls,
asbestos or asbestos containing materials, petroleum and petroleum containing
materials.

A-2
<PAGE>

1.8 "Damages" shall include any loss, damage, injury, decline in value, lost
opportunity, liability, claim, demand, settlement, judgment, award, fine,
penalty, tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.

1.9 "Delaware Law" shall mean the Delaware General Corporation Law, as
amended.

1.10 "Dissenting Shares" shall mean any Target Shares held by Persons who
have not voted such shares for approval of the Merger and with respect to which
such Persons have become entitled to exercise dissenter's rights in accordance
with the Delaware Law.

1.11 "Effective Time" shall mean the time the Merger becomes effective as
defined in Section 2.5.

1.12 "Entity" shall mean a corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.

1.13 "Environmental Activity" shall mean, without limitation, any activity,
event or circumstance in respect of a Contaminant, including, without
limitation, its storage, use, holding, collection, purchase, accumulation,
assessment, generation, manufacture, construction, processing, treatment,
recycling, stabilization, disposition, handling or transportation or its
affirmative or accidental release into the natural environment including
movement through or in the air, soil, subsoil, surface water or groundwater or
any other activity, event or circumstance which is subject to any of the
Environmental Laws including but not limited to noise, vibration, odor or
similar nuisance.

1.14 "Environmental Laws" shall mean laws relating to the environment or any
Environmental Activity.

1.15 "Exchange Ratio" shall mean that ratio at which each outstanding Target
Share will be converted into the right to receive shares of Acquiror Common
Stock. The Exchange Ratio shall equal the number of Acquiror Shares divided by
the number of Target Shares outstanding at the Effective Time on a fully-
diluted basis (including all options, warrants or other rights to acquire
Target Shares issued and outstanding at the Effective Date).

1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.

1.17 "GAAP" shall mean United States of America generally accepted accounting
principles, consistently applied.

1.18 "Governmental Body" shall mean any: (a) nation, state, commonwealth,
province, territory, county, municipality, district or other jurisdiction of
any nature; (b) federal, state, local, municipal, foreign or other government;
or (c) governmental or quasi-governmental authority of any nature (including
any governmental division, department, agency, commission, instrumentality,
official, organization, unit, body, or Entity and any court or other tribunal).

1.19 "Indemnification Period" shall mean the period commencing on the Closing
Date and ending at the close of business on the first anniversary of the
Closing Date.

1.20 "Legal Proceeding" shall mean any action, suit, litigation, arbitration
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding), hearing, inquiry, audit, examination or investigation
commenced, brought, conducted or heard by or before, or otherwise involving any
court or other Governmental Body or any arbitrator or arbitration panel.

1.21 "Material" when capitalized and used in reference to the business,
products or financial situation of Target shall be construed, except as
specifically provided, to qualify the matter referred to herein to matters

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with a value in excess of $50,000. For example, a "Material adverse effect"
would be an adverse effect resulting in costs or expenses in excess of $50,000.
When the word "material" is not capitalized it shall mean material with respect
to the matter referenced. For example, a reference to a material breach of a
particular agreement would mean a breach that is material with respect to the
particular contract (and not necessarily with respect to the overall business
of Target or Acquiror).

1.22 "Merger" shall mean the merger of Sub with and into Target, on the terms
and conditions described herein.

1.23 "Music Rights" shall mean any rights (whether on an exclusive or
nonexclusive basis) to music recording masters, musical arrangements, musical
compositions, lyrics, sound recordings, or album artwork and graphics or other
music-related Proprietary Assets, together with the associated copyrights.

1.24 "Person" shall mean any individual, Entity or Governmental Body.

1.25 "Proprietary Asset" shall mean: (a) any patent, patent application,
trademark (whether registered or unregistered), trademark application, trade
name, fictitious business name, service mark (whether registered or
unregistered), service mark application, copyright (whether registered or
unregistered), copyright application, maskwork, maskwork application, trade
secret, know-how, customer list, franchise, system, computer software, computer
program, invention, design, blueprint, engineering drawing, proprietary
product, technology, proprietary right or other intellectual property right;
and (b) any right to use or exploit any of the foregoing including rights
granted by third parties under license agreements.

1.26 "Proxy Statement" shall mean a joint proxy statement prepared by Target
and Acquiror and distributed to the stockholders of Target and Acquiror as
required pursuant to Section 7.5 hereof.

1.27 "Registration Statement" shall mean a registration statement filed with
the Commission covering the issuance of the Acquiror Shares to the Target
stockholders and warrant holders.

1.28 "Representatives" shall mean officers, directors, employees, agents,
attorneys, accountants and advisors.

1.29 "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations thereunder, all as
the same shall be in effect at the time.

1.30 "Target Stockholders" shall mean the holders of the Target Shares and
those who have a right to acquire any Target Shares.

1.31 "Target Shares" shall mean the shares of Target capital stock issued and
outstanding at the Effective Time.

1.32 "Target Transaction Costs" shall mean legal, investment banking and
accounting fees and other out of the ordinary course expenses incurred by
Target and the Target Stockholders in connection with the Merger, but shall not
include (a) integration costs incurred following the Merger at the request of
Acquiror, or (b) costs incurred by Acquiror in connection with any required
premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.

1.33 "Tax" or "Taxes" shall mean all U.S. federal, territorial, state,
municipal, local or other taxes, including without limitation income capital,
sales and use taxes, value added and goods and services taxes, excise taxes,
transfer and stamp taxes, custom duties and franchise taxes, real and personal
property taxes and payroll taxes (including tax withholdings, employer health
taxes, workers' compensation assessments and ERISA plans and unemployment
insurance premiums, contributions and remittances and the U.S. equivalents
thereof), and penalties, interest and surcharges in respect of any of the
foregoing and all words derived from or including the word "Tax," such as
"Taxing" and "Taxation" shall bear a corresponding meaning.

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1.34 "Transaction Documents" shall mean all documents or agreements required
to be delivered by any party hereunder including the Certificate of Merger.

2. Plan of Reorganization.

2.1 The Merger. Subject to the terms and conditions of this Agreement, Sub
shall be merged with and into Target in accordance with the applicable
provisions of the laws of the State of Delaware and with the terms and
conditions of this Agreement so that:

(a) At the Effective Time, Sub shall be merged with and into Target. As
a result of the Merger, the separate corporate existence of Sub shall cease
and Target shall continue as the surviving corporation (sometimes referred
to herein as the "Surviving Corporation") and shall succeed to and assume
all of the rights and obligations of Sub in accordance with the laws of the
State of Delaware.

(b) The Certificate of Incorporation and the Bylaws of Sub in effect
immediately prior to the Effective Time shall be the certificate of
incorporation and bylaws, respectively, of the Surviving Corporation after
the Effective Time unless and until further amended as provided by law.

(c) The directors and officers of Sub immediately prior to the Effective
Time shall be the directors and officers of the Surviving Corporation after
the Effective Time. Such directors and officers shall hold their position
until the election and qualification of their respective successors or
until their tenure is otherwise terminated in accordance with the Bylaws of
Surviving Corporation.

2.2 Cancellation of Shares and Delivery of Consideration.

(a) At the Effective Time, each share of Target capital stock, if any,
that is owned directly or indirectly by Target shall be canceled and no
cash or other consideration shall be delivered in exchange therefor.

(b) Subject to Section 2.2(f) hereof, at the Effective Time, each Target
Share (other than shares owned directly or indirectly by Target) shall, by
virtue of the Merger, and without further action on the part of any holder
thereof, be converted and exchanged for the right to receive that number of
Acquiror Shares as is equal to the product of the Exchange Ratio and one.

(c) At the Effective Time, each share of capital stock of Sub
outstanding immediately prior to the Merger shall, by virtue of the Merger,
and without further action on the part of any holder thereof, continue to
be issued and shall be converted into one share of Target common stock.

(d) The Exchange Ratio shall be adjusted to reflect the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Acquiror Common Stock or Target
Shares), reorganization, recapitalization or other like change with respect
to Acquiror Common Stock or Target capital stock occurring after the date
hereof and prior to the Effective Time.

(e) No fraction of a share of Acquiror Common Stock shall be issued, but
in lieu thereof each holder of Target Shares who would otherwise be
entitled to a fraction of a share of Acquiror Common Stock (after
aggregating all fractional shares of Acquiror Common Stock to be received
by such holder) shall receive from Acquiror an amount of cash (rounded to
the nearest whole cent) equal to the product of (i) such fraction,
multiplied by (ii) the average last sale price of a share of Acquiror
Common Stock for the twenty most recent days that Acquiror Common Stock has
traded ending on the trading day immediately prior to the Effective Time.

(f) Any Dissenting Shares shall not be converted into Acquiror Common
Stock but shall instead be converted into the right to Dissenting Shares
pursuant to the Delaware Law. Target agrees that, except with the prior
written consent of Acquiror, or as required under the Delaware Law, it will
not voluntarily

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make any payment with respect to, or settle or offer to settle, any such
purchase demand. Each holder of Dissenting Shares (a "Dissenting
Stockholder") who, pursuant to the provisions of the Delaware Law, becomes
entitled to payment for Target Shares shall receive payment therefor (but
only after the value therefor shall have been agreed upon or finally
determined pursuant to such provisions). If, after the Effective Time, any
Dissenting Shares shall lose their status as Dissenting Shares, Acquiror
shall issue and deliver, upon surrender by such stockholder of a
certificate or certificates representing Target Shares, the number of
shares of Acquiror Common Stock to which such stockholder would otherwise
be entitled under this Section 2.2 less the number of shares of Acquiror
Common Stock allocable to such stockholder that have been deposited in the
Indemnity Escrow.

2.3 Exchange Procedures.

(a) Following the Closing Date, Acquiror shall mail to each holder of
record of certificate(s) or other documents which represent Target Shares
(the "Certificates"), to be exchanged pursuant to Section 2.2 hereof (i) a
letter of transmittal (which shall specify that, with respect to the
Certificates, delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to Acquiror
and shall be in such form and have such other provisions as Acquiror shall
reasonably require) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for Acquiror Shares. Upon
surrender of a Certificate for cancellation to Acquiror, together with such
letter of transmittal, duly executed, the holder of such Certificates shall
be entitled to receive in exchange therefor his allocation of the Acquiror
Shares as to which such holder is entitled pursuant to Section 2.2 hereof.
Certificates so surrendered pursuant to this Section 2.3 shall forthwith be
canceled (if not otherwise canceled or terminated in accordance with their
terms). In the event of a transfer of ownership of Target Shares which is
not registered on the transfer records of Target, the appropriate number of
Acquiror Shares may be delivered to a transferee if the Certificate
representing such transferred security is presented to Acquiror and
accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by this Section 2.3, each Certificate
shall be deemed at any time after the Effective Time to represent solely
the right to receive upon such surrender that number of Acquiror Shares
(without interest and subject to applicable withholding, escheat and other
laws) to which such holder is entitled.

(b) Notwithstanding anything to the contrary in this Section 2.3, none
of Acquiror, the Surviving Corporation or any party hereto shall be liable
to a holder of Target Shares for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar
law.

(c) The Acquiror Shares paid in accordance with the terms hereof shall
be deemed to be in full satisfaction of all rights pertaining to such
Target Shares, and there shall be no further registration of transfers on
the records of the Surviving Corporation of Target Shares. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in Section
2.2.

(d) In the event any Certificates evidencing Target Shares shall have
been lost, stolen or destroyed, Acquiror shall issue in exchange for such
lost, stolen or destroyed Certificates, upon the making of an affidavit of
that fact by the holder thereof, such holder's allocation of Acquiror
Shares, as may be required pursuant to Section 2.2; provided, however, that
Acquiror may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Acquiror with respect
to the Certificates alleged to have been lost, stolen or destroyed.

2.4 The Closing. Subject to termination of this Agreement as provided in
Section 11 below, the closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Gray Cary Ware &
Freidenrich LLP at 10:00 a.m. local time on the date three (3) days following
the satisfaction of all conditions to closing set forth herein, or such other
place, time and date as Acquiror and Target may mutually select (the "Closing
Date").

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2.5 Effective Time. Simultaneously with the Closing, the Certificate of
Merger shall be filed in the offices of the Secretary of State of the State of
Delaware. The Merger shall become effective immediately upon the filing of the
Certificate of Merger with such office (the "Effective Time").

2.6 Restrictions on Transfers. Notwithstanding anything to the contrary set
forth herein, the holders of the Acquiror Shares, may not, during the six
months following the Effective Time, offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of the Acquiror Shares except to the
extent such Acquiror Shares are transferred as a gift or gifts, bequested or
transferred to a family trust (provided that any such case the transferee
agrees in writing to be bound by the terms hereof). The foregoing restriction
is expressly agreed to preclude holders of the Acquiror Shares from engaging in
any hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition during such period. Such prohibited hedging
or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Acquiror Shares or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from the Acquiror Shares. Acquiror shall have the right to
impose a legend on the certificates representing the Acquiror Shares consistent
with the foregoing and to enter stop transfer instructions with Acquiror's
transfer agent against the transfer of the Acquiror Shares except in compliance
with this restriction.

3. Representations and Warranties of Target. Except as otherwise set forth in
the "Target Disclosure Schedule," referencing the appropriate section and
paragraph numbers, to be provided to Acquiror concurrent with the execution of
this Agreement, Target represents and warrants to Acquiror as set forth below.
No fact or circumstance disclosed to Acquiror by Target shall constitute an
exception to these representations and warranties unless such fact or
circumstance is set forth in the Target Disclosure Schedule.

3.1 Organization. Target is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation and
has corporate power and authority to carry on its business as it is now being
conducted and as it is proposed to be conducted. Target is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or properties makes such qualification or licensing
necessary. The Target Disclosure Schedule contains a true and complete listing
of the locations of all sales offices, manufacturing facilities, and any other
offices or facilities of Target and a true and complete list of all
jurisdictions in which Target maintains any employees. The Target Disclosure
Schedule contains a true and complete list of all jurisdictions in which Target
is duly qualified to transact business as a foreign corporation. True and
complete copies of Target's charter documents as in effect on the date hereof
and as to be in effect immediately prior to the Closing, have been provided to
Acquiror or its Representatives.

3.2 Capitalization.

(a) The authorized capital stock of Target consists of:

(i) 11,500,000 shares of Target Common Stock, par value $0.01 per
share, of which 1,450,530 shares are issued and outstanding and held of
record by the Target Stockholders named in Section 3.2(a) of the Target
Disclosure Schedule;

(ii) (A) 2,500,000 shares of Series A Convertible Preferred Stock,
par value $0.01 per share, of which (1) 1,666,666 shares are designated
as Series A-I Convertible Preferred Stock, 1,666,666 shares of which
are issued and outstanding, (2) 200,000 shares are designated as Series
A-II Convertible Preferred Stock, all of which are issued and
outstanding, (3) 150,000 shares are designated as Series A-III
Convertible Preferred Stock, all of which are issued and outstanding;
and (4) 300,000 shares are designated as shares of Series A-IV
Convertible Preferred Stock, 76,165 shares of which are issued and
outstanding; (B) 500,000 shares of Series B Convertible Preferred
Stock, par value $0.01 per share, of which 472,000 shares are issued
and outstanding; (C) 533,340 shares of

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Series C Convertible Preferred Stock, par value $0.01 per share, of
which 533,334 shares are issued and outstanding; (D) 800,000 shares of
Series D Convertible Preferred Stock, par value $0.01 per share, of
which 666,136 shares are issued and outstanding; (E) 1,999,999 shares
of Series E Stock, 1,955,661 of which are issued and outstanding; and
(F) 666,661 shares of undesignated preferred stock, issuable in series,
none of which are issued and outstanding. The shares of issued and
outstanding Preferred Stock are held of record by the Target
Stockholders named in Section 3.2(a) of the Target Disclosure Schedule.
Each share of issued and outstanding Target Preferred Stock is
currently convertible into one share of Target Common Stock.

(b) Except as set forth in Section 3.2(b) of the Target Disclosure
Schedule, there are no outstanding options, warrants, rights, commitments,
conversion rights, rights of exchange, plans or other outstanding
agreements of any character providing for the purchase, issuance or sale of
any shares of the capital stock of Target other than as contemplated by
this Agreement. Except as set forth in Section 3.2(b) of the Target
Disclosure Schedule, there are no voting trust, buy-sell or other similar
agreements in effect among the Target Stockholders or with Target. Section
3.2(b) of the Target Disclosure Schedule sets forth a description of all
outstanding vesting restrictions or other rights of Target to re-acquire
Target Shares.

(c) All of the outstanding securities of Target have been duly
authorized and are validly issued, fully paid and nonassessable. All
securities of Target were issued in compliance with applicable securities
laws. Except as set forth in Section 3.2(c) of the Target Disclosure
Schedule, none of Target's outstanding securities were issued in
consideration in whole or in part for any contribution, transfer or
assignment of any Proprietary Assets.

3.3 Power, Authority and Validity. Target has the corporate power and
authority to enter into this Agreement and the other Transaction Documents to
which it is a party and to carry out its obligations hereunder and thereunder.
The execution and delivery of this Agreement and the Transaction Documents to
which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the board of directors of
Target, and no other corporate proceedings are necessary to authorize this
Agreement or the other Transaction Documents except for: (i) the approval of
the Merger and the Transaction Documents by the stockholders of Target and (ii)
the other approvals and consents by the stockholders of Target listed on
Schedule 3.3 or otherwise contemplated by the Proxy Statement. Except as set
forth in Section 3.3 of the Target Disclosure Schedule, Target is not subject
to or obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this
Agreement and the transactions contemplated hereunder and under the other
Transaction Documents. This Agreement is, and each of the other Transaction
Documents to which Target will be a party, when executed and delivered by
Target shall be, the valid and binding obligation of Target enforceable in
accordance with their respective terms, subject to (i) laws of general
application relating to bankruptcy, insolvency, and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.

3.4 Financial Statements.

(a) Schedule 3.4(a) of the Target Disclosure Schedule sets forth the
balance sheet and consolidated statements of operations and changes in
financial condition for the two fiscal years ended December 31, 1998 and
for the nine month period ended September 30, 1999 (collectively, the
"Target Financial Statements"). The Target Financial Statements, including
the notes thereto, were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements, and have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent
throughout the periods indicated and consistent with each other (except as
may be indicated in the notes thereto. The Target Financial statements
fairly present the consolidated financial condition and operating results
of Target and its subsidiaries at the dates and during the periods
indicated therein (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments). There has been no change in Target
accounting policies except as described in the notes to the Target
Financial Statements.

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(b) Except and to the extent reflected or reserved against in the Target
balance sheet as of September 30, 1999 (the "Target Balance Sheet"), Target
does not have, as of the date of such balance sheet, any liabilities or
obligations (absolute or contingent) of a nature required or customarily
reflected in a balance sheet (or the notes thereto). The aggregate
reserves, if any, reflected on the Target Financial Statements are adequate
in light of the contingencies with respect to which they are made.

(c) As of the respective dates of Target Financial Statements, the
Target has no debt, liability, or obligation of any nature, whether
accrued, absolute or contingent that is as not reflected or reserved
against in the Target Financial Statements in accordance with GAAP. Except
as set forth on Schedule 3.4(c) of the Target Disclosure Schedule, all
debts, liabilities, and obligations incurred after the date of the Target
Financial Statements, whether absolute or contingent, were incurred in the
ordinary course of business and are usual and normal in amount both
individually and in the aggregate.

