MUSICMAKER COM INC, S-1/A, 1999-07-02

MUSICMAKER COM INC
S-1/A, 1999-07-02
CATALOG & MAIL-ORDER HOUSES

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<PAGE>

As filed with the Securities and Exchange Commission on July 2, 1999

Registration No. 333-72685
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
MUSICMAKER.COM, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware 5961 54-1811721
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)

---------------
1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
(703) 904-4110
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

---------------
Robert P. Bernardi
Co-Chief Executive Officer
musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
(703) 904-4110
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)

---------------
Copies to:
John L. Sullivan, III Andrew J. Sherman
Andrea S. Kaufman David J. Kaufman
Erik J. Lichter Alan J. Schaeffer
Venable, Baetjer and Howard, LLP Katten Muchin & Zavis
2010 Corporate Ridge 1025 Thomas Jefferson St., N.W.
Suite 400 Suite 700
McLean, VA 22102 Washington, DC 20007
(703) 760-1600 (202) 625-3790
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement is effective.

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

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) per Share Price(2) Fee(3)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share 9,660,000 shares $14.00 $135,240,000 $37,597
- -----------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------

(1) Includes 1,260,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(3) Previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

Subject to completion: dated July 2, 1999.

PROSPECTUS

[logo of Musicmaker.com, Inc. appears here]

8,400,000 shares of common stock

$ per share initial public offering price

This is our initial public offering. We seek to sell 5,000,000 shares of our
common stock and one of our stockholders named in this prospectus seeks to sell
3,400,000 shares. Prior to this initial public offering, there has been no
public market for our common stock. We expect our initial public offering price
to be between $12.00 and $14.00 per share. We have filed an application for our
common stock to be quoted on the Nasdaq National Market under the symbol
"HITS."

Offering Information

<TABLE>
<CAPTION>
Per share Total
<S> <C> <C>
Initial public offering price...................................
Underwriting discounts/commissions..............................
Estimated offering expenses.....................................
Net offering proceeds to musicmaker.com, Inc....................
Net offering proceeds to selling stockholder....................
</TABLE>

The underwriters have reserved up to 250,000 shares of our common stock
offered hereby for sale at the initial public offering price to selected
officers, directors, employees, business associates and other persons
associated with musicmaker.com. We have granted the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase a maximum
of 1,260,000 additional shares to cover over-allotments. Because the
underwriters may choose not to exercise their over-allotment option, the
calculations in the table above do not account for exercise of that option.

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

Investing in our common stock involves risks.
See "Risk Factors" section beginning on page 5 of this prospectus.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Ferris, Baker Watts Incorporated

Fahnestock & Co. Inc.

C.E. Unterberg, Towbin
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>

[At the top of the page of the inside front cover, "musicmaker.com" and the
slogan, "Freedom of Choice in Music" appear.]

[Below the slogan appears a box with a list of artists whose songs
musicmaker.com offers on its website. Underneath the list of artists are
pictures of a computer and a custom CD. Above the computer and the custom CD,
there are arrows pointing from text to the pictures and the text reads "Choose
Your Method of Delivery." Below the computer is the text: "Secure MP3
Digital Download" and below the custom CD is the text "Your Custom CD."]
<PAGE>

[On the left side, top third of the second page of the gatefold appears:
Personalize Your Custom CD screen, including the buttons appearing on the top
of the homepage, an explanation of how to personalize the CD and what it will
look like, and icons that can be chosen to be printed on the CD. At the bottom
of the screen are buttons giving the customer the option to make changes or
ignore changes.

To the right of the personalization screen appears: "4. You can Personalize
your CD. Choose the order of your songs, a title and graphic of your choice
for your CD. Your Title will be printed on the CD, as well as on the spines of
the jewel case and back cover. Select a Graphic for the right occasion."]

[Below and to the right of the Personalize Your Custom CD screen, in the
middle of the second page of the gatefold, appears the View/Edit screen
containing the buttons from the top of the homepage. The View/Edit Screen also
has the options to view and to edit the personalized message and art, to view
and edit the content of the CD, and to play all, delete all, change the
sequence or buy the Custom CD.

To the left of the View/Edit screen appears: "5. Check your list to make
sure your selection of songs, title and graphic is correct. Click on Ready to
Buy."]

[Below and to the left of the View/Edit screen the second page of the
gatefold is the order form page. The screen allows the customer to input the
desired quantity and to recalculate the order price. The page shows the order
statement with the product/CD content, quantity, any Insider's Club member's
bonus and the price. The page has a button to complete the order or to get
feedback.

To the right of the order form page appears: "6. Now just fill out your
Order Form so we can start processing your Custom CD. Click on Complete
Order."]
<PAGE>

Prospectus Summary

You should read this summary together with the more detailed information and
financial statements and related notes appearing elsewhere in this prospectus,
including the information under "Risk Factors." Unless otherwise indicated, all
information reflects: a one-for-3.85 reverse stock split effected on April 8,
1999, and a 2.33-for-one stock split effected on June 14, 1999.

Musicmaker.com is a leading provider of customized music CD compilations over
the Internet. Our music library currently contains over 150,000 song titles
licensed from independent record labels. We have recently entered into an
exclusive license agreement with Virgin Holdings, Inc., an affiliate of EMI
Recorded Music, the third largest music company in the world. Our new
relationship with EMI gives musicmaker.com the potential for access to tracks
from EMI artists and the extensive music catalog of EMI. Under our agreement
with EMI, we were granted an exclusive five-year worldwide license to music
content that EMI makes available for use in online sales of our custom CDs.
Under our agreement with EMI, EMI may also grant us a non-exclusive license to
digitally download tracks from its music catalog once a standard for
downloading is approved by the record industry. EMI now holds a controlling
interest in our common stock.

Our customers can search our extensive online music library and sample and
select songs to make their own customized compilation CDs. Our custom CDs can
be further personalized by including selected graphics and consumer provided
text. Our custom CDs have sound quality equivalent to pre-recorded CDs
available at retail stores and are sold at competitive prices. We manufacture
and ship our custom CDs from our state-of-the-art production facility generally
within 24 hours of order. Our privately developed technology, which can
digitally store approximately five million songs, provides advanced
search/retrieval capabilities and automates the high speed production of our
custom CDs. The U.S. Patent and Trademark Office has notified us that they will
issue a patent for our storage and production system.

Our customers can also download selected music from our existing music
library using:

. Secure-MP3, an MP3 format designed to discourage piracy;

. Liquid Audio format; or

. MS-Audio 4.0, a compression format developed by Microsoft Corporation.

Musicmaker.com has amassed a library of music in multiple genres including
significant catalogs of jazz, blues and classical music. Musicmaker.com has
music content agreements with over 100 independent record labels. Artists in
our music library currently include:

. Creedence Clearwater . The Beach Boys . Ziggy Marley
Revival . Miles Davis . Johnny Cash
. Jerry Lee Lewis . John Coltrane . Dionne Warwick
. Little Richard . The Yardbirds with . Muddy Waters
. Frank Zappa Eric Clapton . The Blues Brothers
. Taylor Dayne . Blondie . The Kinks
. The Ramones . Kansas . The Band

Under our exclusive license agreement, EMI may grant musicmaker.com music
content from its labels which include Blue Note, Capitol Records, Chrysalis,
EMI Records and Virgin Records.

1
<PAGE>

We sell our custom CDs through our website as well as the websites of record
labels, music retailers and online broadcasters, including Platinum
Entertainment, Inc., Trans World Entertainment Corporation and Spinner
Networks, Inc. Additionally, we have a marketing alliance with The Columbia
House Company, a leading record and video club, jointly owned by Sony Music
Entertainment, Inc. and Time Warner Inc. This alliance currently allows us to
exclusively market our custom CDs to Columbia House's 15 million members,
including those without Internet access, through Columbia House's websites and
direct marketing campaigns. Musicmaker.com has also entered into a similar
exclusive marketing alliance with Audio Book Club, Inc., a direct marketer of
audio books through the Internet and club member catalogs, with over 1.5
million audio buyers and users. We intend to seek marketing alliances with
additional music and non-music retailers.

Our custom CDs allow customers to compile their favorite songs on one CD. We
believe that our custom CDs also benefit record labels by providing an
additional source of revenue for songs in its catalog that are not on any
current music charts. We believe that the multimedia features available through
the interactive environment of the Internet make it an ideal medium for
promoting, marketing and selling our custom CDs and digital downloads.

Musicmaker.com believes that the following trends provide us an opportunity
to achieve industry and consumer acceptance of our custom CDs and digital
downloads:

. Growth in sales of CD singles.

. Growth of the Internet as a viable retail medium.

. Increasing affluence of the over 30 generation.

. Continued prominence of classic rock albums.

. Record label desire to diversify distribution methods while protecting
intellectual property rights.

Our management team has significant experience in both the music and
technology industries. Our officers and directors include the:

. Former Chairman and Chief Executive Officer of PolyGram Records, Inc.
and President of Mercury Records Corporation.

. Former President of Warner Music Media and RCA Direct Marketing,
Inc./BMG Direct Marketing, Inc.

. Senior Vice President of Worldwide New Media for EMI Recorded Music.

. Former Vice President of Warner Music Enterprises and PolyGram Group
Distribution, Inc.

. Former Vice President of Strategic Planning and New Business Development
at Comedy Central.

. Co-founder of PictureTel Corporation and TranSwitch Corporation.

We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:

. Offer a new way to buy licensed, customized music.

. Offer most extensive selection of music for custom compilation and
digital downloading.

. Increase website traffic through strategic alliances and multiple
hyperlinks.

. Create strong brand awareness.

. Establish genre-specific user communities.

. Capitalize on cross-selling opportunities.

. Leverage technologies for additional formats.

. Expand international presence.

Musicmaker.com, Inc. is a Delaware corporation incorporated on April 23,
1996. Our principal executive office is located at 1831 Wiehle Avenue, Suite
128, Reston, Virginia 20190, and our telephone number is (703) 904-4110. Our
World Wide Web site is www.musicmaker.com. The information on our website is
not incorporated by reference into this prospectus.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Common stock offered by musicmaker.com.................. 5,000,000 shares

Additional common stock offered by selling stockholder.. 3,400,000 shares
Common stock outstanding after this offering............ 29,944,714 shares

Does not include........................................ . 743,169 shares of
common stock
underlying
outstanding warrants
to be issued to
Ferris, Baker Watts,
Incorporated and
Fahnestock & Co. Inc.
. 1,260,000 shares of
common stock that may
be issued upon
exercise of the
underwriters'
overallotment option.
. 1,806,041 shares of
common stock
underlying
outstanding common
stock warrants.
. 1,697,929 shares of
common stock
underlying warrants
issued upon
conversion of the
outstanding preferred
warrants.
. 2,044,882 shares of
common stock
underlying stock
options issued under
our stock option plan
and outstanding as of
the date of this
prospectus.
. 2,155,118 additional
shares reserved for
issuance under our
stock option plan.
Directed shares......................................... . 250,000 shares
reserved by the
underwriters to be
offered at the
initial public
offering price to
employees, business
associates and
selected other
persons associated
with musicmaker.com.
Use of proceeds......................................... . Pay advances to
record labels in
connection with
acquiring additional
music content.
. Expand advertising,
marketing and
promotional efforts
with existing and
future strategic
marketing partners.
. Maintain and upgrade
technological
systems.
. Fund working capital
and general
corporate purposes.
. Repayment of
$1,000,000 demand
promissory note.
See "Use of Proceeds."

Proposed Nasdaq National Market symbol.................. "HITS"
</TABLE>

3
<PAGE>

Summary Financial Data

The following table summarizes our financial data. You should read this
information together with our consolidated financial statements and related
notes appearing elsewhere in this prospectus. As indicated in the table, we
have presented some of our financial data:

Pro forma to give effect to:

. The issuance of 15,170,860 shares of common stock in exchange for
licensing rights with EMI valued at approximately $87 million.

Pro forma as adjusted to give effect to:
. The sale of 5,000,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the midpoint
of the range.
. The application of the net proceeds of this offering.
. The automatic conversion, upon completion of the offering, of all
outstanding shares of preferred stock into 1,908,729 shares of common
stock.

. The automatic conversion, upon completion of the offering, of all
outstanding convertible notes into 968,252 shares of common stock which
include $2,000,000 in principal amount of convertible notes outstanding
at March 31, 1999.
. The expensing of all capitalized loan fees related to the convertible
notes which include $227,501 capitalized at March 31, 1999.

Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Period from Three months
April 23, 1996 Year ended December 31, ended March 31,
(inception) to ------------------------ ------------------------
December 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160
Cost of sales........... 2,590 450,455 677,700 232,800 463,283
--------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629
--------- ----------- ----------- ----------- -----------
Total operating
expenses............... 370,410 1,613,177 4,068,910 1,035,104 1,337,737
--------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860)
Net interest (expense)
income................. (2,667) (33,957) 17,815 5,250 (23,867)
--------- ----------- ----------- ----------- -----------
Net loss................ $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
========= =========== =========== =========== ===========
Basic and diluted net
loss per share(1)...... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27)
========= =========== =========== =========== ===========
Weighted average shares
outstanding(1)......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561
========= =========== =========== =========== ===========
Pro forma basic and
diluted net loss per
share(1)............... $ (0.26) $ (0.13)
=========== ===========
Pro forma weighted
average shares
outstanding(1)......... 21,842,134 20,884,288
=========== ===========
</TABLE>

Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................. $ 1,685,234 $1,685,234 $60,185,234
Working capital........................... 225,558 225,558 58,725,558
Total assets.............................. 4,444,315 91,069,925 149,342,424
Debt, long-term portion................... 2,214,286 2,214,286 214,286
Convertible preferred stock............... 2,817,888 2,817,888 --
Total stockholders' (deficit) equity...... (2,214,599) 84,411,011 147,501,398
</TABLE>
- --------
(1) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.