3.5 Tax Matters.

(a) Except as set forth in Section 3.5 of the Target Schedule
Disclosure, Target has fully and timely, properly and accurately filed all
Tax returns and reports required to be filed by it (the "Target Returns"),
including all federal, foreign, state and local returns and reports for all
years and periods for which any such returns or reports were due. The
Target Returns and all other Tax returns and reports filed by Target were
prepared in the manner required by applicable law. Except for any goods and
services income Tax due upon the filing of the Target Returns, all income,
sales, use, occupation, property or other Taxes or assessments due from
Target have been paid, and there are no pending assessments, asserted
deficiencies or claims for additional Taxes that have not been paid. The
reserves for Taxes, if any, reflected on the Target Financial Statements
are adequate and there are no Tax liens on any property or assets of Target
except in respect of Taxes which are not due and payable. There have been
no audits or examinations of any Tax returns or reports by any applicable
governmental agency. No state of facts exists or has existed which would
constitute grounds for the assessment of any penalty or of any further Tax
liability beyond that shown on the respective Tax reports or returns. There
are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local income Tax return or
report for any period.

(b) All Taxes which Target has been required to collect or withhold have
been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.

(d) At no time has Target been included in the federal consolidated
income Tax return of any affiliated group of corporations.

(e) Except as set forth on Section 3.5(e) of the Target Disclosure
Schedule, no payment which Target is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an
excess parachute payment as defined in Section 280G of the Code.

(f) Target will not be required to include any adjustment in taxable
income for any Tax period (or portion thereof) ending after the Closing
Date pursuant to Section 481(c) of the Code or any comparable provision of
the Tax laws of any jurisdiction requiring Tax adjustments as a result of a
change in method of accounting implemented by Target prior to the Closing
Date for any Tax period (or portion thereof) ending on or before the
Closing Date or pursuant to the provisions of any agreement entered into by
Target prior to the Closing Date with any taxing authority with regard to
the Tax liability of Target for any Tax period (or portion thereof) ending
on or before the Closing Date.

(g) Target is not currently under any contractual obligation to pay to
any Governmental Body any Tax obligations of, or with respect to any
transaction relating to, any other Person or to indemnify any other Person
with respect to any Tax.

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3.6 Absence of Certain Changes or Events. Except as set forth in Section 3.6
of the Target Disclosure Schedule, from September 30, 1999, Target has not:

(a) suffered any Material adverse change in its financial condition or
in the operations of its business, nor any Material adverse change in its
balance sheet, including but not limited to cash distributions or decreases
in the net assets of Target inconsistent with the projected results of
operations shown in Target's fourth quarter fiscal year 1999 budget, a copy
of which has been delivered to Acquiror;

(b) suffered any physical damage, destruction or loss, whether or not
covered by insurance, which is Material;

(c) granted or agreed to make any increase in the compensation payable
or to become payable by Target to its officers or employees;

(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of the capital stock of Target
or declared any direct or indirect redemption, retirement, purchase or
other acquisition by Target of such shares;

(e) issued any shares of capital stock of Target or any warrants,
rights, options or entered into any commitment relating to the shares of
Target;

(f) made any change in the accounting methods or practices it followed,
whether for general financial or Tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;

(g) sold, leased, abandoned or otherwise disposed of any real property
or any machinery, equipment or other operating property other than in the
ordinary course of business;

(h) sold, assigned, transferred, licensed or otherwise disposed of any
patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright), invention, work of
authorship, process, know-how, formula or trade secret or interest
thereunder or other intangible asset except in the ordinary course of their
business;

(i) suffered any dispute involving any employee that could reasonably be
expected to have a Material adverse effect on Target;

(j) engaged in any activity or entered into any commitment or
transaction (including without limitation any borrowing or capital
expenditure), in either case, other than in the ordinary course of
business;

(k) incurred any liabilities, absolute or contingent except for (i)
liabilities identified as such in the "liabilities" column of the Target
Financial Statements; (ii) accounts payable or accrued salaries that have
been incurred by Target since September 30, 1999, in the ordinary course of
business and consistent with Target's past practices; and (iii) liabilities
in Section 3.6(k) of the Target Disclosure Schedule;

(l) permitted or allowed any of its property or assets to be subjected
to any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance of any kind, other than any purchase money security interests
incurred in the ordinary course of business;

(m) made any capital expenditure or commitment for additions to
property, plant or equipment, in the aggregate, in excess of Twenty Five
Thousand Dollars ($25,000);

(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or
arrangement with any of its Affiliates, officers, directors or stockholders
or any Affiliate or associate of any of the foregoing;

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(o) made any amendment to or terminated any agreement which, if not so
amended or terminated, would be required to be disclosed in the Target
Disclosure Schedule; or

(p) agreed to take any action described in this Section 3.6 or outside
of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.

3.7 Title and Related Matters. Except as set forth in Section 3.7 of the
Target Disclosure Schedule, Target has good and marketable title to all the
properties, interests in properties and assets, real and personal, reflected in
the Target Financial Statements or acquired after the date of the Target
Financial Statements (except properties, interests in properties and assets
sold or otherwise disposed of since the date of the Target Financial Statements
in the ordinary course of business), free and clear of all mortgages, liens,
pledges, charges or encumbrances of any kind or character, except as set forth
in Section 3.7 of the Target Disclosure Schedule. Except as noted in Section
3.7 of the Target Disclosure Schedule, the equipment of Target used in and
material to the operation of its business taken as a whole is in reasonable
operating condition and repair, subject to normal wear and tear. All real or
personal property leases to which Target is a party are valid, binding,
enforceable and effective in accordance with their respective terms, subject to
(i) laws of general application relating to bankruptcy, insolvency, and the
relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies. To the knowledge of Target,
there is not under any of such leases any existing default by Target or, any
other event of default or event which, with notice or lapse of time or both,
would constitute a default by any other party to such leases. Section 3.7 of
the Target Disclosure Schedule contains a description of all real property
leased or owned by Target, describing its interest in said property, including
a summary description of each parcel and the buildings, structures and
improvements thereon. Section 3.7 of the Target Disclosure Schedule contains a
description of all Material tangible personal property leased or owned by
Target, describing its interest in said property. True and correct copies of
Target's real property and such Material personal property leases have been
provided or made available to Acquiror or its Representatives.

3.8 Music Rights.

(a) Section 3.8(a)(i) of the Target Disclosure Schedule sets forth a
true and complete list or summary of all Music Rights owned by Target.
Section 3.8(a)(ii) of the Target Disclosure Schedule sets forth a true and
complete list or summary of all Music Rights licensed by or to Target,
including a description of whether such rights are exclusive or non-
exclusive, whether the rights include the right to distribute tangible
copies, custom compilations or digital downloads of the music in question,
the expiration date of such rights and any territorial limitations of such
rights. Except as set forth in Section 3.8 of the Target Disclosure
Schedule, Target has written contracts (each of which are listed or
summarized in the Target Disclosure Schedule) for all Music Rights owned,
licensed, used, marketed, and sold by it, and those licensed to it, Target
has not received any notice from any party to such a contract or any third
party challenging the enforceability or validity of such a contract, and
all such contracts are enforceable in accordance with their terms. Except
as set forth in Section 3.8 of the Target Disclosure Schedule, the Merger
will not constitute or be deemed to constitute an assignment of any such
Music Rights, require the consent of any third party or otherwise result in
the termination or modification of any such Music Rights. Except as set
forth in Section 3.8 of the Target Disclosure Schedule, all Music Rights
owned by Target were recorded and otherwise prepared in all respects in
accordance with the rules and regulations of any unions, guilds and similar
associations having jurisdiction. Except as set forth in Section 3.8 of the
Target Disclosure Schedule, each Person who has rendered any service or
provided any materials in connection with, or has contributed in any way,
to the making of the Music Rights owned by Target has the right to grant
such rights, render such services or furnish such materials. Except as set
forth in Section 3.8 of the Target Disclosure Schedule, all fees and other
payments applicable to or resulting from the creation, recording,
manufacture, duplication, and distribution of the Music Rights, including,
but not limited to, payments to performers, producers, engineers and
others, have been fully and completely paid by Target.

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(b) Except as set forth in Section 3.8 of the Target Disclosure
Schedule, there are no amounts owed or that will become owing to any holder
of rights for royalties arising as a result of the Music Rights, nor has
the Target paid an advance in respect of such royalties.

(c) Except as described in Section 3.8 of the Target Disclosure
Schedule, Target does not know of or have any reason to believe that any
customers of the Target, or any holder of Music Rights, (i) has any
complaint or objection with respect to the service or any business
practices of the Target or the transactions contemplated hereby which could
reasonably be expected to have a Material Adverse Effect, or (ii) will
cease to do business, or significantly reduce the business conducted, with
Target as a result of the Merger.

3.9 Proprietary Rights and Warranty Claims.

(a) Section 3.9(a)(i) of the Disclosure Schedule sets forth, with
respect to each Proprietary Asset owned by Target (each a "Target
Proprietary Asset" and collectively, the "Target Proprietary Assets")
registered with any Governmental Body or for which an application has been
filed with any Governmental Body, (i) a brief description of such Target
Proprietary Asset, and (ii) the names of the jurisdictions covered by the
applicable registration or application. Section 3.9(a)(ii) of the Target
Disclosure Schedule identifies and provides a brief description of all
other Target Proprietary Assets owned by Target. Section 3.9(a)(iii) of the
Target Disclosure Schedule identifies and provides a brief description of
each Proprietary Asset licensed to Target by any Person (except for any
Proprietary Asset that is licensed to Target under any third party software
license generally available to the public at a per unit cost of less than
One Thousand Dollars ($1,000)), and identifies the license agreement under
which such Proprietary Asset is being licensed to Target. Except as set
forth in Section 3.9(a)(iv) of the Target Disclosure Schedule, Target has
good, valid and marketable title to all Target Proprietary Assets
identified in Sections 3.9(a)(i) and 3.9(a)(ii) of the Target Disclosure
Schedule, free and clear of all liens and other encumbrances, and, except
as disclosed in Section 3.9 of the Target Disclosure Schedule, Target has a
valid right to use all Proprietary Assets identified in Section 3.9(a)(iii)
of the Target Disclosure Schedule in its business as it is currently
conducted. Except as set forth in Section 3.9(a)(v) of the Target
Disclosure Schedule, Target is not obligated to make any payment to any
Person for the use of any Proprietary Asset. Except as set forth in Section
3.9(a)(vi) of the Target Disclosure Schedule, Target has not developed
jointly with any other Person any Proprietary Asset with respect to which
such other Person has any rights.

(b) Except as set forth in Section 3.9(b) of the Target Disclosure
Schedule, Target has taken reasonable and customary measures and
precautions necessary to protect and maintain the confidentiality and
secrecy of all Target Proprietary Assets (except Target Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to
maintain and protect the value of all Target Proprietary Assets. Except as
set forth in the Target Disclosure Schedule, Target has not disclosed or
delivered to any Person, or permitted the disclosure or delivery to any
Person of any of the Target Proprietary Assets used in or necessary for the
conduct of business by Target as currently conducted by Target (except
Target Proprietary Assets whose value would be unimpaired by public
disclosure).

(c) Except as set forth in Section 3.9(c) of the Target Disclosure
Schedule, Target is not infringing, misappropriating or making any unlawful
use of, and Target has not at any time infringed, misappropriated or made
any unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset
owned or used by any other Person ("Third Party Proprietary Asset"). Except
as set forth in Section 3.9(c) of the Target Disclosure Schedule, no other
Person is infringing, misappropriating or making any unlawful use of, and
no Third Party Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Target Proprietary Asset.

(d) Except as set forth in Section 3.9(d) of the Target Disclosure
Schedule: (i) each Target Proprietary Asset conforms with any
specification, documentation, performance standard, representation or

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statement made or provided with respect thereto by or on behalf of Target;
and (ii) there has not been any claim made against Target by any customer
or other person alleging that any Target Proprietary Asset (including each
version thereof that has ever been licensed or otherwise made available by
Target to any person) does not conform with any specification,
documentation, performance standard, representation or statement made or
provided by or on behalf of Target, and there is no basis for any such
claim.

(e) Except as set forth in Section 3.9(e) of the Target Disclosure
Schedule, Target's Proprietary Assets constitute all the proprietary assets
necessary to enable Target to conduct its business in the manner in which
such business has been and is being conducted. Except as set forth in
Section 3.9(e) of the Target Disclosure Schedule, (i) Target has not
licensed any of the Target Proprietary Assets to any Person and (ii) Target
has not entered into any covenant not to compete or contract limiting its
ability to exploit fully any of the Target Proprietary Assets or to
transact business in any market or geographical area or with any Person.

3.10 Employee Benefit Plans. Target does not maintain, nor is it obligated to
contribute to, any defined benefit pension plan or any employee benefit plan
that is subject to either Title IV of the Employee Retirement Income Security
Act of 1974 ("ERISA") or the minimum funding standards of ERISA or the Code.
Except as set forth in Section 3.10 of the Target Disclosure Schedule, each
bonus, incentive, deferred compensation, pension, profit-sharing, retirement,
vacation, severance pay, stock purchase, stock option, group insurance and
other employee benefit or fringe benefit plans, whether formal or informal
(whether written or not), maintained by Target conforms to all applicable
requirements, if any, of ERISA. Section 3.10 of the Target Disclosure Schedule
lists and describes all such plans.

3.11 Bank Accounts and Receivables. Section 3.11 of the Target Disclosure
Schedule sets forth the names and locations of all banks, trust companies,
savings and loan associations, and other financial institutions at which Target
maintains accounts of any nature and the names of all Persons authorized to
draw thereon or make withdrawals therefrom. Section 3.11 of the Target
Disclosure Schedule sets forth an accurate and complete breakdown and aging of
all accounts receivable, notes receivable, and other receivables of Target as
of the date of the Target Balance Sheet. Except as set forth on the Target
Disclosure Schedule, all existing accounts receivable of Target (including
those accounts receivable reflected on the Target Financial Statements that
have not yet been collected and those accounts receivable that have arisen
since December 31, 1998 and have not yet been collected) (i) represent valid
obligations of customers of Target arising from bona fide transactions entered
into in the ordinary course of business, and (ii) are current and to Target's
knowledge are collectible when due, net of allowances therefor, without any
counterclaim or setoff.

3.12 Contracts.

(a) Section 3.12(a) of the Target Disclosure Schedule identifies each
Material document or instrument that is still in effect, to which Target is
a party and that relates to the acquisition, transfer, use, development,
sharing or licensing of any Music Right or Proprietary Asset.

(b) Except as set forth in Section 3.12(b) of the Target Disclosure
Schedule:

(i) Target has no outstanding agreements, contracts or commitments
that call for fixed and/or contingent payments or expenditures by or to
Target which are Material over the life of any such agreement, contract
or commitment;

(ii) Target has no outstanding purchase agreement, contract or
commitment that calls for fixed and/or contingent payments by Target
that are in excess of the normal, ordinary and usual requirements of
Target's business;

(iii) There is no outstanding sales contract, commitment or proposal
(including, without limitation, development projects) of Target that
Target currently expects (or reasonably should expect) to result in any
loss to Target upon completion or performance thereof;

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(iv) Target has no outstanding agreements, contracts or commitments
with officers, employees, agents, consultants, advisors, salesmen,
sales representatives, distributors or dealers that are not cancelable
by it on notice of not longer than thirty (30) days and without
liability, penalty or premium;

(v) Target has no outstanding agreements, contracts or commitments
with sales representatives, OEM's, distributors or dealers;

(vi) Target is not restricted by agreement from competing with any
Person or from carrying on its business anywhere in the world;

(vii) Target has not guaranteed any obligations of other Persons, or
made any agreements to acquire or guarantee any obligations of other
Persons, which guaranties or agreements are still in effect, other than
agreements entered into in the ordinary course of Target's business
pursuant to which Target has sublicensed certain Music Rights and may
thereby be deemed to have warranted to its sublicensee the original
licensor's performance of its license with Target;

(viii) Target does not have any outstanding loan or advance to any
Person; nor is it party to any line of credit, standby financing,
revolving credit or other similar financing arrangement of any sort
which would permit the borrowing by Target of any sum not reflected in
the Target Financial Statements; and

(ix) All contracts, agreements and instruments listed (including any
incorporated by reference) in the Target Disclosure Schedule pursuant
to Section 3.12 (a) and (b) (the "Target Material Contracts") are
valid, binding, in full force and effect, and enforceable by Target in
accordance with their respective terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies. To the knowledge of
Target, no party to any Target Material Contract intends to cancel,
withdraw, modify or amend such contract.

(c) Target has delivered or made available to Acquiror or its
Representatives accurate and complete copies of all written Target Material
Contracts, including all amendments thereto and any correspondence
regarding any dispute with respect thereto. Target has not entered into any
Material oral contracts.

(d) Except as set forth in Section 3.12(d) of the Target Disclosure
Schedule:

(i) Target has not violated or breached, or committed any default
under, any Target Material Contract, and to the knowledge of Target, no
other Person has violated or breached, or committed any default under,
any Target Material Contract;

(ii) No event has occurred, and no circumstance or condition exists,
that with respect to Target, or, to the knowledge of Target, with
respect to any other party (with or without notice or lapse of time)
will, or could reasonably be expected to, (A) result in a violation or
breach of any of the provisions of any Target Material Contract, (B)
give any Person the right to declare default or exercise any remedy
under any Target Material Contract, (C) give any Person the right to
accelerate the maturity or performance of any Target Material Contract;
or (D) give any Person the right to cancel, terminate or modify any
Target Material Contract;

(iii) There are no unresolved claims between Target and any of its
material licensors, vendors, suppliers, distributors, representatives
or customers and none of such Persons has advised Target of its
intention to cease doing business with Target, or with Acquiror
following the Closing Date, whether as a result of the transactions
contemplated hereunder or otherwise.

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3.13 Compliance With Law. Except as set forth in Section 3.13 of the Target
Disclosure Schedule, Target is in compliance in all material respects with all
applicable laws and regulations. All licenses, franchises, permits and other
governmental authorizations held by Target and which are required for its
business are valid and sufficient in all respects for the businesses presently
carried on by Target and as set forth in the Target Disclosure Schedule.

3.14 Labor Difficulties; No Discrimination.

(a) Target is not engaged in any unfair labor practice or in violation
of any applicable laws respecting employment and employment practices,
health and safety, human rights, terms and conditions of employment, and
wages and hours.

(b) There is no unfair labor practice complaint against Target actually
pending or threatened before a labor relations board.

(c) Except as set forth on Section 3.14 of the Target Disclosure
Schedule, there is not and has not been any claim made against Target based
on actual or alleged wrongful termination or on actual or alleged race,
age, sex, disability or other harassment or discrimination, or similar
tortious conduct, nor is there any reasonable basis for any such claim.

(d) Target is not aware of any key-Target employee who intends to
terminate his or her employment with Target as a result of the Merger or
otherwise.

3.15 Insider Transactions. Except as set forth in Section 3.16 of the Target
Disclosure Schedule, no Affiliate of Target has any interest in (i) any
equipment or other property, real or personal, tangible or intangible,
including, without limitation, any Target Music Right or Proprietary Asset,
used in connection with or pertaining to the businesses of Target, or (ii) any
creditor, supplier, customer, manufacturer, agent, representative, or
distributor of products of Target; provided, however, that no such Affiliate or
other Person shall be deemed to have such an interest solely by virtue of the
ownership of less than one percent (1%) of the outstanding stock or debt
securities of any publicly-held company whose stock or debt securities are
traded on a recognized U.S. stock exchange or quoted on the National
Association of Securities Dealers Automated Quotation System.

3.16 Employees, Independent Contractors and Consultants. Section 3.16 of the
Target Disclosure Schedule lists all currently effective written and describes
all oral consulting, independent contractor and/or employment agreements and
other agreements concluded with individual employees, independent contractors
or consultants to which Target is a party and which are Material. True and
correct copies of all such written agreements have been provided or made
available to Acquiror or its Representatives. All salaries and wages paid by
Target are in compliance in all respects with applicable federal, state and
local laws. Section 3.16 of the Target Disclosure Schedule lists the names of
all Persons currently employed by Target as well as the salaries and other
compensation arrangements (bonus, deferred compensation, etc.) and the accrued
vacation time for each such Person.

3.17 Insurance. Section 3.17 of the Target Disclosure Schedule contains a
list of the policies of fire, liability and other forms of insurance held by
Target. Target has done nothing, either by way of action or inaction, that
could reasonably be expected to invalidate such insurance policies in whole or
in part.

3.18 Litigation. Except as set forth in Section 3.18 of the Target Disclosure
Schedule, there is no suit, action or proceeding which has been served upon or,
to the knowledge of Target, threatened against Target (nor is there any
reasonable basis therefor), in each case other than immaterial matters, or
which questions or challenges the validity of this Agreement or the Transaction
Documents. Except as set forth in Section 3.18 of the Target Disclosure
Schedule, there is no judgment, decree, injunction, or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against Target.

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3.19 Subsidiaries. Except as set forth in Section 3.19 of the Target
Disclosure Schedule, Target has no subsidiaries. Except as set forth in Section
3.19 of the Target Disclosure Schedule, Target does not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and
does not have any proprietary interest in, any other corporation, general or
limited partnership, joint venture, firm, association or business organization,
entity or enterprise, and Target does not control (directly or indirectly) the
management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.

3.20 Compliance with Environmental Requirements. Target has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws applicable to Target and relating to pollution or
protection of the environment, including laws or provisions relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials, substances, or wastes into air,
surface water, groundwater, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants or hazardous or toxic materials,
substances, or wastes. Except as set forth in Section 3.20 of the Target
Disclosure Schedule, Target is in compliance with all terms and conditions of
the required permits, licenses and authorizations. Except as set forth in
Section 3.20 of the Target Disclosure Schedule, Target is not aware of, nor has
Target received written notice of, any conditions, circumstances, activities,
practices, incidents, or actions which may form the basis of any claim, action,
suit, proceeding, hearing, or investigation of, by, against or relating to
Target, based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any
pollutant, contaminant, or hazardous or toxic substance, material or waste.

Except as disclosed in Section 3.20 of the Target Disclosure Schedule,

(a) No Environmental Activity has occurred in the business of Target or
on or in relation to any premises currently or formerly used by Target
which may cause Target to incur expenses or costs for the elimination,
neutralization or amelioration of the results of the Environmental Activity
or become liable for compensation to any third party.

(b) Target has held its assets, occupied its respective premises,
operated its respective businesses and conducted all other activities in
compliance with all Environmental Laws. Target has not received any notice
of non-compliance with Environmental Laws from any Person or governmental
authority and Target does not know of any facts which could reasonably be
expected to give rise to any such notice.

(c) There are no underground storage tanks or surface impoundments at,
on, or under premises formerly or currently used by Target.

(d) Target has maintained all environmental and operating documents and
records substantially in the manner and for the time periods required by
any Environmental Laws. Section 3.20 of the Target Disclosure Schedule
lists each environmental permit and each Environmental Audit conducted with
respect to Target or its premises while occupied by either of them. An
"Environmental Audit" shall mean any evaluation, inspection, assessment,
study or test performed at the request of or on behalf of a governmental
authority, including but not limited to, a public liaison committee, as
well as a self-evaluation, whether or not required by Environmental Law.

3.21 Corporate Documents. Target has furnished or made available to Acquiror
or its Representatives for their examination all documents requested by
Acquiror, including, but not limited to: (i) copies of its charter documents;
(ii) its minute book containing all records required to be set forth of all
proceedings, consents, actions, and meetings of the stockholders, the board of
directors and any committees thereof; (iii) all permits, orders, and consents
issued by any regulatory agency with respect to Target, or any securities of
Target, and all applications for such permits, orders, and consents; and (iv)
the stock transfer books of Target setting forth all transfers of any capital
stock. The corporate minute books, stock certificate books, stock registers and
other corporate records of Target are complete and the signatures appearing on
all documents contained therein are

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the true signatures of the Persons purporting to have signed the same. All
actions reflected in such books and records were duly and validly taken in
compliance with the laws of the applicable jurisdiction.

3.22 Accuracy of Information In Proxy Statement. The information furnished by
Target to the Target Stockholders to be included in the Proxy Statement to be
sent to the Target Stockholders in connection with the solicitation of
stockholder consent or proxies for the approval and adoption of this Agreement
and the approval and adoption of the Merger shall not, on the date the Proxy
Statement is first mailed to the Target stockholders, on any date subsequent
thereto and prior to the Effective Time or at the Effective Time, contain any
untrue statement of a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they are made, not false or misleading, or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of consent or proxies which has become false or
misleading.

3.23 No Brokers. Except as set forth in Section 3.23 of the Target Disclosure
Schedule, neither Target nor any stockholder, officer or director of Target is
obligated for the payment of fees or expenses of any broker or finder in
connection with the origin, negotiation or execution of this Agreement or in
connection with any transaction contemplated hereby.

3.24 Accuracy of Documents and Information. The copies of all instruments,
agreements, other documents and written information set forth as, or referenced
in, the schedules or exhibits to this Agreement or specifically required to be
furnished pursuant to this Agreement to Acquiror by Target are complete and
correct. No representations or warranties made by Target in this Agreement, nor
any document, written information, statement, financial statement, certificate,
schedule or exhibit furnished directly to Acquiror pursuant to this Agreement
contains any untrue statement of a material fact, or omits to state a material
fact necessary to make the statements or facts contained herein not misleading.
There is no fact which materially and adversely affects Target known to Target
which has not been expressly and fully set forth in this Agreement or the
schedules and exhibits hereto.

4. Representations and Warranties of Acquiror and Sub. Except as otherwise
set forth in the "Acquiror Disclosure Schedule," referencing the appropriate
section and paragraph numbers, to be provided to Target concurrent with the
execution of this Agreement, Acquiror represents and warrants to Target as set
forth below. No fact or circumstance disclosed to Target by Acquiror shall
constitute an exception to these representations and warranties unless such
fact or circumstance is set forth in the Acquiror Disclosure Schedule.

4.1 Organization. Acquiror and Sub are corporations duly organized, validly
existing and in good standing under the laws of their jurisdictions of
incorporation and have corporate power and authority to carry on their
businesses as they are now being conducted and as they are proposed to be
conducted. Acquiror is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or properties
makes such qualification or licensing necessary.

4.2 Power, Authority and Validity. Acquiror and Sub have the corporate power
and authority to enter into this Agreement and other Transaction Documents to
which they are a party and to carry out their obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Transaction
Documents to which they are a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the board of
directors of Acquiror and Sub, and no other corporate proceedings are necessary
to authorize this Agreement or the other Transaction Documents. Acquiror and
Sub are not subject to or obligated under any charter, bylaw or contract
provision or any license, franchise or permit or subject to any order or
decree, which would be breached or violated in a material manner by or in
material conflict with its executing and carrying out this Agreement and the
transactions contemplated hereunder and under the Transaction Documents. This
Agreement is, and the other Transaction Documents to which Acquiror and Sub are
or will be a party, when executed and delivered by Acquiror and Sub shall be,
the valid and binding obligations of Acquiror and Sub, enforceable in
accordance with their terms, subject to (i) laws of general application
relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules
of law governing specific performance, injunctive relief and other equitable
remedies.

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4.3 Capitalization.

(a) The authorized capital stock of Acquiror as of the date of this
Agreement consists of: (i) Two Hundred Million (200,000,000) shares of
common stock, not more than Thirty Five Million (35,000,000) shares of
which are currently outstanding and (ii) Twenty Million (20,000,000) shares
of preferred stock, none of which are issued and outstanding.

(b) All of the outstanding securities of Acquiror have been duly
authorized and are validly issued, fully paid and nonassessable. All
securities of Acquiror were issued in compliance with applicable securities
laws. Except as otherwise set forth in the Acquiror Disclosure Schedule or
in the Acquiror Commission Documents (as defined in Section 4.6 below),
Acquiror does not have any other shares of its capital stock issued or
outstanding and does not have any other outstanding subscriptions, options,
warrants, rights or other agreements or commitments obligating Acquiror to
issue shares of its capital stock or other securities.

4.4 Valid Issuance of Acquiror Common Stock. The shares of Acquiror's Common
Stock to be issued pursuant to the Merger will be duly authorized, validly
issued, fully paid, and non-assessable and issued in compliance with all
applicable federal or state securities laws, free and clear of all liens and
preemptive rights.

4.5 Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement, has engaged in no
other business activities and has conducted its operations only as contemplated
by this Agreement.

4.6 Commission Documents; Financial Statements. Acquiror has made available
to Target a true and complete copy of its Annual Report on Form 10-K for the
year ended June 30, 1999 as filed with the Commission by Acquiror; and, prior
to the Effective Time, Acquiror will have made available to Target any
additional documents filed with the Commission by Acquiror prior to the
Effective Time (collectively, the "Acquiror Commission Documents"). As of their
respective filing dates, the Acquiror Commission Documents complied in all
material respects with the requirements of the Exchange Act and the Securities
Act, and none of the Acquiror Commission Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed Acquiror Commission Document prior to the
date hereof. The financial statements of Acquiror, including the notes thereto,
included in the Acquiror Commission Documents (the "Acquiror Financial
Statements") were complete and correct in all material respects as of their
respective dates, complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the case of
unaudited statements included in Quarterly Reports on Form 10-Qs, as permitted
by Form 10-Q of the Commission). The Acquiror Financial statements fairly
present the consolidated financial condition and operating results of Acquiror
and its subsidiaries at the dates and during the periods indicated therein
(subject, in the case of unaudited statements, to normal, recurring year-end
adjustments). There has been no change in Acquiror accounting policies except
as described in the notes to the Acquiror Financial Statements.

4.7 Accuracy of Information In Proxy Statement. The information furnished by
Acquiror to be included in the Proxy Statement to be sent to the Target
Stockholders in connection with the solicitation of stockholder consent or
proxies for the approval and adoption of this Agreement and the approval and
adoption of the Merger shall not, on the date the Proxy Statement is first
mailed to the Target stockholders, on any date subsequent thereto and prior to
the Effective Time or at the Effective Time, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the

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circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of consent or proxies which has
become false or misleading.

4.8 Accuracy of Documents and Information. No representations or warranties
made by Acquiror or Sub in this Agreement, nor any document, written
information, statement, financial statement, certificate, schedule or exhibit
furnished directly to Target pursuant to this Agreement, taken as a whole,
contains any untrue statement of a material fact, or omits to state a material
fact necessary to make the statements or facts contained herein not misleading.

4.9 No Brokers. Except for fees payable to CIBC World Markets Corp., Acquiror
is not obligated to pay fees or expenses to any broker or finder in connection
with the origin, negotiation or execution of this Agreement or in connection
with any transaction contemplated hereby.

5. Covenants of Target

5.1 Advice of Changes. Target will promptly advise Acquiror in writing (i) of
any event occurring subsequent to the date of this Agreement which would render
any representation or warranty of Target contained in this Agreement, if made
on or as of the date of such event or the Closing Date, untrue or inaccurate in
any material respect and (ii) of any Material adverse change in Target's
business, taken as a whole.

5.2 Conduct of Business. Until the Closing, Target will continue to conduct
its business and maintain its business relationships in the ordinary and usual
course and will not, without the prior written consent of Acquiror or as
otherwise provided in Section 5.2 of the Target Disclosure Schedule:

(a) borrow any money which borrowings exceed in the aggregate Twenty
Five Thousand Dollars ($25,000);

(b) incur any liability other than in the ordinary and usual course of
business or in connection with the performance or consummation of this
Agreement;

(d) dispose of any of its assets, except inventory in the regular and
ordinary course of business;

(e) enter into any lease or contract for the purchase or sale of any
property, real or personal except for inventory purchased in the ordinary
course of business or other leases or contracts for less than $25,000;

(f) fail to maintain its equipment and other assets in good working
condition and repair according to the standards it has maintained up to the
date of this Agreement, subject only to ordinary wear and tear;

(g) pay or authorize any bonus, increased salary, or special
remuneration to any officer or employee, including any amounts for accrued
but unpaid salary or bonuses;

(h) enter into any agreement for the acquisition or license of any Music
Rights with advances or minimum future commitments in excess of $25,000.

(i) adopt or change any accounting methods;

(j) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of
its capital stock;

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(k) amend or terminate any contract, agreement or license to which it is
a party except non-Material agreements in the ordinary course of business
or other agreements with an annual value of less than $25,000;

(l) enter into any other Material contract;

(m) loan any amount to any Person or entity, or guaranty or act as a
surety for any obligation;

(n) waive or release any right or claim;

(o) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to
issue shares of capital stock or amend the terms of any agreement regarding
the foregoing;

(p) split or combine the outstanding shares of its capital stock of any
class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other
of its securities;

(q) merge, consolidate or reorganize with any entity;

(r) license all or a significant portion of its assets, including, but
not limited to, any license of a significant portion of Target's catalog of
Music Rights;

(s) amend its Articles of Incorporation or Bylaws;

(t) make or change (except as required by applicable tax law) any
election, change any annual accounting period, file any tax return or
amended tax return (other than sales and use tax returns), enter into any
closing agreement, settle any tax claim or assessment relating to Target,
surrender any right to claim refund of taxes, consent to any extension or
waiver of the limitation period applicable to any tax claim or assessment
relating to Target, or take any other action or omit to take any action, if
any such election, adoption, change, filing, amendment, agreement,
settlement, surrender, consent or other action or omission would have the
effect of increasing the tax liability of Target or Acquiror; or

(u) agree to do any of the things described in the preceding clauses of
this Section.

5.3 Risk of Loss. Until the Closing and subject to the confidentiality and
nonuse provisions hereof, all risk of loss, damage or destruction to Target's
assets shall be borne by Target, and the Merger terms described in Section 2
shall, in case of any such loss, damage or destruction, be revised as the
parties may agree, or this Agreement shall be terminated in accordance with
Section 11.

5.4 Access to Information. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, Target shall allow Acquiror and
its Representatives free access upon reasonable notice and during normal
working hours to its files, books, records, and offices, including, without
limitation, any and all information relating to taxes, commitments, contracts,
leases, licenses, and personal property and financial condition. Until the
Closing, Target shall cause its accountants to cooperate with Acquiror and its
Representatives in making available all financial information requested,
including without limitation the right to examine all working papers pertaining
to all financial statements prepared or audited by such accountants.

5.5 Regulatory Approvals. Prior to the Closing, Target shall execute and
file, or join in the execution and filing, of any application or other document
which may be necessary in order to obtain the authorization, approval or
consent of any Governmental Body, federal, state or local, which may be
reasonably required, or which Acquiror may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement.
Target shall use its best efforts to obtain all such authorizations, approvals
and consents.

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5.6 Satisfaction of Conditions Precedent. Target will use its best efforts to
satisfy or cause to be satisfied all the conditions precedent which are set
forth in Section 10, and, without limiting the generality of the foregoing, to
obtain all consents and authorizations of third parties and to make all filings
with, and give all notices to, third parties which may be necessary or
reasonably required on its part in order to effect the transactions
contemplated hereby.

5.7 Equity Compensation Arrangements. Prior to the Closing, any obligation of
Target to issue stock, warrants or options which have been offered or promised
to the employees of Target shall have been fulfilled or been terminated to the
satisfaction of Acquiror.

5.8 Stockholder Consent. Prior to the Closing, Target will submit this
Agreement, the Certificate of Merger and related matters to its stockholders
for consideration and approval and the Board of Directors of Target will
recommend such approval to the Target Stockholders.

6. Covenants of Acquiror and Sub.

6.1 Advice of Changes. Acquiror will promptly advise Target in writing (i) of
any event occurring subsequent to the date of this Agreement which would render
any representation or warranty of Acquiror contained in this Agreement, if made
on or as of the date of such event or the Closing Date, untrue or inaccurate in
any material respect, and (ii) of any material adverse change in Acquiror's
business, taken as a whole.

6.2 Regulatory Approvals. Prior to the Closing, Acquiror and Sub shall
execute and file, or join in the execution and filing, of any application or
other document which may be necessary in order to obtain the authorization,
approval or consent of any Governmental Body, federal, state or local, which
may be reasonably required, or which Target may reasonably request, in
connection with the consummation of the transactions contemplated by this
Agreement. Such Persons and entities shall use their best efforts to obtain all
such authorizations, approvals and consents.

6.3 Satisfaction of Conditions Precedent. Acquiror will use its best efforts
to satisfy or cause to be satisfied all the conditions precedent which are set
forth in Section 9, and Acquiror will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.

6.4 Stock Options and Warrants.

(a) At the Effective Time, each outstanding option to purchase Target
Stock (a "Target Option") under the Target 1997 and 1999 Stock Option Plans
(the "Target Option Plan"), whether vested or unvested, shall be assumed by
Acquiror and deemed to constitute an option (an "Acquiror Option") to
acquire, on the same terms and conditions as were applicable under the
Target Option, the same number of shares of Acquiror Common Stock as the
holder of such Target Option would have been entitled to receive pursuant
to the Merger had such holder exercised such option in full immediately
prior to the Effective Time (rounded down to the nearest whole number), at
a price per share (rounded up to the nearest whole cent) equal to (i) the
aggregate exercise price for the shares of Target Common Stock otherwise
purchasable pursuant to such Target Option divided by (ii) the number of
full shares of Acquiror Common Stock deemed purchasable pursuant to such
Acquiror Option in accordance with the foregoing; provided, however, that,
in the case of any Target Option to which Section 422 of the Code applies
("incentive stock options"), the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of
exercise of such option shall be determined in order to comply with Section
424(a) of the Code.

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(b) Within a reasonable time after the Effective Time, Acquiror shall
deliver to the participants in the Target Option Plan appropriate notice
setting forth such participants' rights pursuant thereto and the grants
pursuant to the Target Option Plan shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section
after giving effect to the Merger). Acquiror shall comply with the terms of
the Target Option Plan and use reasonable commercial efforts to ensure, to
the extent required by, and subject to the provisions of, such Target
Option Plan and Sections 422 and 424(a) of the Code, that Target Options
which qualified as incentive stock options prior the Effective Time
continue to qualify as incentive stock options after the Effective Time.

(c) Acquiror shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Acquiror Common Stock for
delivery upon exercise of Target Options assumed in accordance with this
Section.