4
<PAGE>

RISK FACTORS

You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before making any investment
decision. The risks described below are the most significant factors that make
an investment in musicmaker.com speculative and risky. As a result of any of
the risks we encounter, our business, financial condition and results of
operations could be materially adversely affected. In addition, any of these
adverse effects could cause the trading price of our common stock to decline
and you may correspondingly lose all or some portion of your investment in us.

We have a limited operating history, have incurred losses and may continue to
realize losses. We also have an accumulated deficit that may continue to
increase.

We began commercial operations in November 1997. Accordingly, we have a
limited operating history and we face all of the risks and uncertainties
encountered by early stage companies in new, unproven and rapidly evolving
markets. Among other things, our business will require:

. Expanding the content available in our online music library.

. Increasing awareness of the musicmaker.com brand.

. Increasing our customer base.

. Attracting and retaining talented management, technical, marketing and
sales personnel.

If we are unable to achieve any of these goals, or other requirements for
the successful growth of an early stage Internet commerce company, our
business, financial condition and results of operations may be materially
adversely affected.

We have had net losses in each period since we began operations. We
anticipate that these losses may continue for the foreseeable future as our
operating expenses continue to increase. We reported a net loss of $1,804,727
for the quarter ended March 31, 1999. We reported net losses of $4,654,767 for
the year ended December 31, 1998 and $2,084,157 for the year ended
December 31, 1997. As of March 31, 1999, we had an accumulated deficit of
$9,082,395. In connection with our license agreement with EMI, we will
amortize approximately $17,300,000 in each of the next five years. There can
be no assurance that we will ever achieve profitable operations or generate
significant revenue with our current products and strategy. Investors seeking
further financial data and analysis should review the consolidated financial
statements included in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The success of our business and growth of our online music library
significantly depend upon our license agreement with EMI.

We believe that our license agreement with EMI is a critical component of
our operations and is necessary to our achievement of any significant
commercial success. We currently have exclusive rights under a five-year
worldwide license to include in online sales of our custom CDs the content
that EMI elects to make available. EMI is under no obligation to grant us any
content at all and has not provided any content to date. Should EMI decide to
make any of its music content available to musicmaker.com, our use of that
content may be severely limited and restricted by EMI. EMI can also revoke or
terminate any rights to music content previously granted. Our exclusive rights
under the license agreement automatically become non-exclusive upon the
occurrence of triggering events contained in our agreement. Our agreement does
not limit or prevent EMI or any of its affiliates from offering directly to
the public custom CDs manufactured by them, independent of musicmaker.com, nor
does it obligate EMI to grant us any music for digital downloading.

5
<PAGE>

In the event of a termination of our EMI license agreement, any failure of
EMI to provide substantial or popular music content, or the occurrence of an
event making our rights non-exclusive, our business, results of operations and
financial condition will be materially adversely affected. We may not be able
to negotiate a comparable agreement with other major labels, on terms
favorable to us, if at all. We must obtain licenses for commercially popular
music titles in a timely fashion to meet public demand.

In addition to our EMI license agreement, we also rely upon our license
agreements with over 100 independent record labels as well as our ability to
enter into additional agreements for music content. We cannot be sure of the
effect our license agreement with EMI will have upon our existing content
alliances or on our ability to enter into additional content agreements,
specifically with additional major record labels. See "Business--Music
Content."

We need to develop and increase public recognition of the musicmaker.com
brand.

Our future success and growth significantly depend upon our promotion and
favorable consumer perception of the musicmaker.com brand. Increased
recognition and awareness of the musicmaker.com brand will largely depend upon
our advertising and promotional efforts, our strategic marketing alliances,
and our continued provision of a high quality product and high level of
customer service. There can be no assurance that these efforts will result in
increased brand recognition, or if brand recognition is increased, that we
will experience a corresponding increase in our sales.

The success of our business significantly depends on continued growth of
online commerce.

Purchasing products and services over the Internet is a new and emerging
market. Our future revenues and profits are substantially dependent upon
widespread consumer acceptance and use of the Internet and other online
services as a medium for commerce. Rapid growth of the use of the Internet and
other online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce. Demand for and market acceptance of recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there are few proven products and services. For us to
grow, consumers who have historically used traditional means of commerce will
instead need to purchase products and services online, and as a result the
custom CD and digitally downloaded music markets may not be viable without the
growth of Internet commerce.

Our operations significantly depend upon maintenance and continued improvement
of the Internet's infrastructure.

The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, bandwidth, data capacity
and security. Improvement of the Internet's infrastructure will also require
the timely development of complementary products, such as high-speed modems,
to provide reliable Internet access and services.

The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could face similar
outages and delays in the future. Outages and delays are likely to affect the
level of Internet usage, the level of traffic on our website and the number of
purchases on our website. In addition, the Internet could lose its viability
as a mode of commerce due to delays in the development or adoption of new
standards to handle increased levels of activity or due to increased
government regulation. The adoption of new standards or government regulation
may also require us to incur substantial compliance costs.

6
<PAGE>

Sale of custom CDs and digital delivery of music online is novel and unproven.

Musicmaker.com is based on a novel and unproven business model. It is
impossible to predict the degree to which consumers will use the
musicmaker.com service and the level of consumer acceptance for our custom
CDs. It is also difficult to anticipate the level of acceptance of our
distribution model by additional record labels, specifically additional major
record labels. We will be successful only if consumers and record labels
respond favorably to our business model and our custom CDs and digitally
downloaded music.

Factors influencing consumers' acceptance of our custom CDs and digitally
downloaded music include:

. Our ability to provide high quality custom CDs and digitally downloaded
music at competitive prices.

. Our maintenance of a user-friendly ordering process and a high level of
customer service.

. Consumers' desire to conduct online commerce, specifically their demand
for custom CDs.

Factors influencing record labels' acceptance of our business model include:

. The belief that sales of custom CDs and digitally downloaded music will
enable record labels to gain market exposure for artists and titles in
their catalog that are not on any current music charts.

. The belief that custom CDs will generate additional revenue without
adversely affecting traditional distribution methods and existing retail
pricing for CDs.

. The belief that musicmaker.com will be able to assist in the protection
of record label's intellectual property rights.

Should we encounter difficulty with any of the factors above, or other
factors associated with consumer or record label acceptance of our business
model, it is possible that we will never achieve profitability. See
"Business--musicmaker.com Strategy."

Intense competition for online music sales and continued entry by parties with
greater resources could harm our financial performance and industry position.

The market for online commerce is extremely competitive, and we believe
competition, particularly in connection with online music sales, will continue
to grow and intensify. Our most visible custom compilation competitors
currently include CustomDisc.com, CDuctive, and amplified.com. Although our
primary focus is on sales of custom, rather than pre-recorded music, CDs, we
may ultimately compete with existing online websites that provide sales of
pre-recorded music on the Internet. Online competitors include CDnow, Inc.,
Amazon.com, Inc., barnesandnoble.com inc., Columbia House and BMG Music
Service. CDnow purchased SuperSonic Boom, a custom compilation provider, in
June 1998.

We also face significant competition in the growing market to provide
digitally downloaded music, specifically for music files in MP3 format.
Digitally downloaded music can currently be found on the websites of existing
online music retailers, artists and record labels as well as catalogs of songs
provided by Internet portals such as Lycos. Our most visible competitors for
digitally downloaded music include GoodNoise Corporation (recently renamed
EMusic.com) and MP3.com. We expect the competition to provide MP3 files to
intensify with further entry by additional record labels, artists and portals,
including those with greater resources and music content than musicmaker.com.
In February 1999, the five major record labels announced that they have joined
with IBM to conduct a market trial of a digital distribution system, providing
over 1,000 albums to cable subscribers in the San Diego area. In May 1999,
Matsushita Electric Industrial Co. Ltd., AT&T Corp., BMG Entertainment and
Universal Music Group announced an alliance to develop and test technology for
secure digital distribution of music to personal computers and new digital
music playback devices. In June 1999, media company Cox Enterprises Inc.
announced an investment in and joint venture with MP3.com. We expect
additional market trials and alliances by technology and music industry
participants to continue as the music industry attempts to integrate emerging
technology into its existing distribution methods. See "Risk Factors--Our
industry has encountered and will continue to encounter rapid and significant
changes in music distribution methods."

7
<PAGE>

In addition to competition encountered on the Internet, we face competition
from traditional music retail chains and megastores, mass merchandisers,
consumer electronics stores, music clubs, and a number of small custom
compilation start-up companies. We could also face competition from record
companies, multimedia companies and entertainment companies that seek to offer
recorded music either directly to the public or through strategic ventures and
partnerships. In April 1999, Universal and BMG, which collectively control
approximately 45% of the U.S. music market, announced a joint venture to
promote and sell their pre-recorded CDs through a series of Internet websites
organized by music categories. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities and Sony decided to make its music content available for
downloading from the Internet using Microsoft's multimedia software MS-Audio.
In June 1999, Sony announced a partnership with Digital On-Demand in which
Sony will make its music catalog available for digital delivery to retailers
through in-store kiosks.

Many of our current and potential competitors in the Internet commerce and
music businesses have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger existing customer bases than musicmaker.com. For example, should record
labels, including affiliated entities of EMI, decide to compete with us on
their own or through others by offering custom CDs over the Internet or by
making their music available for digital downloads, we would be at a
significant disadvantage from a music library selection standpoint. Under our
agreement with EMI, EMI can grant us non-exclusive rights to selected music
content for digital downloading, in their sole discretion, once an industry-
wide, secure format is developed by the Secure Digital Music Initiative. If
EMI also grants licensing rights to our competitors, competition for digital
downloading could increase. Our competitors may be able to respond more
quickly to new or emerging technological change, competitive pressures and
changes in customer demand. As a result of their advantages, our competitors
may be able to limit or curtail our ability to successfully compete in the
online music industry. The competitive pressures that we encounter could
materially adversely affect our business, financial condition and operating
results. See "Business--Competition."

We are significantly dependent upon our existing marketing alliances and our
ability to enter into future alliances.

We believe that future marketing of our custom CDs is heavily dependant upon
our existing strategic marketing alliances. We anticipate that our ability to
distribute print advertisements, promote the musicmaker.com brand name and
ultimately sell custom CDs would be materially adversely affected by
contractual difficulties associated with, or the termination of, our existing
marketing alliances.

We especially rely upon our current marketing alliance with Columbia House.
Columbia House may terminate our alliance upon not less than thirty days
notice if Mr. Puthukarai ceases to be musicmaker.com's President and Chief
Operating Officer and Columbia House deems his replacement incompatible with
their interest, or Columbia House determines after the first six
musicmaker.com promotional mailings to its members that its financial returns
do not justify continuing the relationship. Columbia House may choose to enter
into non-exclusive marketing agreements with our competitors if they offer a
significant repertoire of music unavailable through musicmaker.com. Expiration
and failure to renew our alliance with Columbia House on similar terms could
also cause our exclusive rights under our EMI license agreement to
automatically become non-exclusive.

Our future success and development of the musicmaker.com brand name is also
heavily dependant upon our ability to enter into additional marketing
alliances and hyperlink arrangements with music and entertainment companies,
Internet service providers, and Internet search engines. There is no assurance
that we will be able to develop future strategic alliances on terms favorable
to us, if at all. Our inability to enter into marketing alliances in the
future could materially adversely affect the promotion of our musicmaker.com
brand and our custom CDs. See "Business--Marketing."

8
<PAGE>

Our industry has encountered and will continue to encounter rapid and
significant changes in music distribution methods.

New ways of selling music digitally could radically alter the established
order of artists, publishers, distributors, retailers and media companies that
use current music distribution methods. Early adopters are currently
performing market trials with high quality, open format MP3 downloaded music
files--some posted legally by artists or record labels on their own websites,
others posted illegally on sites that have pirated intellectual property owned
by the major and independent labels. A portable device, the Rio, that plays
MP3 downloaded music files is now available to consumers.

In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which uses IBM software, will allow
approximately 1,000 cable subscribers in San Diego to download music from a
library of 1,000 album titles and several hundred song titles provided by the
major record labels. The market trial was viewed by many as the first step
taken by the major record companies to consider the sale of digital music
online. In addition, Microsoft Corporation is currently trying to sign up
artists and record labels for its new compression software MS-Audio. The MS-
Audio distribution method is intended to compete with MP3 and other formats.
Microsoft claims this technology has improved sound quality and faster
downloading. AT&T Corp. has similarly developed its a2b proprietary format for
downloading music. Musicmaker.com is uncertain which distribution format will
achieve market acceptance.

A task force of record companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, is attempting
to develop security and delivery standards by which songs available in digital
format can be disseminated without infringing upon copyright or other
intellectual property rights. In May 1999, Matsushita Electric Industrial Co.
Ltd., AT&T Corp., BMG Entertainment and Universal Music Group announced an
alliance to develop a platform for digital delivery within the work of the
Secure Digital Music Initiative. In May 1999, RealNetworks, Inc. announced the
introduction of its RealJukebox which permits recording and playback of music
CDs and digital downloads through a user's PC as well as the customization of
user playlists. In June 1999, the Secure Digital Music Initiative announced
completion and adoption of specifications for portable devices for digital
music. If a proprietary music delivery format or playback device receives
widespread industry and consumer acceptance, we will be required to license
additional technology and information from third parties. There can be no
assurance that this third-party technology and information will be available
to us on commercially reasonable terms, if at all.