(d) Each Target Warrant, to the extent outstanding at the Effective
Time, whether or not exercisable and whether or not vested at the Effective
Time, shall remain outstanding at the Effective Time. At the Effective
Time, Target Warrants shall, by virtue of the Merger and without any
further action on the part of Target or the holder of any of Target
Warrants (unless further action may be required by the terms of any of
Target Warrants), be assumed by Acquiror and each Target Warrant assumed by
Acquiror shall be exercisable upon the same terms and conditions as under
the applicable warrant agreements with respect to such Target Warrants,
except that (A) each such Target Warrant shall be exercisable for that
whole number of shares of Acquiror Common Stock (rounded down to the
nearest whole share) into which the number of shares of Target Common Stock
subject to such Target Warrant would be converted under Section 2.2(b), and
(B) the exercise price per share of Acquiror Common Stock shall be an
amount equal to the exercise price per share of Target Common Stock subject
to such Target Warrant in effect immediately prior to the Effective Time
divided by the applicable Exchange Ratio (the exercise price per share, so
determined, being rounded to the nearest full cent). From and after the
Effective Time, all references to Target in the warrant agreements
underlying Target Warrants shall be deemed to refer to Acquiror. Acquiror
shall (i) on or prior to the Effective Time, reserve for issuance the
number of shares of Acquiror Common Stock that will become subject to
warrants to purchase Acquiror Common Stock ("Acquiror Warrants") pursuant
to this Section 7.4(d), (ii) from and after the Effective Time, upon
exercise of the Acquiror Warrants in accordance with the terms thereof,
make available for issuance all shares of Acquiror Common Stock covered
thereby and (iii) promptly following the Effective Time, issue to each
holder of an outstanding Target Warrant a document evidencing the foregoing
assumption by Acquiror.

(e) In addition to any options and warrants assumed pursuant to the
terms hereof, Acquiror shall grant to employees of Target designated by
Acquiror after consultation with Target options to purchase not less than
500,000 shares of Acquiror Common Stock. Such options shall be granted
effective as of the Effective Time and shall be in accordance with the
standard terms and conditions of options granted to employees of Acquiror
pursuant to its stock option plans.

(f) Acquiror shall file a registration statement on Form S-8 for the
shares of Acquiror Common Stock issuable with respect to assumed Target
Stock Options so that such registration statement will become effective on
or before the 180th day following the Closing Date, and shall maintain the
effectiveness of such registration statement thereafter for so long as any
of such options or other rights remain outstanding. Notwithstanding the
registration of such Acquiror Common Stock, no Person may sell or otherwise
transfer any shares of Acquiror Common Stock issued with respect to assumed
Target Stock Options within the 180-day period commencing on the Closing
Date.

6.5 Employees, Employee Benefits.

(a) Acquiror agrees that individuals who are employed by the Target as
of the Effective Time shall become employees of the Surviving Corporation
following the Effective Time (each such employee, an

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"Affected Employee"); provided, however, that nothing contained in this
Section 7.8 shall require the Surviving Corporation to continue the
employment of any Affected Employee for any period of time following the
Effective Time.

(b) To the extent permitted under any applicable Acquiror employee
benefit plans or arrangements, Acquiror shall, or shall cause the Surviving
Corporation to, give Affected Employees full credit for purposes of
eligibility, vesting and determination of the level of benefits (but not
for the purpose of benefit accrual under any defined benefit plan) under
any employee benefit plans or arrangements maintained by the Acquiror, the
Surviving Corporation or any Subsidiary of the Acquiror for such Affected
Employees' service with the Target or any Subsidiary of the Target to the
same extent recognized by the Target immediately prior to the Effective
Time.

(c) Acquiror shall use reasonable efforts to the extent permitted by
such welfare benefit plans, to, or to cause the Surviving Corporation to
(i) waive all limitations as to preexisting conditions exclusions and
waiting periods with respect to participation and coverage requirements
applicable to the Affected Employees under any welfare benefit plans that
such Affected Employees may be eligible to participate in after the
Effective Time, other than limitations or waiting periods that are already
in effect with respect to such Affected Employees and that have not been
satisfied as of the Effective Time under any welfare plan maintained for
the Affected Employees immediately prior to the Effective Time, and (ii)
provide each Affected Employee with credit for any co-payments and
deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such
Affected Employees are eligible to participate in after the Effective Time.

(d) Following the Effective Date, Acquiror agrees to indemnify Target's
officers and members of Target's board of directors to the extent that
Target is currently obligated, by any statute, bylaw, or agreement, to
indemnify such officers and directors with respect to actions taken by such
officers and directors prior to the Effective Date.

6.6 Observation Rights; Board Representation. For the twelve (12) months
following the Effective Date, Acquiror shall permit one Person designated by
the holders of a majority of the Target Shares (the "Observer") to attend all
meetings of Acquiror's Board of Directors, in a non-voting observer capacity,
and, in this respect, Acquiror shall, at its expense, give the Observer copies
of all notices, minutes, consents and other materials that it provides to its
directors in connection with such Board of Director meetings at the same time
as such notices are given to Board members; provided, however, that the
Observer shall agree to hold in confidence and trust all information so
provided to the same extent as if he was a member of Acquiror's Board of
Directors. The foregoing provisions shall not be interpreted to preclude
meetings to be held by telephone conference and actions to be taken by written
consent. Upon the Effective Date, Acquiror shall take all actions necessary to
appoint and elect a mutually agreeable representative of Target to Acquiror's
Board of Directors.

6.7 Loan. In the event the Merger is not consummated prior to January 10,
2000, Acquiror shall lend Target $3,000,000 within five business days of a
request for such loan made by Target. The loan amount, including principal and
interest at 2% above prime, will be due in full at the earlier of the
consummation of the Merger or one year following the date of this Agreement.
The loan shall be secured by the accounts receivable of Target.

7. Mutual Covenants.

7.1 Confidentiality. Each party acknowledges that in the course of the
performance of this Agreement, it may obtain the Confidential Information of
the other party. The Receiving Party shall, at all times, both during the term
of this Agreement and thereafter, keep in confidence and trust all of the
Disclosing Party's Confidential Information received by it. The Receiving Party
shall not use the Confidential Information of the Disclosing Party other than
as expressly permitted under the terms of this Agreement or by a separate
written agreement. The Receiving Party shall take all reasonable steps to
prevent unauthorized disclosure or use of the

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Disclosing Party's Confidential Information and to prevent it from falling into
the public domain or into the possession of unauthorized Persons. The Receiving
Party shall not disclose Confidential Information of the Disclosing Party to
any Person or entity other than its Representatives who need access to such
Confidential Information in order to effect the intent of this Agreement and
who have entered into confidentiality agreements with such Person's employer
which protects the Confidential Information of the Disclosing Party. The
Receiving Party shall promptly give notice to the Disclosing Party of any
unauthorized use or disclosure of Disclosing Party's Confidential Information.
The Receiving Party agrees to assist the Disclosing Party to remedy such
unauthorized use or disclosure of its Confidential Information, which remedies
shall include injunctive relief without the necessity of posting a bond or
proving damages. These obligations shall not apply to the extent that
Confidential Information includes information which:

(a) is already known to the Receiving Party at the time of disclosure,
which knowledge the Receiving Party shall have the burden of proving;

(b) is, or, through no act or failure to act of the Receiving Party,
becomes publicly known;

(d) is independently developed by the Receiving Party without reference
to the Confidential Information of the Disclosing Party, which independent
development the Receiving Party will have the burden of proving;

(e) is approved for release by written authorization of the Disclosing
Party; or

(f) is required to be disclosed by a government agency to further the
objectives of this Agreement or by a proper order of a court of competent
jurisdiction; provided, however that the Receiving Party will use its best
efforts to minimize such disclosure and will consult with and assist the
Disclosing Party in obtaining a protective order prior to such disclosure.

7.2 Exclusivity. Until the earlier of the Closing Date or the termination of
this Agreement, Target agrees that it will not (and that it will use best
efforts to assure that its employees, agents and affiliates do not on its
behalf) discuss or enter into any agreement concerning the sale or acquisition
of Target, its stock (including by means of any public offering thereof, but
excluding issuance of stock and options to employees in the ordinary course of
business consistent with past practices) or a substantial part of its assets
with any party other than Acquiror (any of the foregoing transactions, an
"Acquisition Transaction"), and that any such discussions presently in progress
will be terminated or suspended during that period. Target represents and
warrants that it has the legal right to terminate or suspend any such pending
negotiations and agrees to indemnify Acquiror, its representatives and agents
from and against any claims by any party to such negotiations based upon or
arising out of the discussion or any consummation of the Merger. Target shall
notify Acquiror no later than 24 hours after receipt by Target (or its
advisors) of any proposal for any Acquisition Transaction or any request for
nonpublic information in connection with an Acquisition Transaction or for
access to the properties, books or records of Target by any person or entity
that informs Target that it is considering making, or has made, a proposal with
respect to an Acquisition Transaction. Such notice shall be made orally and in
writing and shall indicate in reasonable detail the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact

7.3 Further Assurances. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and
to give such further written assurances, as may be reasonably requested by any
other party to better evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and purposes of
this Agreement.

7.4 Tax-Free Organization. Each party shall each use its best efforts to
cause the Merger to be treated as a reorganization within the meaning of
Section 368(a) of the Code.

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7.5 Proxy Statement; Registration Statement. As promptly as practicable after
the execution of this Agreement, Acquiror and Target shall prepare and file
with the Commission the Proxy Statement, and Acquiror shall prepare and file
with the Commission the Registration Statement, in which the Proxy Statement
will be included as a prospectus. Acquiror and Target shall use all reasonable
efforts to cause the Registration Statement to become effective as soon after
such filing as practicable. The Proxy Statement shall include the
recommendation of the Board of Directors of Target in favor of this Agreement
and the Merger and the recommendation of the Board of Directors of Acquiror in
favor of the issuance of shares of Acquiror Common Stock pursuant to the
Merger. Acquiror and Target shall make all necessary filings with respect to
the Merger under the Securities Act and the Exchange Act and applicable state
blue sky laws and the rules and regulations thereunder. To the extent the
issuance of Acquiror Shares pursuant to the Merger to any stockholder of the
Target agreeing to vote in favor of the Merger pursuant to Section 5.8 are not
permitted by the rules and regulations of the SEC to be registered on the
Registration Statement, Acquiror will use its best efforts to register such
issuance of Acquiror Shares to such stockholders of the Company on a Form S-3
or other appropriate form.

7.6 Stockholder Meetings. Acquiror and Target each shall call a meeting of
its respective stockholders, subject to the provisions of applicable law, to be
held as promptly as reasonably practicable for the purpose of voting upon, in
the case of Target, the adoption of this Agreement and the approval of the
Merger and, in the case of Acquiror, the issuance of shares of Acquiror Common
Stock pursuant to the Merger. Acquiror and Target will, through their
respective Board of Directors, recommend to their respective stockholders
approval of such matters and will coordinate and cooperate with respect to the
timing of such meetings and shall use all reasonable efforts to hold such
meetings as soon as reasonably practicable after the date hereof; provided,
however, that the parties shall notice such meetings for the same day, with
Acquiror's meeting to be held before Target's meeting. Subject to applicable
law, each party shall use its reasonable efforts to solicit from its
stockholders proxies in favor of such matters.

8. The Closing.

8.1 Merger. On the date of the Closing, but not prior to the Closing, the
Certificate of Merger shall be filed with the office of the Secretary of State
of the State of Delaware and the merger of Sub with and into Target shall be
consummated.

8.2 Additional Documents.

(a) At any time and from time to time at or after the Closing, the
parties shall at the request of the other party execute and deliver or
cause to be executed and delivered all such assignments, consents and other
documents and take or cause to be taken all such other actions as either
party may reasonably deem necessary or desirable, in order to more fully
and effectively carry out the intents and purposes of this Agreement.

(b) Target shall execute and deliver to Acquiror a statement meeting the
requirements of Treasury Regulation Section 1.897-2(h)(2) stating that
interests in Target are not United States real property interests.

9. CONDITIONS TO TARGET'S OBLIGATIONS.

Target's obligations to effect the Merger are subject to the fulfillment or
satisfaction on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Target, but only in a writing signed by
Target):

9.1 Accuracy of Representations and Warranties. The representations and
warranties of Acquiror and Sub set forth in Section 4 shall be true on and as
of the Closing with the same force and effect as if they had been made at the
Closing and the conditions to Target's obligations set forth under Sections
9.1, 9.2, 9.3 and 9.4 shall have been satisfied. Target shall receive a
certificate to such effect from an executive officer of Acquiror.

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9.2 Covenants. Acquiror and Sub shall have performed and complied with all of
their covenants contained in this Agreement to be performed on or before the
Closing, and Acquiror shall deliver to Target a certificate executed by an
executive officer of Acquiror at Closing stating that such condition has been
satisfied.

9.3 No Litigation. On and as of the Closing, no litigation or proceeding
shall be threatened or pending against Acquiror for the purpose or with the
probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement or which would have a material
adverse effect on the business, liabilities, income, property, operations or
prospects of Acquiror subsequent to the Closing.

9.4 Authorizations. Target shall have received from Acquiror and Sub written
evidence that the execution, delivery and performance of Acquiror and Sub's
obligations under this Agreement and the Certificate of Merger have been duly
and validly approved and authorized by the Board of Directors and stockholders,
respectively, of Acquiror and Sub.

9.5 No Adverse Development. There shall be no order, decree, or ruling by any
court or Governmental Body or threat thereof or any other fact or circumstance,
which could reasonably be expected to prohibit or render illegal or have a
material adverse effect on the business, prospects, liabilities, income,
property, assets or operations of Acquiror subsequent to the Closing. Acquiror
shall not have sustained a loss, whether or not insured, by reason of physical
damage caused by fire, flood or earthquake, accident or other calamity which
materially affects the Acquiror's financial position or its ability to carry on
its business as proposed to be conducted. There shall have been no other event
which has a material and adverse effect on Acquiror's assets, business,
liabilities, income, property, assets, prospects or operations subsequent to
the Closing.

9.6 Government Consents. There shall have been obtained at or prior to the
date of Closing such permits or authorizations, and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.

9.7 Opinion of Acquiror's Counsel. Target shall have received from counsel to
Acquiror, an opinion substantially in the form attached hereto as Exhibit E

9. Stockholder Approvals. This issuance of shares of Acquiror Common Stock in
the Merger shall have been approved by the minimum vote required under the
rules of the National Association of Securities Dealers, Inc.

9.9 Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.

10. CONDITIONS TO ACQUIROR AND SUB'S OBLIGATIONS.

Acquiror's and Sub's obligations to effect the Merger are subject to the
fulfillment or satisfaction on and as of the Closing, of each of the following
conditions (any one or more of which may be waived by Acquiror, but only in a
writing signed by Acquiror):

10.1 Accuracy of Representations and Warranties. The representations and
warranties of Target contained in Section 3 and of certain Target Stockholders
in certain Shareholder Voting Agreements of even date herewith shall be true in
all material respects on and as of the Closing with the same force and effect
as if they had been made at the Closing and the conditions to Acquiror's and
Sub's obligations set forth under Sections 10.1, 10.2, 10.3 and 10.4 shall have
been satisfied. Acquiror shall receive a certificate to such effect from an
executive officer of Target.

10.2 Covenants. Target shall have performed and complied with all of its
covenants set forth in this Agreement on or before the Closing.

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10.3 No Litigation. On and as of the Closing, no litigation or proceeding
shall be threatened or pending against Target for the purpose or with the
probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, or which would have a material
adverse effect on the business, liabilities, income, property, operations or
prospects of Target subsequent to the Closing.

10.4 Authorizations. Acquiror shall have received from Target written
evidence that (i) the execution, delivery and performance of this Agreement and
the Certificate of Merger have been duly and validly approved and authorized by
its Board of Directors and (ii) not less than ninety-five percent (95%) of
Target Shares held by the Target Stockholders have approved this Agreement, the
Merger and the transactions contemplated hereby and thereby.

10.5 No Adverse Development. There shall be no order, decree, or ruling by
any court or Governmental Body or threat thereof or any other fact or
circumstance, which could reasonably be expected to prohibit or render illegal
or have a material adverse effect on the business, prospects, liabilities,
income, property, assets or operations of Target subsequent to the Closing.
Target shall not have sustained a loss, whether or not insured, by reason of
physical damage caused by fire, flood or earthquake, accident or other calamity
which materially affects the Target Balance Sheet or its ability to carry on
its business as proposed to be conducted. There shall have been no other event
which has a material and adverse effect on Target's assets, business,
liabilities, income, property, assets, prospects or operations subsequent to
the Closing.

10.6 Required Consents.

(a) Acquiror shall have received all written consents, assignments,
waivers, authorizations or other certificates reasonably deemed necessary
by Acquiror's legal counsel to provide for the continuation in full force
and effect of any and all contracts and leases of Target, except where the
failure to obtain such consent, assignment, waiver, authorization or other
certificate would not have a material adverse effect on Target's business.

(b) Target shall have obtained and provided Acquiror with certified
copies of all approvals and consents by the stockholders of Target listed
on Schedule 3.3 or otherwise contemplated by the Proxy Statement.

10.7 Opinion of Target's Counsel. Acquiror shall have received from counsel
to Target, an opinion substantially in the form attached hereto as Exhibit F.

10.8 Government Consents. There shall have been obtained at or prior to the
Closing Date such permits or authorizations and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws. All waiting periods required under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or been
terminated.

10.9 Employment Offers and Other Agreements. Each of the officers and key
employees of Target shall have entered into non-compete agreements with
Acquiror in substantially the same form as attached hereto as Exhibit C and
employment letters in form and substance agreeable to Acquiror; substantially
all other employees and consultants of Target as of the Closing shall have
accepted employment (or consultant positions, as appropriate) with Acquiror or
Target on terms satisfactory to Acquiror; such employees and consultants shall
have entered into confidentiality and inventions agreements in Acquiror's
standard form.

10.10 Transaction Costs. Target shall have a delivered a certificate
confirming all Transaction Costs (as hereinafter defined) payable by Target or
the Target Shareholders.

10.11 Stockholder Approvals. This Agreement shall have been adopted and the
Merger shall have been approved by the affirmative vote of the holders of a
majority of the shares of Target Common Stock

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outstanding as of the record date for the Target Stockholders Meeting, and the
issuance of shares of Acquiror Common Stock in the Merger shall have been
approved by the minimum vote required under the rules of the National
Association of Securities Dealers, Inc.

10.12 Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.

11. Termination of Agreement.

11.1 Mutual Agreement. This Agreement may be terminated at any time prior to
the Closing by the mutual written consent of each of the parties hereto.

11.2 Failure to Fulfill Conditions. Either Acquiror or Target may terminate
this Agreement if the Merger has not been consummated within one hundred and
twenty (120) days of the date of this Agreement or such shorter period as may
be reasonable in the event of breach by one party which is not cured within
thirty (30) days of the date of such breach (provided that the right to
terminate this Agreement under this Section shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such date).
Any termination of this Agreement under this Section shall be effective by the
delivery of notice of the terminating party to the other parties hereto.

11.3 No Liability. Any termination of this Agreement pursuant to this Section
shall be without further obligation or liability upon any party in favor of any
other party hereto.

11.4 Effect of Termination. The termination of the Agreement pursuant to this
Section shall terminate all sections hereof other than Section 7.1.

12. Indemnification.

12.1 Survival of Representations.

(a) The representations and warranties made by Target under Section 3
hereof, the representations and warranties of certain Target Stockholders
in the Shareholder Voting Agreement, and the representations and warranties
set forth in any certificate delivered by Target in connection with this
Agreement shall survive the Closing and shall remain in full force and
effect and shall survive until the end of the Indemnification Period and
shall survive thereafter only with respect to any claims made prior to the
end of the Indemnification Period.

(b) The representations, warranties, covenants and obligations of
Target, and the rights and remedies that may be exercised by the
Indemnitees (as defined herein), shall not be limited or otherwise affected
by or as a result of any information furnished to, or any investigation
made by or knowledge of, any of the Indemnitees or any of their
Representatives.

(c) For purposes of this Agreement, each statement or other item of
information set forth in the Target Disclosure Schedule shall be deemed to
be a representation and warranty made by Target in this Agreement.

12.2 Indemnification by Target Stockholders.

(a) From and after the Closing Date, the Target Stockholders shall be
jointly and severally liable for and shall hold harmless and indemnify
Acquiror and the Surviving Corporation (each an "Indemnitee") from and
against, and shall compensate and reimburse each of the Indemnitees for,
any Damages which are directly or indirectly suffered or incurred by any of
the Indemnitees or to which any of the Indemnitees may otherwise become
subject (regardless of whether or not such Damages relate to any third-
party claim) and which arise from or as a result of, or are directly or
indirectly connected with: (i) any inaccuracy in or

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breach of any representation or warranty set forth in Section 3 hereunder
or in any certificate delivered by Target in connection with this
Agreement; (ii) any breach of any covenant or obligation of Target or the
Target Stockholders hereunder or pursuant to any agreement delivered in
connection herewith; or (iii) any Legal Proceeding relating to any
inaccuracy, breach or expense of the type referred to in clause "(i)" or
"(ii)" above (including any Legal Proceeding commenced by any Indemnitee
for the purpose of enforcing any of its rights under this Section if such
Indemnitee is the prevailing party in any such Legal Proceeding).

(b) If the Surviving Corporation suffers, incurs or otherwise becomes
subject to any Damages as a result of or in connection with any inaccuracy
in or breach of any representation, warranty, covenant or obligation, then
(without limiting any of the rights of the Surviving Corporation as an
Indemnitee) Acquiror shall also be deemed, by virtue of its ownership of
the stock of the Surviving Corporation, to have incurred Damages as a
result of and in connection with such inaccuracy or breach.

(c) No Indemnitee shall have the right to be indemnified pursuant to
this Section unless and until the Indemnitees together shall have incurred
on a cumulative basis from and after the Closing Date aggregate Damages in
an amount not less than $250,000 whereupon the Target Stockholders shall be
obligated to indemnify against all Damages.

(d) Notwithstanding anything to the contrary set forth herein, except
with respect to breaches of Section 7.1 hereof or claims for fraud or
intentional misrepresentation, the indemnity provisions set forth in this
Section shall be Acquiror's sole and exclusive remedy related to claims
following the closing of the acquisition transaction described herein and
the maximum liability of each of the Target Stockholders shall be limited
to the Acquiror Shares issuable to such stockholder which are deposited
into escrow pursuant to the terms hereof.

(e) In the event of any withdrawal from the Indemnity Escrow to satisfy
any claim for damages or to pay any Excess Target Transaction Costs, the
Acquiror Shares shall be valued based upon the average closing price for
Acquiror Common Stock for the twenty trading days prior to the Closing.

12.3 No Contribution. The Target Stockholders shall not have and shall not
exercise or assert (or attempt to exercise or assert), any right of
contribution, right of indemnity or other right or remedy against the Surviving
Corporation which they have in their capacity as stockholders in connection
with any indemnification obligation or any other liability to which it may
become subject under or in connection with this Agreement or any certificate
delivered by Target in connection with this Agreement.

12.4 Defense of Third Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against
the Surviving Corporation, against Acquiror or against any other Person) with
respect to which the Target Stockholders may become obligated to hold harmless,
indemnify, compensate or reimburse any Indemnitee pursuant to this Section, the
procedure set forth below shall be followed.

(a) Notice. Acquiror shall give prompt written notice of the
commencement of any such Legal Proceeding against Acquiror or the Surviving
Corporation for which indemnity may be sought; provided, however, that any
failure on the part of Acquiror to so notify Target shall not limit any of
the obligations of Target under this Section unless the ability to defend
such claim is materially prejudiced by such failure or delay. The
Indemnification Period shall be tolled solely with respect to a particular
claim for the period beginning on the date the Target Stockholders receive
written notice of that claim until the final resolution of such claim so
long as such claim is made within the Indemnification Period.

(b) Defense of Claim. The Indemnitee shall have the right to be
represented by counsel of its choice and to defend or otherwise control the
handling of any claim, or Legal Proceeding for which indemnity is sought.
If the Indemnitee so proceeds with the defense of any such claim or Legal
Proceeding:

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(i) all expenses relating to the defense of such claim or Legal
Proceeding (whether or not incurred by the Indemnitee) shall be borne
and paid exclusively by the Target Stockholders;

(ii) the Target Stockholders shall make available to the Indemnitee
any non-privileged documents and materials in the possession or control
of the Target Stockholders that may be necessary to the defense of such
claim or Legal Proceeding except for documents or materials which are
sealed by a court order or are subject to a nondisclosure agreement
prohibiting disclosure by the Target Stockholders;

(iii) the Indemnitee shall keep the Target Stockholders informed of
all material developments and events relating to such claim or Legal
Proceeding; and

(iv) the Target Stockholders shall have the right to participate in
the defense of such claim or legal proceeding at their sole cost and
expense; and

(v) the Indemnitee shall have the right to settle, adjust or
compromise such claim or Legal Proceeding with the written consent of
the Target Stockholders; provided, however, that the Target
Stockholders shall not unreasonably withhold such consent.

12.5 Indemnity Escrow. At the Effective Time, Acquiror shall not distribute
to Target Stockholders, but shall retain as the "Indemnity Escrow", ten percent
(10%) of the Acquiror Shares (the "Indemnity Escrow Holdback"). The Indemnity
Escrow Holdback shall be withheld on a pro rata basis from the Target
Stockholders who otherwise are entitled to such amounts at the Effective Time
and shall be governed by the terms set forth herein and in an escrow agreement
(the "Indemnity Escrow Agreement") in substantially the form attached hereto as
Exhibit B. The Indemnity Escrow shall be available to pay any Excess Target
Transaction Costs, compensate the Indemnitees for any loss, to the extent of
the amount of Damages that such Indemnitee has incurred and which are subject
to indemnification hereunder.

12.6 Stockholder Representative.

(a) By virtue of their approval of this Agreement, the Target
Stockholders will be deemed to have irrevocably constituted and appointed,
effective as of the Effective Time, Howard A. Tullman (the "Stockholder
Representative"), as their true and lawful agent and attorney-in-fact to
enter into any agreement in connection with the transactions contemplated
by this Agreement or the Indemnity Escrow Agreement, to exercise all or any
of the powers, authority and discretion conferred on him under any such
agreement, to waive any terms and conditions of any such agreement, to give
and receive notices and communications, to authorize delivery to Acquiror
of the Indemnity Escrow Holdback or other property from the Indemnity
Escrow in satisfaction of claims by Acquiror, to object to such deliveries,
to agree to, negotiate, enter into settlements and compromises of, and
demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary
or appropriate in the judgment of the Stockholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the holders
of a majority in interest of the Indemnity Escrow from time to time upon
not less than ten (10) days' prior written notice to Acquiror. The
Stockholder Representative shall receive no compensation for his services.
Notices or communications to or from the Stockholder Representative shall
constitute notice to or from each of the Target Stockholders. This power of
attorney is coupled with an interest and is irrevocable.

(b) The Stockholder Representative shall not be liable for any act done
or omitted hereunder as Stockholder Representative while acting in good
faith and not in a manner constituting gross negligence, and any act done
or omitted pursuant to the advice of counsel shall be conclusive evidence
of such good faith. The Target Stockholders shall severally indemnify the
Stockholder Representative and hold him harmless against any loss,
liability or expense incurred without gross negligence or bad faith on the
part of such Stockholder Representative and arising out of or in connection
with the acceptance or administration of his duties hereunder.

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13. Miscellaneous.

13.1 Governing Laws. It is the intention of the parties hereto that the
internal laws of the State of Delaware (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.

13.2 Binding upon Successors and Assigns. Subject to, and unless otherwise
provided in, this Agreement, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the benefit
of, the permitted successors, executors, heirs, representatives, administrators
and assigns of the parties hereto.

13.3 Severability. If any provision of this Agreement, or the application
thereof, shall for any reason and to any extent be invalid or unenforceable,
the remainder of this Agreement and application of such provision to other
Persons or circumstances shall be interpreted so as best to reasonably effect
the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and enforceable
provision which will achieve, to the extent possible, the economic, business
and other purposes of the void or unenforceable provision.

13.4 Entire Agreement. This Agreement, the exhibits and schedules hereto, the
documents referenced herein, and the exhibits and schedules thereto, constitute
the entire understanding and agreement of the parties hereto with respect to
the subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect hereto
and thereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.

13.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and
the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.

13.6 Expenses. Except as provided to the contrary herein, each party shall
pay all of its own costs and expenses incurred with respect to the negotiation,
execution and delivery of this Agreement and the exhibits hereto. In the event
the Merger is consummated, all Target Transaction Costs in excess of $1,500,000
("Excess Transaction Costs") shall be deemed to be expenses of the Target
Stockholders, shall be borne by the Target Stockholders, but shall be paid by
Acquiror. Target shall present a good faith estimate of such Target Transaction
Costs prior to the closing of the Acquisition. Any Excess Target Transaction
Costs may be deducted as a claim against the Indemnity Escrow.

13.7 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party shall be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on such
party, and the exercise of any one remedy shall not preclude the exercise of
any other.

13.8 Amendment and Waivers. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to
constitute a waiver of any other default or any succeeding breach or default.

13.9 Survival of Agreements. All covenants, agreements, representations and
warranties made herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
notwithstanding any investigation of the parties hereto.

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13.10 No Waiver. The failure of any party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party
thereafter to enforce such provisions.

13.11 Attorneys' Fees. Should suit be brought to enforce or interpret any
part of this Agreement, the prevailing party shall be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys' fees
to be fixed by the court (including without limitation, costs, expenses and
fees on any appeal). The prevailing party shall be the party entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment. A party not entitled to recover its costs shall not be entitled to
recover attorneys' fees. No sum for attorneys' fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party is
entitled to recover costs or attorneys' fees.

13.12 Notices. Any notice provided for or permitted under this Agreement will
be treated as having been received (a) when delivered personally, (b) when sent
by confirmed telex or telecopy, (c) one (1) day following when sent by
commercial overnight courier with written verification of receipt, or (d) three
(3) days following when mailed postage prepaid by certified or registered mail,
return receipt requested, to the party to be notified, at the address set forth
below, or at such other place of which the other party has been notified in
accordance with the provisions of this Section:

Target or the Stockholder Representative:
Tunes.com Inc.
640 North LaSalle Street Suite 560
Chicago, IL 60610
Facsimile: (312) 654-1099
Attention: President

With copy to: Freeborn & Peters
311 South Wacker Drive
Chicago, IL 60606
Facsimile: (312) 360-6575
Attention: Richard R. Dennerline

Acquiror or Sub: Emusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, CA 94036
Facsimile: (650) 216-1610
Attention: President

With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Andrew Zeif

13.13 Time. Time is of the essence of this Agreement.

13.14 Construction of Agreement. This Agreement has been negotiated by the
respective parties hereto and their attorneys and the language hereof shall not
be construed for or against any party. The titles and headings herein are for
reference purposes only and shall not in any manner limit the construction of
this Agreement which shall be considered as a whole.

13.15 No Joint Venture. Nothing contained in this Agreement shall be deemed
or construed as creating a joint venture or partnership between any of the
parties hereto. No party is by virtue of this Agreement authorized as an agent,
employee or legal representative of any other party. No party shall have the
power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of

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independent contractors with respect to each other. No party shall have any
power or authority to bind or commit any other. No party shall hold itself out
as having any authority or relationship in contravention of this Section.

13.16 Pronouns. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person, persons, entity or entities may require.

13.17 Further Assurances. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and
to give such further written assurances, as may be reasonably requested by any
other party to better evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and purposes of
this Agreement.

13.18 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor shall be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner of any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof shall be personal solely between the parties
to this Agreement.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first set forth above.

EMUSIC.COM INC. TUNES.COM INC.

By: /s/ Gene Hoffman, Jr. By: /s/ Howard A. Tullman
----------------------------- -----------------------------
Name: Gene Hoffman, Jr. Name: Howard A. Tullman
Title: President and Chief Executive Officer
Title: Chairman and CEO

GNB CORPORATION

By: /s/ Gene Hoffman, Jr.
-----------------------------
Name: Gene Hoffman, Jr.
Title: President and Chief Executive Officer

[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]

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APPENDIX B

INDEMNITY ESCROW AGREEMENT

This Indemnity Escrow Agreement (this "Agreement") is entered into as of
November 29, 1999, by and among EMusic.com Inc., a Delaware corporation
("Acquiror" and "Indemnity Escrow Agent"), and Howard A. Tullman (the
"Stockholder Representative"), acting on behalf of the former shareholders of
Target (as defined below).

RECITALS

A. Acquiror, GNB Corporation, a Delaware corporation and wholly-owned
subsidiary of Acquiror ("Sub"), and Tunes.com Inc. a Delaware corporation
("Target") have entered into an Agreement and Plan of Reorganization dated as
of November 29, 1999 (the "Reorganization Agreement") pursuant to which Sub
will merge with and into Target (the "Merger"), with Target surviving the
Merger. Capitalized terms used in this Agreement and not otherwise defined in
this Agreement shall have the meanings ascribed to them in the Reorganization
Agreement.

B. Section 12.5 of the Reorganization Agreement provides that at and after
the Closing of the Merger, Acquiror shall not distribute to the Target
Stockholders, but shall retain as the "Indemnity Escrow," ten percent (10%) of
the Acquiror Shares issuable upon the Closing with respect to Target Shares
that are issued and outstanding at the Effective Time (not including options,
warrants or other rights to acquire Target Shares) (the "Indemnity Escrow
Holdback"). The Indemnity Escrow Holdback shall be withheld on a pro rata basis
from the Target Stockholders who otherwise would have been entitled to receive
such consideration under the Reorganization Agreement at the Effective Time and
shall be governed by the terms set forth herein and in the Reorganization
Agreement. The Indemnity Escrow shall be available, subject to the limitations
set forth below and in the Reorganization Agreement, to compensate Acquiror for
any loss, to the extent of the amount of Damages for which Acquiror is entitled
to indemnification under Section 12.2 of the Reorganization Agreement.

C. The parties to this Agreement desire to establish the terms and conditions
pursuant to which the Indemnity Escrow Holdback will be deposited into, held
in, and disbursed from, the Indemnity Escrow.

D. Acquiror is sometimes referred to herein as "the Indemnity Escrow Agent"
in connection with its rights and obligations with respect to the holding and
distribution of the Indemnity Escrow Holdback

AGREEMENT

NOW, THEREFORE, the parties to this Agreement agree as follows:

1. Escrow and Indemnification.

(a) Indemnity Escrow. The Indemnity Escrow Agent agrees to hold the
Indemnity Escrow Holdback subject to the terms and conditions of this
Agreement and Section 12 of the Reorganization Agreement (collectively, the
"Escrow Provisions") until the Indemnity Escrow Agent is required to
release such Indemnity Escrow Holdback pursuant to the terms of this
Agreement.

(b) Indemnification. The Target Stockholders by their appointment of the
Stockholder Representative have agreed in Section 12 of the Reorganization
Agreement to indemnify and hold harmless each of the Indemnitees (as
defined therein) from and against, and shall compensate and reimburse each
of the Indemnitees for, any Damages which are directly or indirectly
suffered or incurred by any of the Indemnitees subject to the limitations
set forth in the Reorganization Agreement; provided,

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<PAGE>

however, that the liability of a Target Stockholder for any Damages under
this agreement shall be limited to and shall not exceed his pro rata
portion of the Indemnity Escrow Holdback then held by the Indemnity Escrow
Agent.. Promptly after the receipt by Acquiror of notice or discovery of
any claim, damage or legal action or proceeding giving rise to
indemnification rights under the Reorganization Agreement, Acquiror will
give the Stockholder Representative written notice of such claim, damage,
legal action or proceeding (a "Claim") in accordance with Section 3 hereof.
Acquiror shall notify the Stockholder Representative of the progress of any
such Claim and shall permit the Stockholder Representative to participate
in such defense in accordance with Section 12.4 of the Reorganization
Agreement, and Acquiror shall not compromise or settle any such Claim
without the written consent of the Stockholder Representative, which
consent will not be unreasonably withheld.

2. Release from Escrow.

(a) Final Distribution to Target Stockholders. Within ten (10) business
days after the date the Indemnification Period ends (the "Release Date"),
the Indemnity Escrow Agent shall release from escrow to the Target
Stockholders their respective portions of the Indemnity Escrow Holdback
less (A) any amount delivered to Acquiror in accordance with Section 4
hereof in satisfaction of Claims by Acquiror and (B) any amount subject to
delivery to Acquiror in accordance with Section 4 hereof with respect to
any pending but unresolved Claims of Acquiror. Any Indemnity Escrow
Holdback held as a result of clause (B) shall be released to the Target
Stockholders or Acquiror (as appropriate) promptly upon resolution of each
specific Claim in accordance with Section 4 hereof.

(b) Release of Indemnity Escrow Holdback. The Indemnity Escrow
Holdback will be held by the Indemnity Escrow Agent until required to be
released pursuant to this Section 2. The Indemnity Escrow Agent will
deliver to each Target Stockholder the requisite portion of the Indemnity
Escrow Holdback to be released as instructed by the Stockholder
Representative in writing in accordance with such Target Stockholder's
instructions delivered by the Stockholder Representative to the Indemnity
Escrow Agent at least five (5) business days prior to such Release Date.

3. Notice of Claim.

(a) Each notice of a Claim by Acquiror (the "Notice of Claim") shall be
delivered in writing to the Stockholder Representative, and shall contain
the following information to the extent it is reasonably available to
Acquiror:

(i) Acquiror's good faith estimate of the reasonably foreseeable
maximum amount of the alleged Damages; and

(ii) A brief description in reasonable detail of the facts,
circumstances or events giving rise to the alleged Damages based on
Acquiror's good faith belief thereof.

(b) Upon resolution of a Claim for which a Notice of Claim has been
previously submitted, Acquiror shall submit to the Stockholder
Representative an Invoice of Claim (the "Invoice of Claim") setting forth
the amount of the Damages actually incurred.

(c) The Indemnity Escrow Agent will not release more than the amount of
the Indemnity Escrow Holdback identified as being needed to satisfy a Claim
pursuant to a Notice of Claim until such Notice of Claim has been resolved
in accordance with Section 4 below and an Invoice of Claim has been
received with respect to such Notice of Claim.