We have made a business decision to provide licensed music content over the
Internet and to license our content from labels in a traditional manner to
ensure compliance with existing copyright laws. The acceptance and integration
of any of these new methods of music distribution, without sufficient
protection of intellectual property or industry uniformity, could materially
adversely affect our business, financial condition and results of operations.
Increased availability of high bandwidth capacity could further alter existing
distribution methods.

We have expanded since beginning our operations and anticipate a period of
rapid growth which may be difficult to manage and could strain our resources.

Since beginning commercial operations in November 1997, we have rapidly
expanded our operations. While we anticipate continued expansion of our
operations for the foreseeable future, this growth may place considerable
strain on our existing resources and technology, as well as our management,
technical, marketing and sales personnel. In order to adequately manage our
growth, it will be necessary to continue to implement our strategy and to
assess and upgrade the systems and resources which support our operations. If
we are unable to manage our growth effectively, our business, financial
condition and results of operations may be materially adversely affected. See
"Business--musicmaker.com Strategy."

9
<PAGE>

We may encounter security risks associated with our business on the Internet.

We are potentially vulnerable to computer break-ins, "hackers," credit
fraud, viruses and other similar disruptive problems caused by our customers
or unauthorized third parties. These disruptions could result in interruption,
delay or possible cessation of service to our customers. Unauthorized activity
on our network or website could also result in potential misappropriation of
confidential information or customer data. If any misappropriation occurs, we
could incur significant litigation expense to assert our property rights or to
defend possible claims of misuse of, or failure to secure, consumers' personal
information.

Consumers currently use their credit cards to make online purchases. We rely
on licensed encryption and authentication technology to secure transmission of
confidential information, including credit card numbers. It is possible that
advances in computer capabilities and technology could result in a compromise
or breach of the technology we use to protect customer transaction data.
Security concerns related to our business and the online industry generally
may deter customers and potential customers from using the Internet as a means
of commerce. Security breaches could also expose us to potential liability to
customers, record labels and others and could inhibit the growth of the
Internet as a merchandising medium.

We may not be able to keep up with technological advancements.

The market for providing custom CDs and digitally downloaded music on the
Internet, and for Internet commerce generally, is characterized by rapid
change, evolving industry standards and the frequent introduction of new
technological products and services. The introduction of new technology,
products, services or standards may prove to be too difficult, costly or
simply impossible to integrate into our existing systems. Moreover,
innovations could render our existing or any future products and services
obsolete. Our ability to remain competitive will also depend heavily upon our
ability to maintain and upgrade our technology products and services. We must
continue to add hardware and enhance software to accommodate any increased
content and use of our website. If we are unable to increase the data storage
and processing capacity of our systems at least as fast as the growth in
demand, our website may fail to operate at an optimal level for unknown
periods of time. Any difficulty keeping pace with technological advancements
could hurt growth of our business, retention of our customers and may
materially adversely affect our business, financial condition and results of
operations.

Risk of music storage and fabrication system failure.

Our business heavily depends upon our ability to maintain our computer and
telecommunications equipment in effective working order. Expansion of our
storage and fabrication systems has not been tested in actual operations and
may not be able to handle a large increase in customer demand or a significant
increase in our online music library. The strain associated with increased
demands upon our systems may result in reduced quality of our customer service
and products or potential system failure. Any interruption, damage to, or
failure of our systems could have a material adverse effect on our business,
financial condition and results of operations.

Substantially all of our computer and telecommunications operations are
located at our facility in Reston, Virginia. We currently do not maintain a
redundant website. We also do not lease space on another server that would
perform our website functions in the event of a system failure. Nor do we have
an off-site back-up of our music library. In the event of a catastrophic loss
at our Reston facility resulting in damage to, or destruction of, our computer
and telecommunications systems, we would have a material interruption in our
business operations.

We depend upon intellectual property rights and risk having our rights
infringed.

We consider our trademarks, trade secrets and similar intellectual property
to be a valuable part of our business. To protect our intellectual property
rights, we rely upon copyright, trademark, patent and trade secret laws, as
well as confidentiality agreements with our employees and consultants. There
can be no assurance that our use of these contracts and the application of
existing law will provide sufficient protection from misappropriation or
infringement of our intellectual property rights. It is possible that others
will develop and

10
<PAGE>

patent technologies that are similar or superior to that of musicmaker.com.
There can also be no assurance that third parties will not claim infringement
by us with respect to others' current or future intellectual property rights
or trade secrets. It is also possible that third parties will obtain and use
our content or technology without authorization.

We may encounter year 2000 risks.

The year 2000 issue is the result of computer programs written using year
identifiers consisting of two digits, rather than four. Use of two digits to
identify years may cause systems to recognize a date using "00" as the year
1900, rather than the year 2000. The year 2000 issue could result in system
failures, or miscalculations causing disruption to the operations of many
businesses. We have not verified that the companies doing business with us are
year 2000 compliant. Significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problem of musicmaker.com, our current and any future strategic
marketing partners, our vendors or our users could have a material adverse
effect on our business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 System Costs."

We may be exposed to liability for content retrieved from our website.

Our exposure to liability from providing content on the Internet is
currently uncertain. Due to third party use of information and musical content
downloaded from our website, we may be subject to claims for defamation,
negligence, copyright, trademark or patent infringement or other theories
based on the nature and content of online materials. Our exposure to any
related liability, particularly for claims not covered by insurance, or in
excess of any insurance coverage, could have a material adverse effect on our
business, financial condition and results of operations. Liability or alleged
liability could further harm our business by diverting the attention and
resources of our management and by damaging our reputation in our industry and
with our customers.

We depend upon the services of key personnel.

Our future success depends heavily upon the continued service and industry
relationships of our key senior management personnel, including, but not
limited to:

. Robert P. Bernardi, our Chairman of the Board of Directors and Co-Chief
Executive Officer.

. Devarajan S. Puthukarai, our President, Co-Chief Executive Officer,
Chief Operating Officer and Director.

. Irwin H. Steinberg, our Vice Chairman of the Board of Directors and a
consultant to musicmaker.com.

Any departure by key senior management personnel may have a material adverse
effect upon our business, financial condition and results of operations. Under
the terms of our agreements, Mr. Puthukarai's departure could materially
adversely affect our relationships with Columbia House and EMI. See
"Business--Marketing" regarding Columbia House, see "Business--Music Content"
regarding EMI. Investors seeking biographical information regarding our
executive officers and directors should review "Management."

We depend upon hiring and retaining qualified employees.

Our current and future operations significantly depend upon our ability to
attract, retain and motivate highly qualified, managerial, technical,
marketing and sales personnel. Competition for qualified personnel is intense,
particularly in the Northern Virginia employment market. There can be no
assurance that we will be able to retain our existing employees or attract,
retain and motivate highly qualified personnel in the future. Inability to
retain or attract qualified personnel could impair growth of our business,
promotion of our musicmaker.com brand and products, and materially adversely
affect our business, financial condition and results of operations.

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<PAGE>

Regulation of Internet domain names is uncertain.

We currently hold the Internet domain name "musicmaker.com." Domain names
generally are regulated by Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to
change. Regulatory bodies could establish additional Internet address
components, appoint additional companies or agencies to assign domain names or
modify the requirements for holding domain names. Recently, the Internet
Corporation for Assigned Names and Numbers, an entity that manages the United
States government oversight of domain name registration, announced that five
new companies, including America Online, will be permitted to assign internet
addresses. As a result of these and other changes, we may not acquire or
maintain the musicmaker.com domain name in all of the countries in which we
conduct or expect to conduct business. The relationship between regulations
governing domain names and laws protecting trademarks and similar intellectual
property rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other intellectual property rights.

Our industry may be subject to increased government regulation.

As commerce conducted on the Internet continues to evolve, federal, state or
foreign agencies may adopt regulations or impose new taxes intended to cover
our business operations. These agencies may seek to regulate areas including
user privacy, pricing, content and consumer protection standards for our
products and services. Compliance with additional regulation could hinder our
growth or prove to be prohibitively expensive. It is also possible that the
introduction of additional regulations could expose companies involved in
Internet commerce, or the provision of content over the Internet, to
significant liability. If enacted, these government regulations could
materially adversely affect the viability of Internet commerce, generally, as
well as our business, financial condition and results of operations.

Virgin Holdings, Inc. beneficially owns a controlling interest in
musicmaker.com's voting securities.

Virgin Holdings, Inc., an affiliate of EMI, will beneficially own 39.3% of
our outstanding shares of common stock following the completion of this
offering and 37.7% if the underwriters' overallotment option is exercised in
full. As a result, Virgin Holdings will exercise significant control over all
matters requiring stockholder approval. Under the terms of a stockholders'
agreement executed by Messrs. Bernardi, Puthukarai, Steinberg, Rho Management
Trust I, Virgin Holdings and RHL Ventures LLC, Virgin Holdings will be
entitled to designate three members to the Board of Directors. The
concentrated holdings of a single stockholder and the presence of three
designees on the Board of Directors may result in a delay or the deterrence of
possible changes in our control, which may reduce the market price of our
common stock. See "Principal Stockholders."

Our international expansion may create compliance and operational
difficulties.

We intend to expand our business into international markets. In the event
that we conduct international expansion, we will encounter many of the risks
associated with international business expansion, generally. These risks
include, but are not limited to, language barriers, changes in currency
exchange rates, political and economic instability, difficulties with
regulatory compliance and difficulties with enforcing contracts and other
legal obligations. See "Business--musicmaker.com Strategy."

Shares held by our current stockholders may adversely affect our stock price.

We will have 29,944,714 shares of common stock outstanding after this
offering. The common stock sold in this offering will be freely tradable
except for any shares purchased by "affiliates" as that term is defined in
Rule 144, under the Securities Act of 1933. Our common stock sold prior to the
offering and other securities sold prior to the offering, including securities
automatically converting into common stock upon completion of this offering
are "restricted securities" as that term is defined in Rule 144. In addition,
the following securities are outstanding and, upon exercise of their
corresponding purchase rights and the issuance of common stock, unless
registered, may only be sold under Rule 144 or an exemption from registration.

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<PAGE>

. Under our stock option plan, options to purchase 2,044,882 shares of common
stock are issued and outstanding and upon exercise, the underlying common
stock may be freely traded subject to the limitations imposed by Rule 701
of the Securities Act. An additional 2,155,118 shares of common stock are
reserved for issuance under our stock option plan.

. 1,806,041 common stock warrants outstanding, 1,697,929 common stock
warrants to be issued upon conversion of the outstanding preferred warrants
and 743,169 common stock warrants to be issued to Ferris, Baker Watts,
Incorporated and Fahnestock & Co. Inc. in connection with this offering.
The holders of the warrants may sell shares of common stock acquired upon
exercise no earlier than six months from the date of issuance, in
accordance with, and as limited by, Rule 144.

Stockholders holding approximately 24.6 million shares or approximately 99%
of our outstanding common stock have agreed not to offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any musicmaker.com securities currently held without
prior written consent of Ferris, Baker Watts, Incorporated for a period of 180
days. Further sales of common stock under Rule 144 or otherwise, and the
introduction of these shares into the public market could materially adversely
affect the market price of our common stock. See "Shares Eligible for Future
Sale."

Our management will have broad discretion in applying the net proceeds of this
offering.

Assuming an initial offering price of $13.00 and after deducting
underwriting discounts and commissions and other expenses of the offering, we
will receive net proceeds of $58,500,000. We have not yet determined the
specific dollar amount of net proceeds to be allocated to any of the possible
uses indicated in "Use of Proceeds." Accordingly, our management will have
broad discretion in applying the net proceeds of the offering. Management's
allocation of the net proceeds will affect how our business evolves. There can
be no assurance that management will choose to spend these proceeds in areas
that benefit our business. In addition, there can be no assurance that
management will choose to allocate proceeds to further our current business
strategy. Management's failure to do so could have a material adverse effect
on our business, financial condition and results of operations. See "Use of
Proceeds."

Investors purchasing common stock in this offering will experience immediate
and substantial dilution.

The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after this offering. Accordingly, if you purchase common
stock in this offering, you will incur immediate dilution of $10.99, or 85% in
the pro forma net tangible book value per share of common stock from the price
you pay for the common stock. To the extent that outstanding options and
warrants are exercised or additional securities are issued, there will be
further dilution to the investors in this offering. See "Dilution" to review
the dilution associated with this offering and "Shares Eligible for Future
Sale" to review information regarding securities that could further dilute net
tangible book value per share.

Sales and other taxes may be imposed on our online business.

It is possible that the current tax moratorium limiting the ability of state
and local governments to impose taxes on Internet based transactions could
fail to be renewed prior to October 2001. Failure to renew this legislation
would allow states to impose new taxes on Internet based commerce. Should
states impose a requirement that online vendors collect taxes for all products
shipped to each state, collection of sales tax could create additional
administrative burdens on our operations and slow the growth of Internet
commerce. The imposition of taxes on Internet based transactions could
materially adversely affect our ability to become profitable in the future.

Our common stock has never been publicly traded.

Prior to this offering there has been no public market for our common stock.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "HITS." There can be no assurance, however, that an active trading
market will develop, or, if developed, that an active trading market will be
maintained.