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<PAGE>

4. Resolution of Notice of Claim and Transfer of Indemnity Escrow
Holdback. Any Notice of Claim and Invoice of Claim received by the Stockholder
Representative pursuant to Section 3 above will be resolved as follows:

(a) Uncontested Claims. In the event that the Stockholder Representative
does not contest a Notice of Claim (or contests only a portion of the
Claim), in writing to Acquiror within 30 days after such notice is deemed
delivered pursuant to Section 11 below, Acquiror shall be entitled to
remove from the Indemnity Escrow Holdback an amount of Acquiror Shares
necessary to satisfy the amount of Damages specified in the Notice of Claim
(that is not contested), until such time as Acquiror, without unreasonable
delay, either (i) determines that no liability will result on the Claim, in
which case such amount will be added back to the Indemnity Escrow Holdback,
or (ii) submits to the Stockholder Representative an Invoice of Claim. Upon
receiving an Invoice of Claim, the Stockholder Representative may contest
the Invoice of Claim (or contest only a portion of the Claim), by
delivering a writing to Acquiror within 30 days of the date such notice is
deemed delivered pursuant to Section 11 below. In the event the Stockholder
Representative does not contest the Invoice of Claim (or contests only a
portion of the Claim) Acquiror shall be entitled to that portion of
Indemnity Escrow Holdback equal to the amount specified in the Invoice of
Claim (that is not contested) and notify the Stockholder Representative of
such transfer.

(b) Contested Claims. In the event that the Stockholder Representative
gives written notice contesting all, or a portion of, a Notice of Claim or
Invoice of Claim (collectively referred to in this Section 4(b) as a
"Notice of Claim") to Acquiror (a "Contested Claim") within the 30-day
period provided above, the matter will be settled by binding arbitration.
Any portion of the Notice of Claim which is not contested shall be
disbursed in accordance with Section 4(a). The final decision of the
arbitrator shall be furnished to the Stockholder Representative and
Acquiror in writing and will constitute a conclusive determination of the
issue in question, binding upon the Target Stockholders, the Stockholder
Representative and Acquiror and shall not be contested or appealed by any
of them. After notice that the Notice of Claim is contested by the
Stockholder Representative, Acquiror will continue to hold in the Indemnity
Escrow a portion of the Indemnity Escrow Holdback equal to the contested
amount to cover such Claim (notwithstanding the expiration of the Release
Date) until the earlier of receipt by it of (i) execution of a settlement
agreement by Acquiror and the Stockholder Representative setting forth a
resolution of the Notice of Claim, or (ii) a copy of the final award of the
arbitrator.

(c) Arbitration. Any Contested Claim shall be settled by (i) Agreement
of the Stockholder Representative and Acquiror or (ii) arbitration in one
of Santa Clara, San Mateo, and San Francisco Counties, State of California
and, except as herein specifically stated, in accordance with the
commercial arbitration rules of the American Arbitration Association ("AAA
Rules") then in effect. However, in all events, these arbitration
provisions shall govern over any conflicting rules which may now or
hereafter be contained in the AAA Rules. Any judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any
judicial proceeding instituted to resolve a Contested Claim.

(i) Compensation of Arbitrator. Any such arbitration shall be
conducted before a single arbitrator who shall be compensated for his
or her services at a rate to be determined by the parties or by the
American Arbitration Association, but based upon reasonable hourly or
daily consulting rates for the arbitrator in the event the parties are
not able to agree upon his or her rate of compensation.

(ii) Selection of Arbitrator. The AAA Rules for the selection of the
arbitrator shall be followed by Acquiror and the Stockholder
Representative.

(iii) Payment of Costs. Acquiror shall advance the initial
compensation to be paid to the arbitrator in any such arbitration and
the costs of transcripts and other normal and regular expenses of the
arbitration proceedings; provided, however, that the prevailing party
in any arbitration shall be entitled to an award of attorneys' fees and
costs, and all costs of arbitration will be paid by the losing party.

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<PAGE>

(iv) Discovery. The parties shall be entitled to conduct discovery
proceedings in accordance with the provisions of the Federal Rules of
Civil Procedure, only to the extent the arbitrator considers necessary
to a full and fair exploration of the issues in dispute.

(v) Burden of Proof. For any Claim submitted to arbitration, the
burden of proof shall be as it would be if the Claim were litigated in
a judicial proceedings.

(vi) Judgment. Upon the conclusion of any arbitration proceedings
hereunder, the arbitrator shall render findings of fact and conclusions
of law and a written opinion setting forth the basis and reasons for
any decision reached by him and shall deliver such documents to each
party to this Agreement along with a signed copy of the award.

(vii) Terms of Arbitration. The arbitrator chosen in accordance with
these provisions shall not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of
this Agreement or the Reorganization Agreement.

(viii) Exclusive Remedy. Except as specifically provided in this
Agreement or the Reorganization Agreement, arbitration shall be the
sole and exclusive remedy of the parties for any Contested Claim
arising out of such agreement.

(d) Determination of Amount of Claims. Any amount owed to Acquiror
hereunder determined pursuant to Section 4(a) or (b) above, will be payable
to Acquiror from the Indemnity Escrow Holdback in accordance with Section
12 of the Reorganization Agreement and will be paid promptly. The Acquiror
Shares in the Indemnity Escrow Holdback shall be valued based upon the
average closing price for Acquiror Common Stock for the twenty trading days
prior to the Closing.

(e) No Exhaustion of Remedies. Acquiror shall institute Claims, if any,
against the Indemnity Escrow Holdback and in satisfaction thereof shall
recover Indemnity Escrow Holdback, if at all, in accordance with the terms
of this Agreement. The assertion of any single Claim for indemnification
hereunder will not bar Acquiror from asserting other claims hereunder.
Notwithstanding the foregoing, if Acquiror elects to make a Claim against
the Indemnity Escrow for an action against a third party, then the
Stockholder Representative, on behalf of the Target Stockholders, shall be
subrogated to the rights of Acquiror with respect to such a Claim, and
Acquiror shall assign all of its rights in connection with such Claim
necessary for the Stockholder Representative to assert such Claim against
such third party.

(f) Payment of Costs. the Indemnity Escrow Agent is authorized and
directed to disburse pro rata any payments due the Target Stockholders
under this Agreement out of the Indemnity Escrow in accordance with their
interest and as identified by the Stockholder Representative, after (i)
payment of any attorney's and accountants' and other fees and expenses
incurred on behalf of the Target Stockholders as contemplated by this
Agreement and (ii) withholding such amounts to pay costs and expenses
relating to potential disputes arising with respect to indemnification or
other obligations of other Target Stockholders under the Escrow Provisions.

5. Limitation of the Indemnity Escrow Agent's Liability. For purposes of this
Section 5, references to the Indemnity Escrow Agent shall be deemed to apply to
it in its capacity as Indemnity Escrow Agent, and not in its capacity as
Acquiror.

(a) The parties acknowledge and agree that Acquiror has agreed to act as
the Indemnity Escrow Agent for the convenience of the parties, and that
Acquiror's liability hereunder shall not be increased by reason of Acquiror
agreeing to so act. Acquiror, when acting as the Indemnity Escrow Agent
pursuant to this Agreement, will incur no liability with respect to any
action taken or suffered by it pursuant to this Agreement in reliance upon
any notice, direction, instruction, consent, statement or other document
believed by it to be genuine and to have been signed by the proper person
other than on its own behalf (and shall have no responsibility to determine
the authenticity or accuracy thereof), nor for any other

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action or inaction, except its own willful misconduct, bad faith or gross
negligence. In no event shall the Indemnity Escrow Agent be liable for
indirect consequential damages. The Indemnity Escrow Agent will not be
responsible for the validity or sufficiency of the Escrow Provisions,
including the amount of Indemnity Escrow Holdback. In all questions arising
under the Escrow Provisions, the Indemnity Escrow Agent may rely on the
advice of counsel, and for anything done, omitted or suffered in good faith
by the Indemnity Escrow Agent based on such advice, the Indemnity Escrow
Agent will not be liable to anyone.

(b) In the event conflicting demands are made or notices are served upon
the Indemnity Escrow Agent with respect to the Indemnity Escrow or should a
third party make a Claim on such Escrow, the Indemnity Escrow Agent will
have the absolute right, at the Indemnity Escrow Agent's election, to do
any of the following: (i) resign so a successor can be appointed pursuant
to Section 7, (ii) file a suit in interpleader and obtain an order from a
court of competent jurisdiction requiring the parties to interplead and
litigate in such court their several claims and rights among themselves; or
(iii) retain all or any of the Indemnity Escrow in its possession, without
liability to anyone, until such dispute shall have been settled as
contemplated in Section 4. In the event such interpleader suit is brought,
the Indemnity Escrow Agent will thereby be fully released and discharged
from all further obligations imposed upon it under the Escrow Provisions,
and Acquiror will pay the Indemnity Escrow Agent (subject to reimbursement
from the Target Stockholders pursuant to Section 4) all reasonable costs,
expenses and reasonable attorney's fees expended or incurred by the
Indemnity Escrow Agent pursuant to the exercise of the Indemnity Escrow
Agent's rights under this Section 5 (such costs, fees and expenses will be
treated as extraordinary fees and expenses for the purposes of Section 6).
The resignation of the Indemnity Escrow Agent under this section shall not
affect the right of the Indemnity Escrow Agent to be paid any amount due to
Indemnity Escrow Agent hereunder.

6. Expenses.

(a) Indemnity Escrow Agent. Acquiror will pay all fees and expenses
including attorney's fees incurred in the ordinary course of performing its
responsibilities as Indemnity Escrow Agent hereunder. Any extraordinary
fees and expenses including attorney's fees, including without limitation
any fees or expenses incurred by the Indemnity Escrow Agent in connection
with a dispute over the distribution of Indemnity Escrow Holdback or the
validity of a Claim or Claims by Acquiror will be advanced by Acquiror and
subject to reimbursement by the Target Stockholders (it being understood
that such obligation shall be joint and several) subject to Section 4(f) in
the event that Acquiror is the prevailing party with respect to such
dispute or Claim. The Target Stockholder's liability for the extraordinary
fees and expenses of the Indemnity Escrow Agent may be paid by Acquiror
after giving at least five (5) days written notice to the Target
Stockholder Representative and may be recovered as a Claim hereunder out of
the Indemnity Escrow. If Acquiror is entitled to reimbursement by the
Target Stockholders of a portion of such fees and expenses as permitted
under this Section 6(a) then the Indemnity Escrow Agent may release to
Acquiror a portion of the Indemnity Escrow Holdback equal to such portion
of fees and expenses. Notwithstanding the foregoing, the liability of a
shareholder of Target under this paragraph shall be limited to and shall
not exceed his pro rata portion of the Indemnity Escrow Holdback then held
by the Indemnity Escrow Agent.

Acquiror and the Target Stockholders, jointly and severally, agree to assume
any and all obligations imposed now or hereafter by any applicable tax law with
respect to the distribution of Indemnity Escrow Holdback under this Agreement,
including without limitation any taxes, additions of late payment, interest,
penalties and other expenses, that may be assessed against the Indemnity Escrow
Agent on any such payment or other activities under this Agreement. Acquiror
and the Stockholders Representative shall mutually determine in writing with
respect to the Indemnity Escrow Agent's responsibility for withholding and
other taxes, assessments or other governmental charges, certifications and
governmental reporting in connection with its acting as Indemnity Escrow Agent
under this Agreement. Acquiror and the Target Stockholders, jointly and
severally, agree to assume any and all liability on account of taxes,
assessments or other governmental charges,

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<PAGE>

including without limitation the withholding or deduction or the failure to
withhold or deduct same, and any liability for failure to obtain proper
certifications or to properly report to governmental authorities, to which the
Indemnity Escrow Agent may be or become subject in connection with or which
arises out of this Agreement, including costs and expenses (including
reasonable legal fees), interest and penalties. Notwithstanding the foregoing,
the liability of a shareholder of Target under this paragraph shall be limited
to and shall not exceed his pro rata portion of the Indemnity Escrow Holdback
then held by the Indemnity Escrow Agent.

(b) Stockholder Representative. The Stockholder Representative will not
be entitled to receive any compensation from Acquiror or the Target
Stockholders in connection with this Agreement. Any fees and expenses
incurred by the Stockholder Representative in connection with actions taken
pursuant to the terms of the Escrow Provisions will be paid by the Target
Stockholders to the Stockholder Representative.

7. Successor Indemnity Escrow Agent. In the event the Indemnity Escrow Agent
becomes unavailable or unwilling to continue in its capacity as such, the
Indemnity Escrow Agent may resign and be discharged from its duties or
obligations hereunder by giving not less than thirty (30) days' prior written
notice of such a date when such resignation will take effect. Acquiror will
designate a successor Indemnity Escrow Agent prior to the expiration of such
30-day period by giving written notice to the Indemnity Escrow Agent and the
Stockholder Representative. Acquiror may appoint a successor Indemnity Escrow
Agent with the consent of the Stockholder Representative, which consent will
not be unreasonably withheld. The Indemnity Escrow Agent will promptly transfer
the Indemnity Escrow Holdback to such designated successor. In the event no
successor Indemnity Escrow Agent is appointed as described in this Section 7,
the Indemnity Escrow Agent may apply to a court of competent jurisdiction for
the appointment of a successor Indemnity Escrow Agent.

8. Limitation of Responsibility; Notices. The Indemnity Escrow Agent's duties
are limited to those set forth in the Escrow Provisions, and no implied duties
or obligations shall be implied; and the Indemnity Escrow Agent may rely upon
the written notices delivered to the Indemnity Escrow Agent hereunder by the
Stockholder Representative and under the Escrow Provisions.

9. Incorporation by Reference of Section 12. The parties agree that the terms
of Section 12 of the Reorganization Agreement shall be deemed to be
incorporated by reference in this Agreement as if such Section had been set
forth in its entirety herein except that only the provisions of this Agreement
shall control the responsibilities and obligations of the Indemnity Escrow
Agent.

10. Stockholder Representative. By virtue of their approval of the
Reorganization Agreement, the Target Stockholders will be deemed to have
irrevocably constituted and appointed, effective as of the Effective Time, the
Stockholder Representative, together with his permitted successors, as their
true and lawful agent and attorney-in-fact to enter into any agreement in
connection with the transactions contemplated by this Agreement or the
Reorganization Agreement, including, without limitation, the exercise of all or
any of the powers, authority and discretion conferred on them under any such
agreement, to waive any terms and conditions of any such agreement, to give and
receive notices and communications, to authorize delivery to Acquiror of the
Indemnity Escrow Holdback or other property from the Indemnity Escrow in
satisfaction of claims by Acquiror, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration
and comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of the
Stockholder Representative for the accomplishment of the foregoing. Such agency
may be changed by the Target Stockholders of a majority in interest of the
Indemnity Escrow from time to time upon not less than ten (10) days' prior
written notice to Acquiror and the Indemnity Escrow Agent. No bond shall be
required of the Stockholder Representative, and the Stockholder Representative
shall receive no compensation for his services. Notices or communications to or
from the Stockholder Representative shall constitute notice to or from each of
the Target Stockholders. This power of attorney is coupled with an interest and
is irrevocable. The Target Stockholders will be bound by all actions taken by
the Stockholder Representative in connection with this Agreement and Acquiror
shall be entitled to rely on any action or decision of the Stockholder
Representative. In performing their functions

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<PAGE>

hereunder, the Stockholder Representative will not be liable to the Target
Stockholders in the absence of gross negligence or willful misconduct.

11. Notices. Any notice provided for or permitted under the Escrow Provisions
will be treated as having been received (a) when delivered personally, (b) when
sent by confirmed telex or telecopy, (c) one (1) day following when sent by
commercial overnight courier with written verification of receipt, or (d) three
(3) days following when mailed postage prepaid by certified or registered mail,
return receipt requested, to the party to be notified, at the address set forth
below, or at such other place of which the other party has been notified in
accordance with the provisions of this Section 11.

Acquiror: Emusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, CA 94036
Facsimile: (650) 216-1610
Attention: President

With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Andrew Zeif

Stockholder Representative: Mr. Howard A. Tullman
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, IL 60610
Facsimile: (312) 654-1099

With copy to:

Indemnity Escrow Agent: Emusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, CA 94036
Facsimile: (650) 216-1610
Attention: President

With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Andrew Zeif

12. Voting Rights. The right to vote the Acquiror Shares shall rest with the
Target Stockholders.

13. General.

(a) Governing Laws. It is the intention of the parties hereto that the
internal laws of the State of Delaware (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction
of its terms, and the interpretation and enforcement of the rights and
duties of the parties to this Agreement.

(b) Binding upon Successors and Assigns. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained in this Agreement shall be
binding upon, and inure to the benefit of, the permitted successors,
executors, heirs, representatives, administrators and assigns of the
parties to this Agreement.

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<PAGE>

(c) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears on such counterpart and all of which together shall
constitute one and the same instrument. This Agreement shall become binding
when one or more counterparts of this Agreement, individually or taken
together, shall bear the signatures of all of the parties reflected in this
Agreement as signatories.

(d) Entire Agreement. Except as set forth in the Reorganization
Agreement, this Agreement, the documents referenced in this Agreement and
the exhibits to such documents, constitute the entire understanding and
agreement of the parties to this Agreement with respect to the subject
matter of this Agreement and of such documents and exhibits and supersede
all prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties with
respect to this Agreement, provided that with respect to the Indemnity
Escrow Agent, this Agreement (without reference to any other agreements)
sets forth the entire understanding of the parties. The express terms of
this Agreement control and supersede any course of performance or usage of
the trade inconsistent with any of the terms of this Agreement.

(e) Waivers. No waiver by any party to this Agreement of any condition
or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach,
in any one instance, will be deemed to be a further or continuing waiver of
any such condition or breach or a waiver of any other condition or breach
of any other provision contained in this Agreement.

(f) Amendment. This Agreement may be amended with the written consent of
Acquiror, the Indemnity Escrow Agent and the Stockholder Representative,
provided that if the Indemnity Escrow Agent does not agree to an amendment
agreed upon by Acquiror and the Stockholder Representative (except an
amendment which may adversely affect the rights or interests of the
Indemnity Escrow Agent), Acquiror will appoint a successor Indemnity Escrow
Agent in accordance with Section 7.

(g) Acts of God. Neither Acquiror nor the Target Stockholders nor the
Indemnity Escrow Agent nor the Stockholder Representative shall be
responsible for delays or failures in performance resulting from acts
beyond their control. Such acts shall include but not be limited to acts of
God, strikes, lockouts, riots, acts of war, epidemics, governmental
regulations superimposed after the fact, fire communication line failures,
power failures, earthquakes or other disasters.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written and will be effective as to all the Target
Stockholders when executed by Acquiror, the Indemnity Escrow Agent and the
Stockholder Representative.

EMUSIC.COM INC., as Acquiror and
Indemnity Escrow Agent:

By:
-----------------------------------

Its:
-----------------------------------

SHAREHOLDER REPRESENTATIVE:

-------------------------------------
Howard A. Tullman

[SIGNATURE PAGE FOR INDEMNITY ESCROW AGREEMENT]

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APPENDIX C

SHAREHOLDER VOTING AGREEMENT

This Shareholder Voting Agreement (the "Agreement") is made and entered into
as of November 29 , 1999 by and among Tunes.com Inc., a Delaware corporation
("Target"), Emusic.com Inc., a Delaware corporation ("Acquiror"), and the
undersigned shareholder (the "Shareholder") of Target.

WHEREAS, concurrently with the execution of this Agreement, Acquiror, GNB
Corporation, a Delaware corporation and a wholly-owned subsidiary of Acquiror
("Sub"), and Target have entered into an Agreement and Plan of Reorganization
(the "Reorganization Agreement"), which provides for the merger (the "Merger")
of Sub with and into Target. Pursuant to the Merger, Acquiror will acquire
Target in exchange for shares of Acquiror Common Stock;

WHEREAS, Shareholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of Target and shares subject
to outstanding options as is indicated on the signature page of this Agreement
(the "Shares"); and

WHEREAS, in consideration of the execution of the Reorganization Agreement by
Acquiror, Shareholder agrees to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of Target acquired by
Shareholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), agrees to vote the Shares and any other such shares of capital
stock of Target so as to facilitate consummation of the Merger, and agrees to
grant Acquiror an irrevocable proxy to vote the Shares and any other shares of
capital stock of Target upon the terms and subject to the conditions set forth
herein.