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<PAGE>

Our common stock price and quarterly results are likely to be highly volatile.

The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price
of common stock for many companies engaged in industries similar to
musicmaker.com. These market fluctuations could materially adversely affect
the market price of our common stock. Further, we expect to experience
significant fluctuations in our future quarterly operating results caused by a
variety of factors, many of which are outside of our control. Factors that may
affect our operating results and the market price of our common stock include:

. Any announcement, or introduction of new or enhanced websites, products,
services and strategic alliances by us, our alliance partners or our
competitors.

. Increases or decreases in our song library, including specifically
content either granted or revoked under our EMI license.

. Seasonality of music purchases.

. Level of customer satisfaction, including our ability to retain existing
customers and attract new customers.

. Price competition, the introduction of new competitors or changes in our
current licensing arrangements.

. Increases or decreases in the use of the Internet, generally, and
consumer acceptance of the Internet for retail commerce purposes.

. Our ability to upgrade or respond to technological advances in a timely
and cost effective manner with minimal disruption to our operations.

. Technical difficulties, system downtime or Internet disruptions.

. General economic conditions, conditions specific to Internet commerce
and the music industry and changes in estimates prepared by market
analysis.

As a result of these and other factors, period-to-period comparisons of our
results of operations may not be meaningful and should not be relied upon as
an indication of our future performance. Difficulties in connection with any
of the factors above may cause our operating results to be below expectations
of investors and market analysts, and adversely affect the market price of our
common stock. As a result, investors purchasing in this offering may not be
able to resell their shares at or above the initial public offering price and
could lose all of their investment. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Anti-takeover provisions in our Charter and Bylaws could deter or delay
possible takeovers.

Our Charter and Bylaws contain provisions that could discourage potential
acquisition proposals or proxy contests and might delay or prevent a change in
control of musicmaker.com. These provisions and Delaware General Corporation
Law could make musicmaker.com less attractive to potential acquirers. These
provisions could also result in our stockholders being denied a premium for,
or receiving less for, their shares than they otherwise might have been able
to obtain in a takeover attempt.

Our stockholders may have difficulty in recovering monetary damages from
directors.

Our Charter contains a provision which eliminates personal liability of our
directors for monetary damages to be paid to us and our stockholders for some
breaches of fiduciary duties. As a result of this provision, our stockholders
may be unable to recover monetary damages against our directors for their
actions that constitute breaches of fiduciary duties, negligence or gross
negligence. Inclusion of this provision in our Charter may also reduce the
likelihood of derivative litigation against our directors and may discourage
lawsuits against our directors for breach of their duty of care even though
some stockholder claims might have been successful and benefited stockholders.

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<PAGE>

Future growth of our operations may make additional capital or financing
necessary.

We anticipate that the proceeds of this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital needs for at least the next 12 months. Beyond that period, we
may need to raise additional funds in order to:
. Finance unanticipated working capital requirements.

. Develop or enhance existing services or products.

. Fund costs associated with strategic marketing alliances.

. Respond to competitive pressures.

. Acquire complementary businesses, technologies, content or products.

We cannot be certain that we will be able to obtain funds on favorable terms,
if at all. If we decide to raise funds by issuing additional equity
securities, purchasers in this offering may experience additional dilution.
Issuance of additional equity securities may also involve granting preferences
or privileges ranking senior to those purchasers in this offering. If we
cannot obtain sufficient funds, we may not be able to grow our operations,
take advantage of future business opportunities or respond to technological
developments or competitive pressures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

We do not intend to pay dividends.

We have never paid dividends on our common stock. We do not intend to pay
dividends and purchasers should not expect to receive dividends on our common
stock for the foreseeable future. See "Dividend Policy."

Warning regarding our use of forward-looking statements.

This prospectus contains forward-looking statements which relate to possible
future events, our future performance and our future operations. In some
cases, you can identify forward-looking statements by our use of words such as
"may," "will," "should," "anticipates," "believes," "expects," "plans,"
"future," "intends," "could," "estimate," "predict," "potential" or
"continue," the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions. Our actual results could
and likely will differ materially from these forward-looking statements for
many reasons, including the risks described above and appearing elsewhere in
this prospectus. 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.

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<PAGE>

USE OF PROCEEDS

Assuming an initial offering price of $13.00 and after deducting
underwriting discounts and commissions and other expenses of this offering, we
will receive net proceeds of $58,500,000 from the sale of 5,000,000 shares of
our common stock in this offering. We intend to use the net proceeds of this
offering to pay advances in connection with acquiring additional music content
from record labels. We also anticipate using net proceeds to expand our
advertising, marketing and promotional efforts with our existing and future
strategic marketing partners. Net proceeds may be used to support promotional
inserts in direct mailings to Columbia House and Audio Book Club members,
website advertising and seasonal product promotions. We intend to use net
proceeds to maintain, back-up, and upgrade the technological systems which
support our operations. Although we do not have any current plans to acquire
any businesses, we may use a portion of the net proceeds of the offering for
these purposes. We are required to repay a 12% loan from Rho Management Trust
I in the principal amount of $1,000,000 plus interest from the proceeds of
this offering. See "Certain Transactions." We have not yet determined the
amount of net proceeds to specifically allocate to each of the foregoing
purposes. As a result, management will have significant discretion in the
application of the proceeds. Allocation of net proceeds is further subject to
future events including general economic conditions, changes in
musicmaker.com's strategy and response to competitive pressures and consumer
preferences associated with the music industry and Internet commerce. Pending
use, we will invest the net proceeds of this offering in bank certificates of
deposit and other fully insured investment grade interest bearing securities.
See "Risk Factors--Our management will have broad discretion in applying the
net proceeds of this offering."

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 1999:

. On a pro forma basis to reflect:

. The issuance of 15,170,860 shares of common stock in exchange
for licensing rights with EMI valued at approximately $87
million.

. On a pro forma as adjusted basis, to reflect:

. The receipt of and application by musicmaker.com of the
estimated net proceeds from the offering.

. The automatic conversion, upon completion of the offering, of
all outstanding shares of preferred stock into 1,908,729 shares
of common stock.

. The automatic conversion, upon completion of the offering, of
all outstanding convertible notes into 968,252 shares of common
stock, which includes $2,000,000 in principal amount of
convertible notes outstanding at March 31, 1999.

. The expensing of all capitalized loan fees related to the
convertible notes which includes $227,501 capitalized at March
31, 1999.

. On a pro forma and a pro forma as adjusted basis does not reflect the
demand promissory note in the principal amount of $1,000,000, which we are
required to repay from the proceeds of this offering. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

The information below assumes an initial public offering price of $13.00 as
reduced for underwriting discounts, commissions and expenses incurred in
connection with the offering.

<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- ------------
<S> <C> <C> <C>
Current portion of long-term
obligation............................ $ 42,857 $ 42,857 $ 42,857
=========== =========== ============
Convertible notes and long-term
obligation............................ $ 2,214,286 $ 2,214,286 $ 214,286
Series A preferred stock............... 1,067,788 1,067,788 --
Series B preferred stock............... 1,750,100 1,750,100 --
Stockholders' (deficit) equity:
Common stock, $0.01 par value;
100,000,000 shares authorized;
6,896,873 shares issued and
outstanding on an actual basis;
22,067,733 shares issued and
outstanding on a pro forma basis and
29,944,714 shares issued and
outstanding on a pro forma as
adjusted basis...................... 68,969 220,678 299,448
Additional paid-in capital........... 6,019,768 92,493,669 156,414,999
Warrants............................. 779,059 779,059 779,059
Accumulated deficit.................. (9,082,395) (9,082,395) (9,992,108)
----------- ----------- ------------
Total stockholders' (deficit) equity .. (2,214,599) 84,411,011 147,501,398
----------- ----------- ------------
Total capitalization................... $ 2,817,575 $89,443,185 $147,715,684
=========== =========== ============
</TABLE>

17
<PAGE>

DILUTION

The difference between the initial public offering price per share of common
stock and the as adjusted pro forma net tangible book value per share of
common stock after this offering constitutes the dilution to investors
purchasing common stock in this offering. Net tangible book value per share is
determined by dividing musicmaker.com's net tangible book value by the number
of outstanding shares of common stock. The net tangible book value equals
total assets less total liabilities.

At March 31, 1999, our pro forma net tangible book value, (deficit), after
giving effect to the EMI transaction, was $(3,252,000) or $(0.15) per share of
common stock. After giving effect to the sale of the common stock in this
offering, assuming an initial public offering price of $13.00 after deducting
the estimated underwriting discounts, commissions and offering expenses and
after the conversion of preferred stock and the convertible notes to common
stock, our pro forma as adjusted net tangible book value as of March 31, 1999,
would have been $60,066,000 or $2.01 per share. This represents an immediate
increase in net tangible book value of $2.16 per share to the existing holders
of common stock and an immediate dilution to investors purchasing in this
offering of $10.99 per share. The following table illustrates the per share
dilution to investors purchasing in this offering:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $13.00
Pro forma net tangible book value (deficit) before
offering.................................................. (0.15)
Pro forma increase attributable to new investors........... 2.16
Pro forma as adjusted net tangible book value after
offering.................................................. 2.01
------
Pro forma dilution to investors purchasing in offering....... $10.99
======
</TABLE>

The following table summarizes as of March 31, 1999, on the pro forma basis
described above, the number of shares of capital stock purchased from
musicmaker.com, the total consideration paid to musicmaker.com and the average
price per share paid by existing stockholders and by investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $13.00, before deducting the estimated underwriting discount and
commissions and estimated offering expenses:

The table below excludes the following:

. 1,806,041 common stock warrants issued and outstanding, 1,697,929 common
stock warrants to be issued upon conversion of the outstanding preferred
stock warrants, and 743,169 common stock warrants to be issued to
Ferris, Baker Watts, Incorporated and Fahnestock & Co. Inc. in
connection with this offering; and

. 2,044,882 options issued as of June 25, 1999 under our stock option
plan.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 24,944,714 83.3% $ 98,214,447 60.2% $ 3.94
New investors................. 5,000,000 16.7 65,000,000 39.8 13.00
---------- ---- ------------ ---- ------
Total....................... 29,944,714 100% $163,214,447 100% $ 5.45
========== ==== ============ ==== ======
</TABLE>

To the extent that any of these options or warrants are exercised, there
would be further dilution to investors purchasing in the offering. See Notes 5
and 9 of the notes to the consolidated financial statements.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends, if any, in the future will be at the sole
discretion of the Board of Directors.

18
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the period from April 23, 1996, inception, to December
31, 1996 and the years ended December 31, 1997 and 1998, and the consolidated
balance sheet data at December 31, 1997 and 1998 are derived from the
consolidated financial statements of musicmaker.com that have been audited by
our independent auditors, and are included elsewhere in this prospectus. We
believe the interim financial data reflect all adjustments necessary to
present fairly the results of operations for the three months ended March 31,
1998 and March 31, 1999 and our financial position at March 31, 1999. These
adjustments are of a normal recurring nature. The results of operations of
prior periods are not necessarily indicative of results that may be expected
for any other period. As indicated in the table, we have presented some of our
financial data:
Pro forma to give effect to:

. The issuance of 15,170,860 shares of common stock in exchange for
licensing rights with EMI valued at approximately $87 million.
Pro forma as adjusted to give effect to:
. The sale of 5,000,000 shares of common stock to be sold in this offering
at an assumed initial public offering price of $13.00 per share.
. The application of the net proceeds from this offering.
. The automatic conversion, upon completion of the offering, of all shares
of outstanding preferred stock into 1,908,729 shares of common stock.

. The automatic conversion, upon completion of the offering, of all
outstanding convertible notes into 968,252 shares of common stock which
include $2,000,000 in principal amount of convertible notes outstanding
at March 31, 1999.
. The expensing of all capitalized loan fees related to the convertible
notes, which include $227,501 capitalized at March 31, 1999.

Pro forma and pro forma as adjusted do not give effect to the demand
promissory note in the principal amount of $1,000,000 which we are required to
repay from the proceeds of this offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Period from Three months
April 23, 1996 Year ended December 31, ended March 31,
(inception) to ------------------------ ------------------------
December 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160
Cost of sales........... 2,590 450,455 677,700 232,800 463,283
--------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629
--------- ----------- ----------- ----------- -----------
Total operating
expenses............... 370,410 1,613,177 4,068,910 1,035,104 1,337,737
--------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860)
Net interest (expense)
income................. (2,667) (33,957) 17,815 5,250 (23,867)
--------- ----------- ----------- ----------- -----------
Net loss................ $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
========= =========== =========== =========== ===========
Basic and diluted net
loss per share(1)...... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27)
========= =========== =========== =========== ===========
Weighted average shares
outstanding(1)......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561
========= =========== =========== =========== ===========
Pro forma basic and
diluted net loss per
share(1)............... $ (0.26) $ (0.13)
=========== ===========
Pro forma weighted
average shares
outstanding(1)......... 21,842,134 20,884,288
=========== ===========
</TABLE>

Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 1,685,234 $ 1,685,234 $ 60,185,234
Working capital.......................... 225,558 225,558 58,725,558
Total assets............................. 4,444,315 91,069,925 149,342,424
Debt, long-term portion.................. 2,214,286 2,214,286 214,286
Convertible preferred stock.............. 2,817,888 2,817,888 --
Total stockholders' (deficit) equity..... (2,214,599) 84,411,011 147,501,398
</TABLE>
- --------
(1) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of musicmaker.com should be read in conjunction with the
consolidated financial statements and related notes as well as other financial
information included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
Musicmaker.com's actual results may differ materially from those anticipated
in these forward-looking statements as a result of factors, including, but not
limited to, those factors set forth under "Risk Factors" and appearing
elsewhere in this prospectus.

Overview

Musicmaker.com was incorporated in April 1996 ("Inception"). On July 31,
1996, musicmaker.com acquired the technology to produce its custom CDs. See
"Certain Transactions." During the remainder of 1996 and through the year
ended December 31, 1997, musicmaker.com's operating activities consisted of
recruiting personnel, developing the technological infrastructure necessary to
create custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. Musicmaker.com
launched its website in October 1997 and shipped its first custom CD in
November 1997. In 1998, musicmaker.com established several strategic alliances
with leading online and offline music marketers. In June 1999, musicmaker.com
entered into a license agreement with Virgin Holdings, Inc., an affiliate of
EMI Recorded Music. We were granted an exclusive worldwide license to include
the music content that EMI makes available for use in our online sales of
custom CDs. See "Business--Marketing."

Since commercial operations primarily began in the fourth quarter of 1997,
musicmaker.com has sold over 6,300 custom CDs. Through July 1998, all of
musicmaker.com's net sales had been derived from the sale of custom CDs
through its own website and print promotions. In August 1998, musicmaker.com
began selling its custom CDs through a marketing alliance with N2K.
Musicmaker.com and N2K conducted two joint promotions and established co-
branded websites through which N2K customers could purchase our custom CDs.
Our marketing alliance with N2K has expired and new terms will be negotiated
for future promotions and marketing, if any. In October 1998, musicmaker.com
began selling its custom CDs through marketing alliances with Platinum and
Columbia House. See "Business--Marketing."

Net sales are primarily derived from custom CDs offered over the Internet
and through advertising campaigns and individual songs downloaded directly
from musicmaker.com's website. Net sales are net of sales discounts, and
include shipping and handling charges. Customer accounts are settled by
directly charging a customer's credit card or by offering credit to customers
that have previous payment history with musicmaker.com. Accordingly, we will
be required to manage the associated risks of accounts receivable, expansion
and collection. To date, we have not extended a material amount of customer
credit. Net sales are recognized upon shipment of the CD from musicmaker.com's
production site in Reston, Virginia. For digitally downloaded songs, net sales
are recognized upon execution of the order.

Cost of sales principally consist of content costs, production and shipping
costs, and credit card receipt processing costs. To establish our music
library, we made advance royalty payments under license agreements with record
labels providing music content. Under these agreements, we are required to
make additional annual advance payments for up to two years. Content costs
include our royalty payments based on actual sales. We will also make royalty
payments in connection with our actual sales of custom CDs that include any
content made available under the terms of our license agreement with EMI.
Aggregate royalty payments to EMI under our license agreement will increase or
decrease depending upon the level of revenues, if any, generated from sales of
custom CDs that include any content made available under the terms of our
license agreement. Production costs include jewel cases, CD trays and CD
inserts. Musicmaker.com expects that its cost of sales will increase
significantly as it enters into additional licensing agreements to further
expand and develop its music library.

Sales and marketing expenses consist primarily of advertising and
promotional expenditures, including payroll and related expenses.
Musicmaker.com expenses all advertising costs as incurred. Musicmaker.com
expects sales and marketing expenses to increase significantly as it endeavors
to increase its customer base, drive traffic to its website and enhance brand
name awareness.

20
<PAGE>

Operating and development expenses are expensed as incurred.
Musicmaker.com's operating and development costs consist primarily of payroll
and related expenses for website and system development as well as expenses
associated with website hosting and Internet operations. Musicmaker.com's
operating and development expenses have increased significantly since
Inception, and are expected to continue to increase with our growth.

General and administrative expenses consist primarily of legal and
professional fees, payroll costs and related expenses for officers and
administrative personnel, as well as other expenses associated with corporate
functions. Also included in general and administrative expenses are expenses
associated with the issuance of warrants to various consultants, a shareholder
and Columbia House. The fair market values of these warrants were calculated
using the Black-Scholes option pricing method and expensed upon issuance of
the warrants.

Musicmaker.com has an extremely limited operating history upon which to base
an evaluation of its business and prospects. Musicmaker.com has yet to achieve
significant net sales and its ability to generate significant net sales in the
future is uncertain. Further, in view of the rapidly evolving nature of
musicmaker.com's business and its very limited operating history,
musicmaker.com has little experience forecasting net sales. Therefore,
musicmaker.com believes that period-to-period comparisons of our financial
results are not necessarily meaningful and you should not rely upon them as an
indication of future performance.

To date, musicmaker.com has incurred substantial costs to create, introduce
and enhance its services, to acquire content, to build brand awareness and to
grow its business. As a result, musicmaker.com has incurred operating losses
since Inception. In addition, musicmaker.com expects significantly increased
operating expenses in connection with an increase in the size of its staff,
expansion of its marketing efforts, and an increase in its research and
development efforts to assist in musicmaker.com's planned growth. To the
extent that increases in operating expenses precede or are not followed by
increased net sales, musicmaker.com's business, financial condition and
results of operations will be materially adversely affected.

We have recently entered into an exclusive five-year licensing agreement
with EMI. Our new relationship with EMI gives musicmaker.com the potential for
access to tracks from EMI artists and the extensive music catalog of a major
record company. In connection with our license agreement with EMI, we will
amortize approximately $17,300,000 in each of the next five years.

Musicmaker.com's business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early years, particularly companies in new and rapidly evolving markets such
as electronic commerce. In addition, musicmaker.com's net sales depend
substantially upon the level of activity on its website, the amount and
quality of content provided under its EMI license agreement and the success of
its Columbia House print promotions. Although musicmaker.com has experienced
growth in its operations, there can be no assurance that musicmaker.com's net
sales will continue at its current level or rate of growth. See "Risk
Factors--We have a limited operating history, have incurred losses and may
continue to realize losses. We also have an accumulated deficit that may
continue to increase."

Results of Operations

Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998

Net Sales. Net sales for the quarter ended March 31, 1999 were $20,160
compared to $22,416 for the quarter ended March 31, 1998. For the quarter
ended March 31, 1999, primarily all of musicmaker.com's net sales were through
our website of which $11,907 were from direct sales, $3,936 were from the
affiliation with Columbia House and $2,313 were from the affiliation with N2K.
For the quarter ended March 31, 1998, all of musicmaker.com's net sales were
from direct sales. The generation of net sales resulted from development of
our customer base, expansion of our music library and the formation of
strategic alliances with Columbia House, N2K and Platinum which provided
Internet traffic and access to additional customer bases.

21
<PAGE>

Cost of Sales. Cost of sales for the quarter ended March 31, 1999 were
$463,283 compared to $232,800 for the quarter ended March 31, 1998. Cost of
sales included royalty advances that were paid upon signing of royalty
agreements with independent music labels of $458,819 for the quarter ended
March 31, 1999 and $221,348 for the quarter ended March 31, 1998. For the
quarter ended March 31, 1999, these royalty advances were charged as content
costs and accounted for $458,819 or 99% of cost of sales and production costs
accounted for $4,464 or 1%. For the quarter ended March 31, 1998, content
costs accounted for $225,861 or 97% of cost of sales, which included the
royalty advances charge of $221,348. Production costs of $6,939 accounted for
3% of cost of sales for the quarter ended March 31, 1998.

Operating and Development Expenses. Operating and development expenses were
$253,256 for the quarter ended March 31, 1999 compared to $203,644 for the
quarter ended March 31, 1998. For the quarter ended March 31, 1999, operating
and development expenses were primarily attributable to our website
maintenance of $44,126, equipment expense of $69,238, consultant expense of
$80,580 and salary expense of $44,504. For the quarter ended March 31, 1998,
operating and development expenses were primarily attributable to our website
maintenance of $7,760, equipment expense of $59,356, consultant expense of
$105,500 and salary expense of $30,000.

Sales and Marketing Expenses. Sales and marketing expenses were $259,852 for
the quarter ended March 31, 1999 and $397,729 for the quarter ended March 31
1998. Sales and marketing expenses primarily consisted of consulting expenses
of $204,969 and salary expense of $36,346 for the quarter ended March 31,
1999. For the quarter ended March 31, 1998, sales and marketing expenses
primarily consisted of consulting expenses of $107,668 and advertising
expenses of $290,061.

General and Administrative Expenses. General and administrative expenses
were $824,629 for the quarter ended March 31, 1999 and $433,731 for the
quarter ended March 31, 1998. General and administrative expenses consisted
primarily of $208,028 for salary, bonus and other payroll related expenses,
$77,499 for amortization of intangibles, legal and professional fees of
$93,157, equipment leasing expense of $75,728, warrant expense of $169,624 and
rent expense of $53,464. For the quarter ended March 31, 1998, general and
administrative expense primarily consisted of $182,062 for consulting expense,
$114,794 for legal and professional expense, and $85,274 for warrant expense.
See Notes 5 and 12 of the notes to the consolidated financial statements for
further discussion of warrant expense.

Interest Expense/Income. Interest income for the quarter ended March 31,
1999 was $16,539 compared to $5,250 for the quarter ended March 31, 1998.
Interest expense for the quarter ended March 31, 1999 was $40,406 compared to
no interest expense for the quarter ended March 31, 1998. The interest expense
for the quarter ended March 31, 1999 was attributable to the interest
associated with the outstanding convertible notes.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net Sales. Net sales for the year ended December 31, 1998 were $74,028
compared to $13,432 for the year ended December 31, 1997. The generation of
net sales resulted from development of our customer base, expansion of our
music library and the formation of strategic alliances with Columbia House,
N2K and Platinum which provided Internet traffic and access to additional
customer bases.

Cost of Sales. Cost of sales for the year ended December 31, 1998 were
$677,700 compared to $450,455 for the year ended December 31, 1997. Cost of
sales included royalty advances that were paid upon signing of license
agreements with independent music labels of $614,000 for the year ended
December 31, 1998 and $447,500 for the year ended December 31, 1997. For the
year ended December 31, 1998 content costs accounted for $10,258 or 2% of cost
of sales and production costs accounted for $32,086 or 5% of cost of sales.
Postage and mailing costs accounted for $2,382 and credit card costs accounted
for $2,095 for the year ended December 31, 1998, or a combined 1% of cost of
sales. For the year ended December 31, 1997, production costs accounted for
$2,955, or 1% of cost of sales.

22
<PAGE>

Operating and Development Expenses. Operating and development expense
include expenses associated with enhancing the features and functionality of
our website and related systems. Operating and development expenses were
$804,811 for the year ended December 31, 1998 compared to $244,541 for the
year ended December 31, 1997. For the period ended December 31, 1998,
operating and development expenses were primarily attributable to our network
and website maintenance of $138,996, equipment expense of $102,304, consultant
expense of $431,848 and salary expense of $117,937. For the year ended
December 31, 1997, operating and development expenses were primarily
attributable to our network and website maintenance of $122,211, and
consultant expense of $122,330.

Sales and Marketing Expenses. Sales and marketing expenses were $929,661
for the year ended December 31, 1998 compared to $7,780 in the year ended
December 31, 1997. Sales and marketing expense for the year ended December 31,
1998 consisted primarily of print advertising, expenditures incurred in the
development of our strategic alliances and increases in sales and marketing
personnel.

General and Administrative Expenses. General and administrative expenses
were $2,334,438 for the year ended December 31, 1998 and $1,360,856 for year
ended December 31, 1997. For the year ended December 31, 1998, general and
administrative expenses consisted primarily of $375,305 for salary, bonus and
other payroll related expense, $305,873 for amortization of intangibles,
$317,199 for legal and professional fees, $33,806 for equipment leasing
expense, $225,000 for warrant expense and $75,848 for rental expense. For the
year ended December 31, 1997, general and administrative expense primarily
consisted of $954,320 for consulting expense, $211,111 for legal and
professional expense, and $92,817 for travel expense.

Interest Expense/Income. Interest income for the year ended December 31,
1998 was $17,815 compared to interest expense of $33,957 for the year ended
December 31, 1997. The 1997 interest expense was attributable to convertible
notes which were converted to common stock in June 1997. Musicmaker.com did
not have any interest expense associated with debt during the year ended
December 31, 1998.

Year Ended December 31, 1997 Compared to Inception Period from April 23, 1996
to December 31, 1996

Net Sales. Net sales were $13,432 for the year ended December 31, 1997
compared to $8,355 for the period from Inception through December 31, 1996
(the "Inception Period"). Net sales in the Inception Period consisted of
product sales from musicmaker.com's subsidiary which was dissolved in early
1999. The increase in net sales was principally due to growth in
musicmaker.com's customer base and expansion of its music library.

Cost of Sales. Cost of sales were $450,455 for the year ended December 31,
1997 compared to $2,590 for the Inception Period. Cost of sales included
royalty advances that were paid upon signing of license agreements with
independent music labels of $447,500 for the year ended December 31, 1997 and
$0 for the year ended December 31, 1996.

Operating and Development Expenses. Operating and development expenses were
$244,541 for the year ended December 31, 1997 compared to $64,029 for the
Inception Period. This increase was primarily attributable to costs incurred
to enhance the features and functionality of musicmaker.com's website and
related systems. We incurred research and development costs of approximately
$120,000 for the year ended December 31, 1997 compared to $64,000 for the
Inception Period.

Sales and Marketing Expenses. Sales and marketing expenses were $7,780 for
the year ended December 31, 1997. There were no sales and marketing expenses
for the Inception Period.