NOW, THEREFORE, the parties agree as follows:

1. Agreement to Retain Shares.

1.1 Transfer and Encumbrance. Shareholder agrees, during the period
beginning on the date hereof and ending on the Expiration Date (as defined
below), not to transfer, sell, exchange, pledge or otherwise dispose of or
encumber (collectively, "Transfer") any of the Shares or any New Shares (as
defined in Section 1.2 below) or to discuss, negotiate or make any offer or
agreement relating thereto. Shareholder acknowledges that the intent of the
foregoing sentence is to ensure that Acquiror retains the right under the
Proxy (as defined in Section 5 below) to vote the Shares and any New Shares
in accordance with the terms of the Proxy. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) the Effective Time
as defined in the Reorganization Agreement, or (ii) the termination of the
Reorganization Agreement in accordance with its terms.

1.2 New Shares. Shareholder agrees that any shares of capital stock of
Target that Shareholder purchases or with respect to which Shareholder
otherwise acquires beneficial ownership after the date of this Agreement
and prior to the Expiration Date ("New Shares") shall be subject to the
terms and conditions of this Agreement to the same extent as if they
constituted Shares.

2. Agreement to Vote Shares. At every meeting of shareholders of Target
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of shareholders of Target
with respect to any of the following, Shareholder shall vote the Shares and any
New Shares, unless otherwise directed in writing by Acquiror:

(i) in favor of approval of the Merger, the execution and delivery by
Target of the Reorganization Agreement and the adoption and approval of
the terms thereof and in favor of each of the other actions contemplated
by the Reorganization Agreement and any action required in furtherance
hereof and thereof, including without limitation, the amendment of
Target's Restated

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Certificate of Incorporation as described in Schedule 3.3 of the
Reorganization Agreement and any other action requiring shareholder
approval as described in Schedule 3.3 of the Reorganization Agreement;

(ii) against any action or agreement that would result in a breach
of any representation, warranty, covenant or obligation of Target in
the Reorganization Agreement; and

(iii) against the following actions (other than those actions that
relate to the Merger and the transactions contemplated by the
Reorganization Agreement): (A) any merger, consolidation or other
business combination involving Target with any party other than
Acquiror or its affiliates; (B) any sale, lease or transfer of more
than a significant part of the assets of Target to any party other than
Acquiror or its respective affiliates (except in the ordinary course of
business); (C) any reorganization, recapitalization, dissolution or
liquidation of Target; (D) any change in a majority of the Board of
Directors of Target; (E) any amendment to the Certificate of
Incorporation of Target; (F) any material change in the capitalization
of Target or Target's corporate structure; or (G) any other action
which is intended, or could reasonably be expected to, impede,
interfere with, delay, postpone, discourage or adversely affect the
Merger or any of the other transactions contemplated by the
Reorganization Agreement or this Voting Agreement.

Prior to the Expiration Date, Shareholder shall not enter into any agreement
or understanding with any person to vote or give instructions in any manner
inconsistent with this Section.

3. Waiver of Dissenters' Rights. Each Shareholder hereby waives any rights of
appraisal and any dissenters' rights that such Shareholder may have in
connection with the Merger.

4. Non-Solicitation Agreement. Until the Expiration Date, Shareholder will
not (nor will Shareholder permit any of Shareholder's officers, directors,
agents, representatives or affiliates to) directly or indirectly, take any of
the following actions with any party other than Acquiror and its designees: (a)
solicit, initiate, entertain, encourage any proposals or offers from, or
conduct discussions with or engage in negotiations with any person, relating to
any possible acquisition of Target (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock or assets or any equity interest in Target (an "Opposing Acquisition"),
(b) provide information with respect to Target to any person, other than
Acquiror and its affiliates or representatives or otherwise cooperate with,
facilitate or encourage any effort or attempt by any such person with regard to
any possible Opposing Acquisition or potential Opposing Acquisition, (c) enter
into an agreement with any person, other than Acquiror, providing for an
Opposing Acquisition or (d) make or authorize any statement, recommendation or
solicitation in support of any possible Opposing Acquisition other than by
Acquiror. In addition to the foregoing, if Shareholder receives prior to the
Expiration Date any offer, proposal or request, directly or indirectly,
relating to any of the above, Shareholder shall immediately notify Acquiror
thereof.

5. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Acquiror a proxy in the form attached as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permitted by law, covering the total number of Shares and New Shares of capital
stock of Target beneficially owned (as such term is defined in Rule 13d-3 under
the Exchange Act) by Shareholder set forth therein.

6. Transferee of Shares and New Shares to be Bound by this
Agreement. Shareholder agrees that, during the period from the date of this
Agreement through the Expiration Date, Shareholder shall not cause or permit
any sale, exchange, pledge, transfer, assignment, conveyance or other
disposition of any Shares or New shares to be effected unless each person to
which any Shares or New Shares, or any interest in any of such shares, is or
may be transferred shall have: (a) executed a counterpart of this Agreement;
and (b) agreed to hold such Shares and New Shares (or interest in such shares)
subject to all of the terms and provisions of this Agreement.

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<PAGE>

7. Representations, Warranties and Covenants of Shareholder. Shareholder
represents, warrants and covenants to Acquiror as follows: except to the extent
otherwise disclosed in the Reorganization Agreement (or the Schedules thereto),
Shareholder (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date constitutes
Shareholder's entire interest in the outstanding capital stock of Target, and
will be free and clear of any rights of first refusal, co-sale rights, security
interests, liens, pledges, claims, options, charges or other encumbrances, (ii)
does not beneficially own or have sole or shared voting or investment power of
any shares of capital stock or other securities (including all rights, options
and warrants to acquire shares of capital stock and other securities) of Target
other than the Shares, (iii) has full power and authority to make, enter into
and carry out the terms of this Agreement and the Proxy, and (iv) is not a
party to any voting trusts, buy sell or other similar agreements with respect
to the voting stock of Target, and the Shares are not subject to or bound by
any voting trusts, buy sell or other similar agreements.

8. Covenants of Target. Target hereby agrees and covenants that:

(i) Target will not, and will cause its stock transfer agent not to,
register the transfer of any of the Shares or New Shares on the stock
transfer ledger of Target at any time prior to the Expiration Date; and

(ii) Target agrees that any shares of capital stock of Target that
Shareholder purchases or with respect to which Shareholder otherwise
acquires beneficial ownership after the date of this Agreement and
prior to the Expiration Date shall be considered "New Shares" and
subject to each of the terms and conditions of this Agreement.

9. Additional Documents. Shareholder and Target hereby covenant and agree to
execute and deliver any additional documents reasonably necessary or desirable
to carry out the purpose and intent of this Agreement.

10. Consent and Waivers. Shareholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Shareholder is a party or pursuant to any rights
Shareholder may have.

11. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force and effect as of the
Expiration Date.

12. Legending of Shares. If so requested by Acquiror, Shareholder agrees that
the Shares and any New Shares shall bear a legend stating that they are subject
to this Agreement and to an irrevocable proxy. Shareholder agrees that she/he
shall not Transfer the Shares or any New Shares without first having the
aforementioned legend affixed to the certificates representing the Shares or
any New Shares.

13. Miscellaneous.

13.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.

13.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by any of the parties without the prior written consent of the
other parties.

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<PAGE>

13.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.

13.4 Waiver. No failure on the part of Acquiror to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part
of Acquiror in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any
other power, right, privilege or remedy. Acquiror shall not be deemed to
have waived any claim arising out of this Agreement, or any power, right,
privilege or remedy under this Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a written
instrument duly executed and delivered on behalf of Acquiror, and any such
waiver shall not be applicable or have any effect except in the specific
instance in which it is given.

13.5 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Acquiror will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies which may be available to Acquiror upon
such violation, Acquiror shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Acquiror at law or in equity.

13.6 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
first-class mail, postage prepaid, to the parties at the following address
(or at such other address for a party as shall be specified by like
notice):

If to Acquiror:

With a copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Andrew Zeif, Esq.

If to Shareholder: To the address for notice set forth on the
signature page hereof

If to Target:

With a copy to: Freeborn & Peters
311 South Wacker Drive
Chicago, IL 60606
Facsimile: (312) 360-6575
Attention: Richard R. Dennerline, Esq.

13.7 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California,
without giving effect to any choice or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State
of California.

13.8 Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement
is brought against Shareholder, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled).

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<PAGE>

13.9 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.

13.10 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.

13.11 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.

ACQUIROR SHAREHOLDER

By:
----------------------------- -----------------------------
Name: Signature
Title:

TARGET -----------------------------
Print Name

By:
----------------------------- Shareholder's Address for Notice:
Name:
Title: -----------------------------

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

Shares beneficially owned:

shares of Target Common Stock

shares of Target Preferred Stock

[SIGNATURE PAGE TO SHAREHOLDER VOTING AGREEMENT]

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<PAGE>

EXHIBIT A

IRREVOCABLE PROXY

The undersigned shareholder of , a Delaware , corporation
("Target"), hereby irrevocably (to the fullest extent permitted by law)
appoints and of , a Delaware corporation
("Acquiror"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to vote
and exercise all voting and related rights (to the full extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Target that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of Target issued or
issuable in respect thereof on or after the date hereof (collectively, the
"Shares"), in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned shareholder of Target as of the date of this Proxy are
listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by each undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the Expiration Date
(as defined below).

This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Shareholder
Voting Agreement dated as of November , 1999 by and among Acquiror, Target
and the undersigned shareholder (the "Voting Agreement"), and is granted in
consideration of Acquiror entering into that certain Agreement and Plan of
Reorganization dated as of November , 1999 (the "Reorganization Agreement"),
by and among Acquiror, GNA Corporation, a Delaware corporation and a wholly-
owned subsidiary of Acquiror ("Sub") and Target. The Reorganization Agreement
provides for the merger of Target with and into Sub in accordance with its
terms (the "Merger") and Shareholder is receiving a portion of the proceeds of
the Merger. As used herein, the term "Expiration Date" shall mean the earlier
to occur of (i) the Effective Time as defined in the Reorganization Agreement
or (ii) the termination of the Reorganization Agreement in accordance with its
terms.

The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting, consent and similar rights of the
undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or
adjourned meeting of shareholders of Target and in every written consent in
lieu of such a meeting:

(i) in favor of approval of the Merger, the execution and delivery by
Target of the Reorganization Agreement and the adoption and approval of the
terms thereof and in favor of each of the other actions contemplated by the
Reorganization Agreement and any action required in furtherance hereof and
thereof;

(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of Target in the
Reorganization Agreement; and

(iii) against the following actions (other than those actions that
relate to the Merger and the transactions contemplated by the
Reorganization Agreement): (A) any merger, consolidation or other business
combination involving Target with any party other than Acquiror or its
respective affiliates; (B) any sale, lease or transfer of more than a
significant part of the assets of Target to any party other than Acquiror
or its respective affiliates (except in the ordinary course of business);
(C) any reorganization, recapitalization, dissolution or liquidation of
Target; (D) any change in a majority of the board of directors of Target;
(E) any amendment to the Certificate of Incorporation of Target; (F) any
material change in the capitalization of Target or Target's corporate
structure; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement or this Voting Agreement.

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<PAGE>

Prior to the Expiration Date, at any meeting of the shareholders of Target,
and in every written consent in lieu of such meeting, the attorneys and proxies
named above will be empowered, and may exercise this proxy, to vote the Shares
in opposition to (i) any Opposing Acquisition (as such term is defined in the
Voting Agreement) and any related transaction or agreement and (ii) any action
which is intended, or could reasonably be expected, to facilitate the
consummation of any Opposition Acquisition.

The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned shareholder may vote the
Shares on all other matters.

Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.

This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically
upon the Expiration Date.

Dated: , 1999 Signature of
Shareholder:

Print Name of Shareholder:

Shares beneficially owned:

shares of Target Common Stock

shares of Target Preferred Stock

C-7
<PAGE>

APPENDIX D

[LETTERHEAD OF CIBC WORLD MARKETS CORP.]

November 29, 1999

The Board of Directors
EMusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, California 94063

Members of the Board:

You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Board of Directors as to the fairness to
EMusic.com Inc. ("EMusic"), from a financial point of view, of the Exchange
Ratio (defined below) provided for in the Agreement and Plan of
Reorganization, dated as of November 29, 1999 (the "Reorganization
Agreement"), by and among EMusic, GNB Corporation, a wholly owned subsidiary
of EMusic ("Sub"), Tunes.com, Inc. ("Tunes"), and certain principal
stockholders of Tunes (the "Principal Stockholders"). The Reorganization
Agreement provides for, among other things, the merger of Sub with and into
Tunes (the "Merger") pursuant to which each outstanding share of the common
stock, par value $0.01 per share, of Tunes ("Tunes Common Stock") will be
converted into the right to receive that number of shares of the common stock,
par value $0.001 per share, of EMusic ("EMusic Common Stock") determined by
dividing (i) 10,600,000 shares of EMusic Common Stock by (ii) the number of
shares of Tunes Common Stock outstanding at the effective time of the Merger
on a fully diluted basis (the number of shares of EMusic Common Stock into
which shares of Tunes Common Stock will be so converted in the Merger, the
"Exchange Ratio"). The Reorganization Agreement further provides that 10% of
the EMusic Common Stock issuable in the Merger will be subject to an escrow
arrangement as more fully described in the Reorganization Agreement and
related escrow agreement.

In arriving at our Opinion, we:

(a) reviewed the Reorganization Agreement and certain related
documents;

(b) reviewed audited financial statements of Tunes for the fiscal years
ended December 31, 1997 and December 31, 1998, and audited
financial statements of EMusic for the fiscal years ended June 30,
1998 and June 30, 1999;

(c) reviewed unaudited financial statements of Tunes for the nine
months ended September 30, 1999 and unaudited financial statements
of EMusic for the three months ended September 30, 1999;

(d) reviewed financial projections prepared by the managements of
EMusic and Tunes;

(e) reviewed the historical market prices and trading volume for EMusic
Common Stock;

(f) held discussions with the senior managements of EMusic and Tunes
with respect to the businesses and prospects for future growth of
EMusic and Tunes;

(g) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to EMusic and Tunes;

(h) reviewed and analyzed certain publicly available information for
transactions that we deemed comparable to the Merger;

D-1
<PAGE>

The Board of Directors
EMusic.com Inc.
November 29, 1999
Page 2

(i) performed a discounted cash flow analysis of Tunes using certain
assumptions of future performance provided to us by the management
of Tunes;

(j) reviewed public information concerning EMusic; and

(k) performed such other analyses and reviewed such other information
as we deemed appropriate.

In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by EMusic,
Tunes and their respective employees, representatives and affiliates. With
respect to forecasts of future financial condition and operating results of
EMusic and Tunes provided to or discussed with us, we assumed, at the
direction of the managements of EMusic and Tunes, without independent
verification or investigation, that such forecasts were reasonably prepared on
bases reflecting the best available information, estimates and judgments of
the managements of EMusic and Tunes. We have neither made nor obtained any
independent evaluations or appraisals of the assets or the liabilities of
EMusic, Tunes or affiliated entities. We have assumed, with your consent, that
the Merger will be treated as a tax-free reorganization for federal income tax
purposes. We are not expressing any opinion as to the underlying valuation,
future performance or long-term viability of EMusic or Tunes, or the price at
which the EMusic Common Stock will trade subsequent to announcement or
consummation of the Merger. Our Opinion is necessarily based on the
information available to us and general economic, financial and stock market
conditions and circumstances as they exist and can be evaluated by us on the
date hereof. It should be understood that, although subsequent developments
may affect this Opinion, we do not have any obligation to update, revise or
reaffirm the Opinion.

As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.

We have acted as financial advisor to EMusic in connection with the Merger and
to the Board of Directors of EMusic in rendering this Opinion and will receive
a fee for our services, a significant portion of which is contingent upon
consummation of the Merger. We also will receive a fee upon the delivery of
this Opinion. We have in the past provided financial services to EMusic
unrelated to the proposed Merger, including having acted as lead managing
underwriter for a secondary offering of Emusic Common Stock, for which
services we have received compensation. In the ordinary course of business,
CIBC World Markets and its affiliates may actively trade securities of EMusic
for their own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.

Based upon and subject to the foregoing, and such other factors as we deemed
relevant, it is our opinion that, as of the date hereof, the Exchange Ratio is
fair to EMusic from a financial point of view. This Opinion is for the use of
the Board of Directors of EMusic in its evaluation of the Merger and does not
constitute a recommendation as to how any stockholder should vote with respect
to any matters relating to the Merger.

Very truly yours,

/s/ CIBC World Markets Corp.

CIBC WORLD MARKETS CORP.

D-2
<PAGE>

APPENDIX E

November 29, 1999

Board of Directors
Tunes.com, Inc.
640 N. LaSalle Street, Suite 560
Chicago, IL 60610

Members of the Board of Directors:

You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Tunes.com, Inc. ("Tunes"), taken as a whole, of
the Conversion Ratio (as defined hereafter) pursuant to the terms of that
certain Agreement and Plan of Reorganization, to be dated as of November 29,
1999 (the "Agreement"), by and among Tunes, EMusic.com, Inc. ("EMusic") and GNB
Corporation ("GNB").

As more specifically set forth in the Agreement, and subject to the terms and
conditions thereof, the Agreement provides for the acquisition of Tunes by
EMusic through the merger (the "Merger") of GNB with and into Tunes, with Tunes
as the surviving company as a wholly-owned subsidiary of EMusic. In the Merger,
among other things, each share of common stock of Tunes, par value $0.01 per
share ("Tunes Common Stock"), outstanding as of the effective time of the
Merger, other than shares held by Tunes, EMusic or affiliates of EMusic, will
be converted into the right to receive a number of shares of EMusic common
stock, par value $0.001 per share ("EMusic Common Stock"), determined by
dividing 10.6 million by the number of shares of Tunes Common Stock outstanding
as of the effective time of the Merger determined on a fully-diluted basis
(including all options, warrants or other rights to acquire Tunes Common Stock
issued and outstanding at the effective time of the Merger) (the "Conversion
Ratio"). Subsequent to the Merger, the EMusic Common Stock will be subject to
certain restrictions on transfer. Additional terms and conditions of the Merger
are more fully set forth in the Agreement.

SG Cowen Securities Corporation ("SG Cowen"), as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of our business, we and our affiliates actively trade the
equity securities of EMusic for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities. We also hold a warrant to purchase shares of Tunes Common
Stock.

We have been engaged to act as exclusive financial advisor to Tunes in
connection with the Merger and to render to the Board of Directors of Tunes in
connection with the Merger an opinion as to the fairness, from a financial
point of view, to the stockholders of Tunes, taken as a whole, other than
EMusic and its affiliates, of the Conversion Ratio. We will receive a fee from
Tunes for providing these services, including this opinion, pursuant to the
terms of our engagement letter with Tunes, dated as of November 16, 1999. A
significant portion of our fee is contingent upon the consummation of the
Merger. SG Cowen and its affiliates in the ordinary course of business have
from time to time provided, and in the future may continue to provide,
investment banking services to Tunes.

In connection with our opinion, we have reviewed and considered such financial
and other matters as we have deemed relevant, including, among other things:

(i) a draft of the Agreement, dated as of November 22, 1999;

E-1
<PAGE>

(ii) audited financial statements of EMusic for the fiscal years
ended June 30, 1997, 1998, and 1999, unaudited financial statements of
EMusic for the first fiscal quarter ended September 30, 1999 and
certain other relevant financial and operating data prepared by EMusic;

(iii) audited financial statements of Tunes for the fiscal years
ended December 31, 1997 and 1998, unaudited financial statements of
Tunes for the third fiscal quarter ended September 30, 1999 and certain
other relevant financial and operating data prepared by Tunes;

(iv) certain publicly available information for EMusic, including
EMusic's Annual Report on Form 10-K for the fiscal year ended June 30,
1999 and Quarterly Report on Form 10-Q for the quarter ended September
30, 1999;

(v) certain publicly available information for Tunes, including the
Registration Statement on Form S-1, dated June 14, 1999, and all
amendments thereto;

(vi) financial projections (the "Analyst Projections") provided in
currently available analyst reports for EMusic;

(vii) certain internal financial analyses, financial forecasts,
reports and other information concerning each of EMusic and Tunes
prepared by the management of EMusic and Tunes, respectively (the
"EMusic Forecasts" and "Tunes Forecasts," respectively);

(viii) discussions we have had with certain members of the
management of each of EMusic and Tunes concerning the historical and
current business operations, financial conditions and prospects of
EMusic and Tunes, respectively, and such other matters we deemed
relevant;

(ix) the reported price and trading histories of the shares of
EMusic Common Stock;

(x) the respective financial conditions of Tunes and EMusic as
compared to the financial conditions of certain other companies we
deemed relevant;

(xi) certain financial terms of the Merger as compared to the
financial terms of certain selected business combinations we deemed
relevant;

(xii) based on the Tunes Forecasts, the cash flows generated by
Tunes on a stand-alone basis to determine the present value of the
discounted cash flows;

(xiii) based on the EMusic Forecasts and Tunes Forecasts, the
potential pro forma financial effects of the Merger; and

(xiv) such other information, financial studies, analyses and
investigations and such other factors that we deemed relevant for the
purposes of this opinion.

In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by Tunes and EMusic, respectively, or which is publicly available, and we have
not undertaken any responsibility for the accuracy, completeness or
reasonableness of, or independently verified, such information. In addition, we
have not conducted any physical inspection of the properties or facilities of
Tunes or EMusic. We have further relied upon the assurance of management of
Tunes that it is unaware of any facts that would make the information provided
to us or which is publicly available incomplete or misleading in any respect.
We have, with your consent, assumed that the Tunes Forecasts and EMusic
Forecasts were reasonably prepared by the management of Tunes and EMusic,
respectively, and reflect the best currently available estimates and good faith
judgments of such management as to the future performance of Tunes and EMusic,

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<PAGE>

respectively. Management of Tunes and EMusic, respectively, have confirmed to
us and we have assumed, with your consent, that the Tunes Forecasts, EMusic
Forecasts and Analyst Projections provide a reasonable basis for our Opinion.
We have not made or obtained any independent evaluations, valuations or
appraisals of the assets or liabilities of Tunes or EMusic, nor have we been
furnished with such materials. With respect to all legal matters relating to
Tunes and EMusic, we have relied on the advice of legal counsel of Tunes. We
have assumed, with your consent, that each share of preferred stock of Tunes
shall be converted into Tunes Common Stock immediately prior to the effective
time of the Merger. We do not express any opinion as to the terms of such
conversion or the effects of any preference. Our opinion is necessarily based
upon economic and market conditions and other circumstances as they exist and
can be evaluated by us on the date hereof. It should be understood that
although subsequent developments may affect our opinion, we do not have any
obligation to update, revise or reaffirm our opinion, and we expressly disclaim
any responsibility to do so.

For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each party
contained in the Agreement are true and correct, that each party will perform
all of the covenants and agreements required to be performed by it under the
Agreement and that all conditions to the consummation of the Merger will be
satisfied without waiver thereof. We have assumed that the final form of the
Agreement will be substantially similar to the last draft reviewed by us. We
have also assumed that all governmental, regulatory and other consents and
approvals contemplated by the Agreement will be obtained and that in the course
of obtaining any of those consents no restrictions will be imposed or waivers
made that would have an adverse effect on the contemplated benefits of the
Merger. You have informed us, and we have assumed, that the Merger (i) will be
recorded as a purchase under generally accepted accounting principles and (ii)
will be treated as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended.

It is understood that this letter is intended for the benefit and use of the
Board of Directors of Tunes in its consideration of the Merger and may not be
used for any other purpose or reproduced, disseminated, quoted or referred to
at any time, in any manner or for any purpose without our prior written
consent. This letter does not constitute a recommendation to any stockholder as
to how such stockholder should vote with respect to the Merger or to take any
other action in connection with the Merger or otherwise. We are not expressing
an opinion as to what the value of EMusic Common Stock will be when issued to
Tunes' stockholders pursuant to the Merger nor as to the fairness of the
Conversion Ratio as it relates to any individual stockholder or class of
stockholders. Furthermore, we are not expressing any opinion as to what the
future price, trading range or value of EMusic Common Stock will be following
the Merger or as to the effects, financial or otherwise, if any, of the
restrictions on transfer imposed on the EMusic Common Stock pursuant to the
Agreement. We have not been requested to opine as to, and our opinion does not
in any manner address, Tunes' underlying business decision to effect the
Merger.

Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date
hereof, the Conversion Ratio is fair, from a financial point of view, to the
stockholders of Tunes, taken as a whole, other than EMusic and its affiliates.

Very truly yours,

SG COWEN SECURITIES CORPORATION

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APPENDIX F

SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

262 APPRAISAL RIGHTS.

(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S)228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251 (other than a merger effected pursuant to
(S)251(g) of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:

(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:

a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.

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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or

(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in

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advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after
the effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.

F-3
<PAGE>

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.

(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 339, L.
'98, eff. 7-1-98.)

F-4
<PAGE>

APPENDIX G

EMUSIC.COM INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS

FEBRUARY 14, 2000

The undersigned stockholder of EMusic.com Inc. acknowledges receipt of the
Notice of Special Meeting of Stockholders and Joint Proxy Statement/Prospectus
relating to EMusic's acquisition of Tunes.com Inc. through the merger of GNB
Corporation with and into Tunes pursuant to an Agreement and Plan of
Reorganization, dated as of November 29, 1999, and the transactions
contemplated thereby, and the undersigned revokes all other proxies and
appoints Gene Hoffman, Jr., Joseph Howell and Peter M. Astiz, and each of them,
the attorneys and proxies for the undersigned, each with full power of
substitution, to attend and act for the undersigned at EMusic's special meeting
of stockholders to be held in the offices of Gray Cary Ware & Freidenrich LLP,
400 Hamilton Avenue, Palo Alto, California, on Monday, February 14, 2000, at
9:00 a.m., local time, and at any adjournments or postponements thereof in
connection therewith to vote and represent all of the shares of EMusic's common
stock that the undersigned would be entitled to vote.

This card provides voting instructions as applicable to the appointed proxies
for shares held of record by the undersigned. If registrations are not
identical, you may receive more than one set of proxy materials. Please sign,
date and return all cards you receive.

THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE. IN THE ABSENCE OF
ANY DIRECTION THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.

SEE REVERSE SIDE

G-1
<PAGE>

[X] Please mark your
votes as in this
example

The Board of Directors recommends a vote FOR adoption of the merger agreement
and approval of the transactions contemplated by the merger agreement.

1. Adoption of the merger agreement and approval of the transactions
contemplated by the merger agreement.

[_] FOR [_] AGAINST [_] ABSTAIN

2. Approval of the adjournment or postponement of the special meeting.

[_] FOR [_] AGAINST [_] ABSTAIN

Signature(s) Date

NOTE: Please sign exactly as name appears above. Joint owners should each sign.
Fiduciaries should add their full title to their signature. Corporations should
sign in full corporate name by an authorized officer. Partnerships should sign
in partnership name by an authorized person.

G-2
<PAGE>

APPENDIX H

TUNES.COM INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS

FEBRUARY 14, 2000

The undersigned stockholder of Tunes.com Inc. acknowledges receipt of the
Notice of Special Meeting of Stockholders and Joint Proxy Statement/Prospectus
relating to the acquisition of Tunes by EMusic.com Inc. through the merger of
GNB Corporation with and into Tunes pursuant to an Agreement and Plan of
Reorganization, dated as of November 29, 1999, and the transactions
contemplated thereby, and the undersigned revokes all other proxies and
appoints Howard A. Tullman and Stuart B. Frankel, and each of them, the
attorneys and proxies for the undersigned, each with full power of
substitution, to attend and act for the undersigned at Tunes' special meeting
of stockholders to be held at the offices of Freeborn & Peters, 311 South
Wacker Drive, Suite 3000, Chicago, Illinois, on Monday, February 14, 2000, at
1:00 p.m., local time, and at any adjournments or postponements thereof in
connection therewith to vote and represent all of the shares of Tunes' common
stock and convertible preferred stock that the undersigned would be entitled to
vote.

THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE. IN THE ABSENCE OF
ANY DIRECTION THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.

SEE REVERSE SIDE

H-1
<PAGE>

[X] Please mark your
votes as in this
example

The Board of Directors recommends a vote FOR adoption of the merger agreement
and approval of the transactions contemplated by the merger agreement.

1. Adoption of the merger agreement and approval of the transactions
contemplated by the merger agreement.

[_] FOR [_] AGAINST [_] ABSTAIN

2. Approval of the adjournment or postponement of the special meeting.

[_] FOR [_] AGAINST [_] ABSTAIN

Signature(s) Date

H-2
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 20. Indemnification of Directors and Officers

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

Item 21. Exhibits and Financial Statement Schedules

II-1
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
5.1)
23.3 Consent of Ernst & Young LLP
23.4 Consent of Richard A. Eisner & Company LLP
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
99.1 Consent of CIBC World Markets Corp.
99.2 Consent of SG Cowen Securities Corporation
</TABLE>
- ------------------
(1) Incorporated by reference to the Registrant's Form 10-SB filed on July 22,
1998
(2) Incorporated by reference to the Registrant's Form 10-SB/A filed on
December 24, 1998
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on July 23, 1999
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-83685) filed on July 23, 1999
(5) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-83685) filed on
September 17, 1999
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on November 22, 1999

Item 22. Undertakings

The undersigned registrant hereby undertakes:

(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of this
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(d) That, for purposes of determining liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration

II-2
<PAGE>

statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;

(e) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to such reofferings by persons
who may be deemed underwriters, in addition to the information called for
by the other Items of the applicable form;

(f) That every prospectus (i) that is filed pursuant to paragraph (b)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;

(g) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request; and

(h) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.

(i) 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.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Redwood
City, State of California, on January 10, 2000.

EMUSIC.COM INC.

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert H. Kohn, Gene Hoffman, Jr, Joseph
H. Howell and Peter M. Astiz, each of them acting individually, as his true and
lawful attorneys-in-fact and agents, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), 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 January 10, 2000
______________________________________ Assistant Secretary
Robert H. Kohn
/s/ Gene Hoffman, Jr President, Chief Executive January 10, 2000
______________________________________ Officer and Director
Gene Hoffman, Jr. (Principal Executive
Officer)
/s/ Joseph H. Howell Executive Vice President January 10, 2000
______________________________________ and Chief Financial
Joseph H. Howell Officer (Principal
Financial and Accounting
Officer)
/s/ Ralph Peer, II Director January 10, 2000
______________________________________
Ralph Peer, II
Director
______________________________________
Tor Braham
Director
______________________________________
Ed Rosenblatt
</TABLE>

II-4
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1 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 (1)
2.2 Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Creative Fulfillment, Inc., GN Acquisition Corporation
and certain other parties dated as of October 8, 1998 (2)
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 (4)
2.4 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)
2.5 Agreement and Plan of Reorganization by and among EMusic.com Inc.,
GNA Corporation, Group K Inc. d.b.a. Cductive and the principal
shareholders of Cductive, dated as of November 15, 1999 (6)
2.6 Agreement and Plan of Reorganization, dated as of November 29, 1999,
among EMusic.com Inc., GNB Corporation and Tunes.com Inc. (included
as Appendix A to the Joint Proxy Statement/Prospectus that is a part
of this Registration Statement)
3.1 Amended and Restated Certificate of Incorporation (5)
3.2 Amended and Restated Bylaws (4)
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Form of Indemnity Agreement (4)
10.2 Common Stock Purchase Agreement dated as of March 30, 1998 with Gary
Culpepper (2)
10.3 1998 Stock Option Plan (2)
10.4 1998 Nonstatutory Stock Option Plan (4)
10.5 1999 Employee Stock Purchase Plan (4)
10.6 Form of Amendment to Investor Rights Agreement dated July 19, 1999
(4)
10.7 Indemnity Escrow Agreement, dated as of November 29, 1999, between
EMusic.com Inc. and Howard A. Tullman, as representative of the
former stockholders of Tunes.com Inc. (included as Appendix B to the
Joint Proxy Statement/Prospectus that is a part of this Registration
Statement)
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
5.1)
23.3 Consent of Ernst & Young LLP
23.4 Consent of Richard A. Eisner & Company LLP
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
99.1 Consent of CIBC World Markets Corp.
99.2 Consent of SG Cowen Securities Corporation
</TABLE>
- ------------------
(1) Incorporated by reference to the Registrant's Form 10-SB filed on July 22,
1998
(2) Incorporated by reference to the Registrant's Form 10-SB/A filed on
December 24, 1998
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on July 23, 1999
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-83685) filed on July 23, 1999
(5) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-83685) filed on
September 17, 1999
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on November 22, 1999

<PAGE>

Exhibit 5.1

[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]

January 11, 2000

Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: EMUSIC.COM INC. REGISTRATION STATEMENT ON FORM S-4

Ladies and Gentlemen:

This opinion is furnished to you in connection with the filing of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), for the registration of 9,097,952
shares (the "Shares") of the Common Stock, par value $0.001 per share, of
EMusic.com Inc., a Delaware corporation (the "Company").

We have acted as counsel for the Company in connection with the issuance of the
Shares pursuant to the Agreement and Plan of Reorganization, dated as of
November 29, 1999, by and among the Company, GNB Corporation, a Delaware
corporation and a wholly-owned subsidiary of the Company, and Tunes.com Inc., a
Delaware corporation (the "Merger Agreement"). We have examined all
instruments, documents and records which we deemed relevant and necessary for
the basis of our opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and the conformity to the originals of all
documents submitted to us as copies.

Based on such examination, and expressly subject to the assumptions and
limitations set forth herein, we are of the opinion that the Shares have been
validly authorized by the Company and that the Shares will be, upon
effectiveness of the Registration Statement and when issued in accordance with
the terms of the Merger Agreement, legally issued, fully paid, and non-
assessable.

We are admitted to practice in the State of California and are not admitted to
practice in the State of Delaware. However, for the limited purpose of our
above opinions, we are generally familiar with the laws of the State of
Delaware as presently in effect and have made such inquiries as we consider
necessary to render these opinions with respect to a Delaware corporation. This
opinion is limited to the laws of the State of California, United States
federal laws and, to the limited extent set forth above, the laws of the State
of Delaware as such laws presently exist and to the facts as they presently
exist. We express no opinion with respect to the effect or applicability of the
laws of any other jurisdiction.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in said
Registration Statement, including the Joint Proxy Statement/Prospectus
constituting a part thereof, as originally filed or as subsequently amended. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules
and regulations promulgated by the Commission thereunder.

Respectfully submitted,

/s/ Gray Cary Ware & Freidenrich LLP
_________________________________
GRAY CARY WARE & FREIDENRICH LLP

<PAGE>

Exhibit 21.1

LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Creative Fulfillment, Inc............................. California
Internet Underground Music Archive, Inc............... California
Group K Inc. d/b/a Cductive........................... New York
GNB Corporation....................................... Delaware
</TABLE>

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-4 of our
report dated July 26, 1999 relating to the financial statements of EMusic.com
Inc. (formerly Goodnoise Corporation), our report dated March 31, 1999 relating
to the financial statements of Creative Fulfilment Inc., and our report dated
July 21, 1999 relating to the financial statements of Internet Underground
Music Archive Inc. ("IUMA") which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.

/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP

San Jose, California
January 10, 2000

<PAGE>

Exhibit 23.3

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 26, 1999, with respect to the consolidated
financial statements of Tunes.com, Inc. and to the use of our report dated June
22, 1998 with respect to the financial statements of Tunes Network, Inc.
included in the Registration Statement on Form S-4 and related Prospectus of
EMusic.com, Inc. for the registration of 9,097,952 shares of its common stock.

/s/ Ernst & Young LLP

Chicago, Illinois
January 10, 2000

<PAGE>

Exhibit 23.4

INDEPENDENT AUDITORS' CONSENT

We consent to the inclusion in the Registration Statement of EMusic.com Inc. on
Form S-4 of our report dated November 19, 1999, on our audit of the financial
statements of Group K Inc. as of December 31, 1998 and 1997 and for the period
June 16, 1997 (inception) through December 31, 1998, the year ended December
31, 1998 and the period June 16, 1997 (inception) through December 31, 1997 and
to the reference to our firm under the caption "Experts".

/s/ Richard A. Eisner & Company, LLP

New York, New York
January 10, 2000

<PAGE>

Exhibit 99.1

[LETTERHEAD OF CIBC WORLD MARKETS CORP.]

The Board of Directors
EMusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, California 94063

Members of the Board:

CIBC World Markets Corp. ("CIBC World Markets") hereby consents to the
inclusion of the opinion of CIBC World Markets dated November 29, 1999 (the
"Opinion") as Appendix D to, and to the reference thereto under the captions
"SUMMARY -- Opinion of EMusic's Financial Advisor" and "THE MERGER -- Opinion
of EMusic's Financial Advisor" in, the Joint Proxy Statement/Prospectus of
EMusic.com Inc. ("EMusic") and Tunes.com, Inc. ("Tunes") relating to the
proposed merger transaction involving EMusic and Tunes. In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.

By: /s/ CIBC World Markets Corp.
___________________________________
CIBC WORLD MARKETS CORP.

New York, New York
January 11, 2000

<PAGE>

Exhibit 99.2

CONSENT OF SG COWEN SECURITIES CORPORATION

We hereby consent to the inclusion of our opinion, dated November 29, 1999, to
the Board of Directors of Tunes.com, Inc. (the "Company") attached as Appendix
E to the Company's Joint Proxy Statement/Prospectus on Form S-4 (the
"Prospectus") and to the references to our firm in the Prospectus under the
headings "Background of the Merger" and "Opinion of Tunes' Financial Advisor."
In executing this consent, we do not admit or acknowledge that SG Cowen
Securities Corporation comes within the class of persons whose consent is
required by Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder, and we do not thereby admit that we are
experts with respect to any part of the Registration Statement under the
meaning of the term "expert" as used in the Securities Act of 1933, as amended,
or the rules and regulations promulgated thereunder.

SG COWEN SECURITIES CORPORATION

By: /s/ M. Ben Howe
___________________________________

Name: M. Ben Howe
Title: Managing Director

January 10, 2000
Boston, Massachusetts