General and Administrative Expenses. General and administrative expenses
were $1,360,856 for the year ended December 31, 1997 compared to $306,381 for
the Inception Period. This increase was primarily due to increases in the
number of personnel and corporate facility expenses necessary to support the
growth of musicmaker.com's business and operations.

23
<PAGE>

Liquidity and Capital Resources

Net cash used in operating activities totaled $1,616,747 for the quarter
ended March 31, 1999 as compared to net cash used in operating activities of
$1,324,417 for the quarter ended March 31, 1998. Net cash used in operating
activities for the quarter ended March 31, 1999 was primarily attributable to
the net loss of $1,804,727 and net changes in operating assets and liabilities
of $139,410 offset by the issuance of stock and warrants for services for
$169,621 and depreciation and amortization of $157,769. Net cash used in
operating activities for the quarter ended March 31, 1998 was primarily
attributable to the net loss of $1,240,238 and net changes in operating assets
and liabilities of $264,275 offset by the issuance of stock and warrants for
services for $156,317 and depreciation and amortization of $23,779.

Cash used in investing activities was $100,961 for the quarter ended
March 31, 1999 and $137,381 for the quarter ended March 31, 1998. In both
quarters, the cash used in investing activities was primarily for the purchase
of property and equipment, including computer equipment and software,
leasehold improvements, and furniture and other office equipment.

Net cash provided by financing activities was $2,429,998 for the quarter
ended March 31, 1999 compared to $534,700 for the quarter ended March 31,
1998. Net cash provided by financing activities, for the quarter ended
March 31, 1999 was primarily through the issuance of 8% convertible notes for
$1,313,625, net of fees of $173,875 and the issuance of common stock for
$1,116,363. Net cash provided by financing activities, for the quarter ended
March 31, 1998 was primarily through the issuance of convertible preferred
stock of $534,700.

Net cash used in operating activities totaled $3,519,777 for the year ended
December 31, 1998 as compared to net cash used in operating activities of
$1,101,275 for the year ended December 31, 1997. Net cash used in operating
activities for the year ended December 31, 1998 was primarily attributable to
the net loss of $4,654,767 offset by accrued compensation to related parties
of $30,665, an increase in accounts payable and accrued expenses of $297,250,
and an increase in long-term obligations of $257,143. Net cash used in
operating activities for the year ended December 31, 1997 was primarily
attributable to the net loss of $2,084,157, offset by an increase to accrued
compensation payable to related parties of $543,634, the issuance of stock and
warrants for services for $150,500, and an increase in accounts payable and
accrued expenses of $207,776.

Cash used in investing activities was $217,961 for the year ended December
31, 1998 and $299,755 for the year ended December 31, 1997. In both years the
cash used in investing activities was primarily for the purchase of property
and equipment, including computer equipment and software, leasehold
improvements, and furniture and other office equipment.

Net cash provided by financing activities was $3,308,710 for the year ended
December 31, 1998 and $2,390,940 for the year ended December 31, 1997. Net
cash provided by financing activities, for the year ended December 31, 1998
was through the issuance of outstanding preferred stock for $1,568,033 and the
issuance of common stock for $1,344,302. The net cash provided by financing
activities for this period also included the net proceeds from the issuance of
convertible notes of $396,375. Net cash provided by financing activities, for
the year ended December 31, 1997, was primarily through the issuance of
outstanding preferred stock and warrants for $1,700,000, issuance of common
stock for $440,940 and proceeds from the issuance of convertible notes of
$250,000.

On January 8, 1999, musicmaker.com signed a lease line agreement which
provides leasing for computer and related equipment as well as CD fabrication
equipment up to $200,000 between the signing of the agreement and June 8,
1999. Any equipment leased under this agreement will have a 24 month lease
term, and at the end of the lease term musicmaker.com will either be obligated
to buy the equipment at 10% of the original equipment cost or extend the lease
term for an additional 24 months. Borrowings under this lease line agreement
require payments due in advance with a monthly rental factor of .0498 for
months one through 24. The actual monthly rental will be determined by
multiplying the cost of the equipment by the applicable monthly rental factor,
plus any monthly

24
<PAGE>

maintenance charges. We will provide the lessor with a first security interest
in the equipment leased under this agreement for the duration of the term of
the lease. Musicmaker.com also signed the first lease under this agreement
which will have a monthly rental payment of $8,261. As part of the lease line
agreement, musicmaker.com issued a warrant to purchase 14,524 shares of its
common stock at $2.06 per share which expires on January 8, 2009.
Musicmaker.com recorded an expense of $16,021 related to the issuance of the
warrant.

On February 12, 1999, musicmaker.com signed a loan and security agreement
with a financial institution for a credit facility of up to $250,000 in a
revolving line of credit for equipment and software purchases and general
working capital and up to $100,000 in a cash secured letter of credit, all of
which has been borrowed. Borrowings under this line of credit bear interest at
Imperial Bank's prime rate of interest plus 2%. The line of credit is secured
by a blanket security interest on all of our assets including general
intangibles excluding previously leased equipment. The line has financial
covenants, including minimum net worth and liquidity ratios. At March 31,
1999, we have $250,000 outstanding under this line of credit. Interest on any
balance outstanding is payable monthly with principal and all accrued interest
due six months from the date of the loan. In the event that equipment and
software purchases under the line are converted into a term loan, equal
payments of principal and interest will be due monthly for 24 months, starting
on the first month following the initial six month maturity. The initial six
month period runs from March 12, 1999. The credit facility will automatically
convert to a 24 month term loan after September 11, 1999, if $5,000,000 in new
equity is raised prior to that date. If the term of the credit facility is
extended, Imperial Bank will have the right to purchase warrants equal to 4%
of the commitment amount.

On April 8, 1999, musicmaker.com issued a warrant to purchase 242,077 shares
of common stock at $1.98 per share to a consultant for services rendered.
Musicmaker.com recorded an expense of $464,415 related to the issuance of this
warrant.

On June 8, 1999, musicmaker.com entered into a license agreement with
EMI. Under this agreement, musicmaker.com issued 15,170,860 shares of common
stock valued at our estimate of the fair market value of our common stock of
$5.71 per share in exchange for a five-year license which provides us with
exclusive rights to use the content they make available for online sales of
our custom CDs. The license fee of $86,625,610 will be written off as a non-
cash charge of approximately $17,300,000 in each year over the next five
years, the term of the license. In addition, we will make royalty payments to
EMI for sales of custom CDs that include EMI's content.

On July 1, 1999, musicmaker.com issued a demand promissory note to Rho
Management Trust I for financing in the principal amount of $1,000,000 bearing
interest at 12% and maturing on January 1, 2000. The promissory note states
that if musicmaker.com has not consummated this offering by September 30,
1999, the interest payable on the note increases to 14%. We are required to
repay the note from the proceeds of this offering.

Musicmaker.com anticipates that it will have negative cash flows for the
foreseeable future. It is estimated that musicmaker.com will need to provide
for items such as computer storage, production equipment, distribution
equipment, hardware and software for computer systems, and furniture and
fixtures. Musicmaker.com expects to fund its purchase of necessary capital
equipment with its working capital, which will include the proceeds from this
offering.

As of March 31, 1999, musicmaker.com had $1,685,234 in cash and cash
equivalents, a net increase of $1,210,350 from the quarter ended March 31,
1998 and an increase of $712,280 from the year ended December 31, 1998.
Musicmaker.com believes that the net proceeds from its prior financings, this
offering, and cash flows from operations, will be adequate to satisfy its
operations, working capital and capital expenditure requirements for at least
the next 12 months, although musicmaker.com may seek to raise additional
capital during that period. There can be no assurance that additional
financing will be available on acceptable terms, if at all, or that any
additional financing will not dilute shares held by musicmaker.com's
stockholders. See "Risk Factors--Future growth of our operations may make
additional capital or financing necessary."

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Year 2000 System Costs

Computer systems, software packages and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."

Musicmaker.com may realize exposure and risk if the systems it relies upon
to conduct day-to-day operations are not year 2000 compliant. The potential
areas of exposure include electronic data exchange systems operated by third
parties with whom musicmaker.com transacts business, products purchased from
third parties and computers, software, telephone systems and other equipment
used internally. To minimize the potential adverse effects of the year 2000
problem, musicmaker.com established an internal project team comprised of all
functional disciplines. This project team has begun a three-phase process of:
. identifying our internal information and non-information technology
systems that are not year 2000 compliant,
. determining their significance in the effective operation of
musicmaker.com, and
. developing plans to resolve the issues where necessary.

Musicmaker.com has been communicating with its suppliers and others with
whom it does business to coordinate year 2000 readiness. The responses
received by musicmaker.com to date indicate that steps are currently being
taken to address this concern. However, if those third parties are not able to
make all systems year 2000 compliant, there could be a material adverse impact
on musicmaker.com.

After initial review of musicmaker.com's principal transaction processing
software through which nearly all of musicmaker.com's business is transacted,
management has determined musicmaker.com to be year 2000 compliant and, as
such, does not anticipate any material adverse operational issues to arise.
Based on current estimates, management expects that musicmaker.com's future
costs in connection with its year 2000 compliance project will not exceed
$10,000; however, future anticipated costs are difficult to estimate with any
certainty and may differ materially from those currently projected based on
the results of phase one of musicmaker.com's year 2000 project. The
anticipated costs associated with musicmaker.com's year 2000 compliance
program do not include time and costs that may be incurred as a result of any
potential failure of third parties to become year 2000 compliant or costs to
implement musicmaker.com's future contingency plans. Musicmaker.com has not
yet developed a contingency plan in the event that any non-compliant critical
systems are not remedied by January 1, 2000, nor has it formulated a timetable
to create a contingency plan. Upon completion of our review, if systems
material to musicmaker.com's operations have not been made year 2000 compliant
in a timely manner, the year 2000 issue could have a material adverse effect
on musicmaker.com's business, financial condition and results of operations.

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BUSINESS

Overview

. We are a leading provider of custom CDs over the Internet.

. We have a license agreement with EMI, the third largest music company in
the world, and content agreements with over 100 independent labels.

. We have a music library of over 150,000 licensed song titles.

. Customers can search our extensive online music library and sample and
select the songs of their choice for custom CDs.

. Our technology, which can digitally store approximately five million
songs, provides advanced search/retrieval capabilities and automates
high speed production of custom CDs.

. Our custom CDs sound equivalent to pre-recorded CDs available at retail
stores and are sold at competitive prices.

. Our customers can also download music from our music library using
Secure-MP3, Liquid Audio, or Microsoft MS-Audio format.

Industry Background

Historically, the music industry has benefited from advances in technology,
such as the introduction of the CD in 1982. During the last ten years much of
the industry's growth resulted from consumers replacing existing record or
tape music collections with CDs. Moreover, the Recording Industry Association
of America reported that the shipment of full-length CDs grew 12.5% in 1998
providing evidence that the CD format continues to be popular.

According to the Recording Industry Association of America, domestic music
sales grew from $6.2 billion in 1988 to $13.7 billion in 1998. Of the $13.7
billion in total sales, full length CDs continue to account for the greatest
dollar and unit volume. In 1998, CD unit shipment increased 12.5% from 753
million units in 1997 to 847 million units, and CD dollar value grew 15% from
$9.9 billion in 1997 to $11.4 billion in 1998.

Musicmaker.com believes that substantial growth opportunities exist for
sales of music over the Internet. According to Jupiter Communications, LLC,
total online sales of pre-recorded music are projected to increase from $37.0
million in 1997 to $1.4 billion in 2002. Musicmaker.com believes that while
the Internet provides an additional, price competitive distribution channel
for pre-recorded music, the potential exists to use the Internet as a value-
added method of distribution. Internet based retailers have other advantages
over traditional retail channels as well. Musicmaker.com estimates that music
retail stores generally stock between 10,000 and 39,000 of the available
200,000 CDs and tend to carry a greater percentage of hit releases, often at
the expense of differing music genres and songs that are not on any current
music chart. Additionally, online retailers are open 24 hours and Internet
users and their purchases can be tracked to provide demographic information
for use in direct marketing or other targeted programs.

Within the prerecorded music market, sales of compilation CDs, CD singles
and sales made through mail order and record club operations have encountered
steady growth. According to the Recording Industry Association of America,
sales of CD singles have increased from $6 million in annual sales in 1990 to
$213 million in 1998 and from 1 million CD single units shipped to 56 million
units over the same period. The Recording Industry Association of America's
research indicates an 11.6% increase in units shipped to direct and special
markets which include mail order operations, record clubs and non-traditional
retailers and a 7.4% increase in dollar value from these music sales between
1997 and 1998. The Recording Industry Association of America estimates that
sales by mail order, record club and other non-traditional retail outlets
account for 24.4% of the total domestic market.

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One of the latest technological innovations in the music industry has
centered on digital distribution, the downloading of compressed music files
over the Internet to a PC. These music files can be stored to a PC or on a CD
using a read/write CD-ROM drive. Recently, MP3, a non-streaming compression
technology, has proliferated over the Internet. It is estimated that five
million MP3 players were downloaded as of January 1999. Online music sales
attributable to digital distribution remain a small, but we believe increasing
portion of the total pre-recorded online music sales market. Forrester
Research Inc. predicts that revenues from digital music downloads will reach
$1.1 billion in 2003, equaling approximately 7% of total music sales. However,
Jupiter Communications estimates that revenues from digital music downloads
will reach only $30 million by 2002. MP3's ability to freely copy and
distribute music without making royalty payments to the music labels and to
the artists holding the rights is of substantial concern to the music
industry.

The music industry, and control over commercially popular music content, is
significantly concentrated among the five major record labels below, which
together accounted for approximately 80% of the music sold in 1997:

. BMG Entertainment . Sony Music Entertainment
. EMI Recorded Music . Warner Music
. Universal Music Group

In April 1999, Universal and BMG, which collectively control approximately
45% of the U.S. music market, announced a joint venture to promote and sell
their pre-recorded CDs through a series of Internet websites organized by
music categories. In May 1999, Microsoft Corporation and Sony Corporation
announced an agreement to pursue a number of cooperative activities and Sony
decided to make its music content available for downloading from the Internet
using Microsoft's multimedia software MS-Audio.

Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs:

. Growth in sales of CD singles.

. Growth of the Internet as a viable retail medium.

. Increasing affluence of the over 30 generation.

. Continued prominence of classic rock albums.

. Record label desire to diversify distribution methods while protecting
intellectual property rights.

musicmaker.com Strategy

We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:

Offer a new way to buy licensed, customized music. Through our privately
developed technology, we offer consumers a new method for customizing,
digitally downloading and purchasing music over the Internet. Unlike many
online retailers, we do not use the Internet simply to distribute products
that can be purchased elsewhere. Rather, our website and production technology
provide the ability to create a novel product--the custom CD-- that could not
previously be mass marketed. We use a new technology for digital downloading
to help protect the intellectual property rights of record labels.

Offer most extensive selection of music for custom CD compilation and
digital downloading. We intend to offer consumers the most extensive
collection of music available for use in custom CDs and digital downloading.
In June 1999, we entered into a five-year license agreement with EMI under
which we currently have exclusive rights to the content they make available
for use in online sales of our custom CDs. We also have entered into exclusive
and non-exclusive license agreements with more than 100 independent music
labels and currently have a music library of more than 150,000 songs. We
intend to significantly expand our existing music catalog through the
development of content relationships with additional record labels, including
major labels.

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Increase website traffic through strategic alliances and multiple
hyperlinks. We seek to establish strategic alliances with global music and
media companies to attract additional users to the musicmaker.com website. We
are currently the exclusive provider or a featured retailer of custom CDs for
Columbia House, Platinum, Audio Book Club and Trans World. We have recently
entered into a strategic marketing alliance with Spinner Networks, an online
music broadcaster owned by America Online. We intend to continue to expand the
number and depth of our marketing alliances and affiliate programs to drive
traffic and increase the number of third party hyperlinks to musicmaker.com.

Create strong brand awareness. We currently promote our brands through
online and traditional media, special event driven promotions and artist-
specific offerings. We intend to enhance brand awareness of our website by
advertising and co-marketing as well as through strategic relationships
whereby other websites designate musicmaker.com as their online music retailer
for custom CDs.

Establish genre-specific user communities. By collecting information about
our customers, we are able to target demographic user groups, thereby
providing advertisers and sponsors with access to highly defined audiences.
This segmentation will enable advertisers and sponsors to customize their
messages through banner advertisements, event and program sponsorships and
music recording promotions. We intend to provide our advertisers and sponsors
with quantitative feedback on the effectiveness of their programs.

Capitalize on cross-selling opportunities. We intend to generate additional
revenue by drawing users to our website and providing hyperlinks to music
related merchandise sites offering posters, clothing and books. We intend to
generate cross-selling opportunities by establishing hyperlinks between artist
and fan club websites, placing posts in music related news groups and securing
reviews and event notices in appropriate online directories.

Leverage technologies for additional formats. We intend to provide
additional products to consumers which may include custom music on mini-disc,
custom music videos on DVD, audio books on CD and software on CD-ROM. By
leveraging our existing technology to a variety of formats, we believe that we
will effectively increase the content and marketability of our products.

Expand international presence. We intend to capitalize on the global nature
of music and the Internet by building an international user base. We intend to
create local language versions of, and culture specific music content for,
musicmaker.com. We also intend to expand our international presence through
localized websites in countries with a demand for international music. We
believe that our relationship with EMI, an international music company with
operations in over 50 countries and access to international recording artists,
will assist in developing our international presence.

Music Content

Our online library of songs is licensed from record labels and made
available to customers for custom CDs and digital downloading.

In June 1999, we entered into a license agreement with EMI, the third
largest music company in the world, with major record labels including Blue
Note, Capitol Records, Chrysalis, EMI Records and Virgin Records. EMI has
artists in every leading music market, representing most genres of music from
pop, rock, jazz, classical, urban, dance, Christian and country. It also has a
rich catalog of music that is not listed on any current music charts. EMI's
current roster of artists includes approximately 1,500 artists.

Our license agreement with EMI expires in June 2004. During the term of our
license agreement, we have exclusive worldwide rights to include in our
library the music content that EMI makes available for use in online sales of
our custom CDs. EMI may also elect, in its sole discretion, to provide
selected music content to musicmaker.com for digital downloads once a secure
industry-wide standard has been approved by the Secure Digital Music
Initiative.

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EMI has no obligation, however, to make any of its, or its affiliates',
music available to musicmaker.com and has not provided any content to date.
Any rights granted to us under the agreement may be limited by additional
restrictions. These restrictions may include limiting the duration of our
rights to a particular song or artist, limiting the geographic scope of our
distribution and restricting the combination of artists or songs with other
artists or songs, or other restrictions. EMI may also revoke or terminate any
rights to music content granted to musicmaker.com. Musicmaker.com is further
restricted from allowing any customer to purchase any custom CD with fewer
than five songs or containing more than one-half of the songs contained on any
EMI album.

Our exclusive rights under the license agreement automatically become non-
exclusive, permitting EMI to grant similar rights to other providers of custom
CDs upon:

. Our failure to meet agreed upon sales targets.

. The expiration of, and failure to renew on similar terms, our alliance with
Columbia House.

. The reduction of EMI's stock ownership in musicmaker.com below 25%.

. The acquisition by any person of 50% of our voting rights.

. Mr. Puthukarai's ceasing to act as our President, or to be actively
involved in our day-to-day operations.

Our agreement also does not limit or prevent EMI or any of its affiliates
from offering directly to the public custom CDs manufactured by them,
independent of musicmaker.com, nor does it obligate EMI to grant us any
content for digital downloading.

We believe that our relationship with EMI has positioned musicmaker.com for
additional growth. We believe that our relationship with EMI will be critical
to our ability to:

. Enlist additional music content providers.

. Enter into future marketing and strategic alliances.

. Increase awareness of the musicmarker.com brand.
To date, we have also entered into content licenses with over 100
independent record labels.

Our music collection currently contains over 150,000 tracks licensed from
independent record labels including:

. The All Blacks B.V. . Platinum Entertainment, Inc.
(Roadrunner) . Prestige Records, Ltd.
. Alligator Records . Reachout International Records,
. Brunswick Record Corp. Inc. (ROIR)
. Cakewalk LLC (32 Records . Rounder Records Corp.
Jazz) . Sacred Groove Records
. Del-Fi Records . Storyville Records
. Fantasy Records, Inc. . Sun Entertainment Corporation
. HNH International Limited . Surrey House Music
(Naxos) . Tuff Gong International
. Koch International L.P. . VelVel Records LLC
. Lightyear Entertainment, L.P. . Viceroy Entertainment Group
. Minnesota Mining and
Manufacturing Company (3M)
. Nimbus Communications
International Limited

<PAGE>

Our music library contains significant catalogs of blues, jazz, classical,
rock (including heavy metal and punk), country, rhythm and blues, pop, gospel
and oldies. Set forth below is a sampling of the artists contained in our music
library, organized by music genre, for which we have licensed at least ten
songs.

Sample Artists by Music Genre

Blues .Marcia Ball Jazz . Louis Armstrong
.Elvin Bishop . Chet Baker
.Blues Brothers and Friends . Count Basie
.Roy Buchanan . Dave Brubeck
.Otis Clay . John Coltrane
.Albert Collins . Miles Davis
.Buddy Guy . Bill Evans
.John Lee Hooker . Stan Getz
.Lightnin' Hopkins . Dizzy Gillespie
.Elmore James . Billie Holiday
.Albert King . Charles Mingus
.Brownie Mc Ghee . Thelonious Monk
.Roomful of Blues . Charlie Parker
.Memphis Slim . Cole Porter
.Muddy Waters . Art Tatum
.Junior Wells
.Johnny Winter

Rock .Atlanta Rhythm Section Country .Bellamy Brothers
.The Band .Johnny Cash
.Big Star .Roy Clark
.Savoy Brown .Patsy Cline
.Creedence Clearwater Revival .The Gatlin Brothers
.The Guess Who .Crystal Gayle
.Kansas .Merle Haggard
.The Kinks .Ronnie McDowell
.Alvin Lee .Roger Miller
.Alan Parsons .Juice Newton
.Paul Rodgers .Billy Joe Royal
.The Troggs .Conway Twitty
.Bill Wyman
.The Yardbirds with Eric Clapton
.Frank Zappa

Metal . Annihilator Soul/R & B . Barbara Acklin
. Biohazard . Booker T. & The MG's
. Crimson Glory . Cameo
. Deicide . Gene Chandler
. King Diamond . The Chi-lites
. Life of Agony . George Clinton
. Machine Head . Dramatics
. Motorhead . The Gap Band
. Obituary . Isaac Hayes
. Sepultura . Etta James
. Type O Negative . The Persuasions
. Jackie Wilson

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Sample Artists by Music Genre (Continued)

Rock 'n . Jerry Lee Lewis Pop . The Beach Boys
Roll . Carl Lee Perkins . Peter Cetera
. Ritchie Valens . Roger Daltrey
. Taylor Dayne
. The Foundations
. KC & The Sunshine Band
. The Vogues
. Dionne Warwick

Reggae . Black Uhuru Alternative . Circle Jerks
. Dennis Brown . The Fleshtones
. Culture . In The Nursery
. Marcia Griffiths . The Legendary Pink Dots
. The Heptones . Marine Girls
. Gregory Isaacs . The Moon Seven Times
. The Paragons . Plastic Noise Experience
. Lee "Scratch" Perry . Television
. Yellowman

Folk . The Burns Sisters Bluegrass . Bela Fleck
. Ramblin' Jack Elliott . The Bluegrass Album Band
. John Fahey . J.D. Crowe & The New
. David Grisman South
. Peter Keane . The Freight Hoppers
. Leo Kottke . John Hartford
. John McCutcheon . The Johnson Mountain Boys
. Tom Paxton . The Nashville Bluegrass
. Tony Rice Band
. Dave Van Ronk . Doc Watson
. Cheryl Wheeler

Punk . The Buzzcocks Easy Listening . Ronnie Aldrich
. The Dickies . Arthur Ferrante
. The Dictators . Nick Ingman Orchestra
. UK Subs . Intimate Broadway
. Peter Nero
. The Royal Philharmonic
Orchestra
. Pat Valentino

Techno . Chosen Few
. Fear Factory
. Front Line Assembly
. Intermix
. Technohead

We believe that we will continue to expand and diversify our existing music
catalog through our license agreement with EMI and through development of
content relationships with additional record labels.

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Downloading of Music on the Internet

As of January 1999, approximately five million MP3 players had been
downloaded by consumers, suggesting that MP3 is rapidly becoming a preferred
method of obtaining music files over the Internet. Music files in an MP3
format can be typically downloaded in approximately ten minutes using a 56K
modem. MP3 music files may be easily copied and transferred.

Under our agreement with EMI, EMI may elect to make selected music content
available for digital downloading on a non-exclusive basis through
musicmaker.com, once a secure industry-wide standard has been adopted by the
Secure Digital Music Initiative. Beginning in October 1998, musicmaker.com
customers could download selected songs from our music library directly
through the Internet. To date over 99% of our revenues have been generated
from the sale of custom CDs and less than 1% of our revenues have been
generated from sales of downloaded music. We expect revenues from downloaded
music sales to increase as digital downloading methods becomes more popular.
To date, musicmaker.com has approximately 23,000 songs available for digital
downloading in the various formats we currently support.

Liquid Audio and Secure-MP3, two secure downloading formats that protect the
copyrights of the record label and the recording artist are available for
digital downloading of music from our website. We license Liquid Audio, a
downloading format that prevents the transference of downloaded music to other
PCs. In addition, we have developed a new, secure MP3 format called Secure-
MP3. Secure-MP3 incorporates a watermarking technology licensed from Aris
Technologies. Our system embeds a permanent watermark into each MP3 music file
downloaded from our library, allowing the music file to be tracked by us or by
industry copyright protection agencies. Our digital downloads also support
Microsoft Corporation's new Windows Media Technologies, MS-Audio 4.0 and
Windows Rights Manager. During a Secure-MP3, Liquid Audio or MS-Audio 4.0
download, an on-screen display notifies the consumers that they are receiving
a copyrighted file and provides the name of the licensing record label. Each
of the formats supported by our digital downloads requires downloading a
software player to decrypt and play downloaded music files.

Marketing

Our marketing strategy is designed to build brand awareness, attract repeat
users and direct traffic to our website through hyperlinks with strategic
partner websites. We use a combination of advertising and promotion, both
traditional and online, to accomplish these objectives.

Marketing Alliances

To promote our custom CDs and establish musicmaker.com as the premier brand
for custom CDs, we rely upon strategic marketing alliances. We believe that as
a result of our recent content relationship with EMI, we may have
opportunities to pursue strategic marketing programs with EMI, including the
introduction of new online music services. We have existing marketing
alliances with major music clubs, labels, broadcasters and retailers,
including Columbia House, Platinum, Spinner Networks and Trans World. We also
have a marketing alliance with Audio Book Club and intend to seek additional
alliances with music and non-music retailers. These strategic alliances are
intended to drive traffic to our website, increase the number of websites
where our custom CDs can be purchased, and co-promote our products through
direct mail campaigns. Through marketing alliances, musicmaker.com seeks to be
the exclusive custom CD provider featured on a partner's website or in other
promotional materials or activities. We believe that our marketing alliances
provide us access to a targeted customer base, such as customers who purchase
music or music related merchandise online.

The Columbia House Company Alliance. We are currently the exclusive
marketer and featured retailer of custom CDs for Columbia House, a leading
record and video club, jointly owned by Sony Music Entertainment, Inc. and
Time Warner Inc. We provide our custom CD compilation services to Columbia
House's 15 million club members through website and direct mail promotions.
Sales from Columbia House accounted for 5% of net sales in 1998. In connection
with our marketing alliance with Columbia House, we issued a warrant to
purchase 478,226 shares of common stock at $1.98 per share to Columbia House,
which expires on September 1, 2001.

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The Company recorded an expense of $160,000 for the value of the warrant. We
also issued a warrant to purchase 242,077 shares at $1.98 per share to a
consultant for services rendered in connection with the signing of the
agreement, which expires on April 8, 2003. The Company recorded an expense of
$464,415 related to the issuance of this warrant.

Columbia House displays and promotes musicmaker.com's custom CDs on
ColumbiaHouse.com, its club website and TotalE.com, its non-club website that
offers music, videos, DVDs, computer software and other related merchandise to
the general public. Columbia House also provides a hyperlink directly to a co-
branded musicmaker.com and Columbia House website.

We will also market our custom CDs through a series of print promotion
campaigns in conjunction with the Columbia House's direct mail program.
Through these direct promotion campaigns, we can market our products to all of
Columbia House's members, including those without Internet access.
Musicmaker.com can include promotional inserts in at least six Columbia House
direct mailings per year. The inserts will promote both the co-branded and
musicmaker.com websites and allow club members to purchase custom CDs using a
mail-in form.

Our marketing alliance with Columbia House expires in September 2001. Under
this alliance, we may not sell custom CDs through any other music club without
prior consent of Columbia House. Additionally, we have exclusive rights to
offer our custom CDs to Columbia House's members unless and until one of our
competitors offers a significant repertoire of music content unavailable
through musicmaker.com. Columbia House and musicmaker.com share the profits
net of expenses, including but not limited to, actual expenses incurred under
the contract, royalties and reimbursements, from custom CD sales originating
from Columbia House members and from users referred from their websites. The
allocation of net profits is calculated based upon the terms of the
musicmaker.com license agreement covering each of the selected song titles.

If during the term of the Columbia House alliance, Sony or Warner
exclusively allow Columbia House club members to create custom CDs using music
from their libraries, Columbia House is required to use musicmaker.com as its
custom CD provider. Columbia House may terminate our alliance upon not less
than thirty days notice if Mr. Puthukarai ceases to be musicmaker.com's
President and Chief Operating Officer and Columbia House deems his replacement
incompatible with their interest, or Columbia House determines after the first
six musicmaker.com promotional mailings to its members that its financial
returns do not justify continuing the relationship. We mailed our first
promotional insert to Columbia House members on May 27, 1999.

Platinum Entertainment, Inc. Alliance. We are the exclusive marketer of
custom CDs and digitally downloaded music for Platinum, the largest
independent music label in the United States with artists such as Peter
Cetera, Roger Daltry, Crystal Gayle and Dionne Warwick. Platinum displays and
promotes our custom CDs on their PlatinumCD.com website which has a direct
hyperlink to musicmaker.com. Musicmaker.com also has exclusive license rights
to Platinum's entire music catalog of approximately 13,000 songs.

We have a marketing alliance and license agreement with Platinum that
expires in September 2003. We currently have exclusive rights to Platinum's
music content and to offer custom CDs on Platinum's website. After the first
two years of our alliance, however, Platinum may elect to provide its library
on a non-exclusive basis to other custom compilation providers. Net profits
from the sale of custom CDs under the alliance are allocated based upon the
song titles selected, from which website customer orders originate and the
exclusivity of the alliance. Under this alliance, we may not use music content
licensed from Platinum for sale of custom CDs through an automated kiosk.

Under our marketing and music content alliance with Platinum we intend to
offer approximately 13,000 in MP3 format. We began offering these digital
downloads in the second quarter of 1999 and to date have approximately 10,000
Platinum songs available for downloading in MP3 format.

Audio Book Club, Inc. Alliance. We have an exclusive marketing alliance
with Audio Book Club, a provider of direct to consumer marketing of audio
books with over 1.5 million audio users and buyers. Under this

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arrangement, musicmaker.com will be the exclusive provider of custom CDs
through the AudioBookClub.com and BooksAloud.com websites and through print
promotions in direct mailings to its members.

Our marketing alliance with Audio Book Club expires in January 2002, with
three-year renewals to be negotiated with terms no less favorable than the
current arrangement. Under this alliance, musicmaker.com will promote its
custom CDs:

. On Audio Book Club's websites.

. By participating in at least six direct mailings to club members per year.

. By sponsoring annual Valentine's Day and Christmas promotions.

Net profits of sales to Audio Book Club members will be allocated based upon
the license arrangements covering the songs selected. Audio Book Club may
terminate the marketing alliance upon 30 days' notice after the first six
months of the relationship.

Trans World Entertainment Corporation Alliance. We have a non-exclusive
marketing alliance with Trans World, one of the largest music retailers in the
United States operating approximately 520 specialty retail music and video
stores including approximately 320 mall locations under the names Record Town,
Saturday Matinee, and F.Y.E., and approximately 200 freestanding stores under
the names Coconuts Music and Movies, Planet Music, Strawberries and Waxie
Maxie's. Under this alliance, musicmaker.com and Trans World established a co-
branded, co-promoted marketing campaign to sell our custom CDs over the
Internet through Trans World's TWEC.com website.

Our marketing alliance with Trans World is for a one-year term, renewable
from year to year but terminable by either party upon 60 days notice after the
first year. The term began upon activation of the link between musicmaker.com
and TWEC.com. This alliance requires musicmaker.com to accept any music
content owned or licensed and offered by Trans World for inclusion in custom
CDs. Musicmaker.com and Trans World will divide the gross revenues received
from orders under the alliance based upon the license arrangement covering the
content included on custom CDs.

Spinner Networks, Inc. Alliance. We have an exclusive marketing alliance
with Spinner Networks, Inc., a leading Internet radio broadcaster reaching
approximately 1.5 million listeners monthly through its Spinner.com website.
Under this alliance, musicmaker.com and Spinner Networks will establish a co-
branded website through which we will sell our custom CDs and digital
downloads through the Spinner.com website. We will also include monthly
promotional sales of our custom CDs and digital downloads through our co-
branded "music store" on the Internet.

Our exclusive marketing alliance with Spinner Networks is for a six month
term and shall automatically renew for an additional six month period provided
that Spinner Networks receives agreed upon minimum revenues during the initial
term. After the first three months of the initial term, Spinner Networks may
request that we remove access from the co-branded website to our digital
downloads.

In connection with this alliance, we have agreed to purchase from Spinner
Networks not less than $37,500 in media placements, including banner ads and
sponsorship opportunities on Spinner.com, promoting our co-branded website. In
June 1999, America Online announced that it had acquired Spinner Networks.

Affiliate Program
We intend to position our website as part of an interconnected online music
network through our affiliate program. This program will allow customers who
visit affiliate websites to hyperlink to musicmaker.com through banner ads and
other prominent displays. Musicmaker.com will allocate a portion of revenue
from sales of custom CDs to the referring affiliate.

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Merchandising and Consumer Programs

Insider's Club. Our Insider's Club membership program awards members a free
song(s) on custom CDs. This club allows us to collect user demographics,
foster repeat purchases, and attempt to capture a greater portion of a
member's purchases of custom CDs and digitally downloaded music. Consumers
joining the Insider's Club submit personal and credit profiles to eliminate
time and effort required for the collection of billing and shipping
information.

Special Promotional Sales. We intend to produce and license custom CDs to
marketers for use as promotional items. We will have specialized sales
personnel who will target large companies for custom-made, promotional CD
products.

Targeted Consumer Marketing. We collect information on website visitors and
customers such as point of origin, advertisement banner clicks, destination
after leaving the musicmaker.com website, genres searched, previous purchases
and geographic location. Additional customer specific marketing data is
obtained through the musicmaker.com Insider's Club. This information is used
to develop advertising strategies and marketing campaigns and serves as the
basis for our one-to-one marketing efforts. We intend to deploy push-marketing
programs consisting of targeted e-mails, which may include discount coupons
and information regarding new releases and special sales and promotions. We
have also developed a Music Advisor program based on "intelligent agent"
software licensed from Net Perceptions, Inc. that compares consumers'
interests based upon past purchases and other activities and provides
personalized recommendations. Musicmaker.com believes that these personalized
measures are important in building and maintaining customer loyalty and in
positioning musicmaker.com as a preferred source of custom CDs and digitally
downloaded music.

Pricing
We price our custom CDs to be competitive with pre-recorded CDs sold in
retail locations. A five song custom CD is priced at $9.95 with each
additional song priced at $1.00, plus an additional charge for shipping and
handling. A charge of $4.00 is added to the price of custom CDs personalized
with customer-provided photographs. Songs digitally downloaded to a consumer's
PC are priced at $1.00 per song.

Electronic Kiosks
We intend to offer our custom CDs through stand-alone, touch screen, user-
friendly kiosks placed in strategic locations in 1999. We intend to place
these kiosks in retail music stores, university bookstores, national movie
theater chains, major book chains, convenience stores, computer store chains,
video chains, and other places frequented by potential music purchasers. Using
musicmaker.com's privately developed kiosk system, a consumer can select up to
20 songs from a library of music stored locally in the kiosk. The custom CD is
fabricated on musicmaker.com's recording system housed within the kiosk and
delivered automatically to the consumer within approximately five minutes of
placing the order. We believe that the presence of these kiosks in strategic
locations will further promote musicmaker.com as the premier brand for custom
CDs.

In April 1999, we entered into an agreement with Trans World Entertainment
Corporation to test market sales of our custom CDs through kiosks placed in
seven Trans World locations in Florida, New Jersey, New York and Virginia. We
expect our in-store kiosk test program to begin in August 1999 and to continue
for approximately five months.

Technology

Our technology enables us to rapidly manufacture and ship custom CDs that
are equivalent in sound quality to pre-recorded CDs. This process technology
consists of a storage and high speed CD fabrication system. That system runs
across a high speed fiber local area network managed and is controlled by
software we developed.

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We store and maintain our digital library of music files in uncompressed
format. The files are stored on mulitple hard drive units which are known as
arrays. Each array consists of five 18 gigabyte hard drives that holds
approximately 90 gigabytes of digital information, or approximately 2,250
uncompressed songs. Each array can be expanded up to eight 36 gigabyte hard
drives. Music data is typically received in digital format on pre-recorded CDs
or digital audio tape. Some of the older titles are converted to digital audio
tape from analog format prior to being transferred to the arrays for permanent
digital storage.

The array architecture is expandable and additional arrays can be added to
accommodate an increase in our online music library. Using this method, our
configuration can manage terabytes of musical data (or millions of songs of
storage capability). We believe that the array configuration is a cost-
effective storage method preferable to alternative systems including CD
jukeboxes and optical jukeboxes as it can:
. Expand to store additional data as necessary.

. Provide rapid search and retrieval functions.

. Provide a more reliable search, retrieval and delivery capability.

Moreover, alternative systems do not expand as easily or effectively and
also contain fragile moving parts. Our arrays are complemented by a magnetic
tape backup system, and each array can be re-recorded in approximately 60
minutes.

Database Management

Our system uses a software program to manage the vast amount of digital
music and customer information stored in the arrays. This program enables the
system to:

. Scan the stored musical data by artist, title, music genre or key word.

. Retrieve the music from the arrays.

. Deliver the information to the fabrication units that produce the custom
CDs.

The software runs on our workstation PCs that are linked to several magnetic
storage arrays. These PCs run in parallel on our high speed network. As a
result, any PC on the system can find musical information contained in any
array. The database is maintained on various servers running a UNIX operating
system. The workstations and PCs that run our web, storage, and news audio
servers are built to our specifications.

CD Fabrication
Our CD fabrication units automatically write musical information to a CD as
well as print song titles, artist names, graphics, pictures and other
personalized information on the CD. Based on an average CD selection of ten
songs, the custom CD can be produced in five minutes, or eight times as fast
as manual fabrication. Musical information is received by the fabrication
unit, sits in a queue and is assigned a consumer order number so that a
customer can check on the status of their order online. A single CD
fabrication unit is capable of producing up to approximately 1,500 CDs in a 24
hour period. The present capacity of our five fabrication units is
approximately 5,000 CDs per 24 hour period. Our production system is scalable
and can grow to support production of tens of thousands of CDs per day, or
millions of CDs per year. The scalable feature of the fabrication units does
not involve any modification to our software.

Fault Tolerance
Our storage and production architecture uses redundant servers and a tape
storage system for backup, to minimize downtime due to system outages or
maintenance needs. The largest single point of failure in our storage system
is a single magnetic disk or 36 gigabytes, approximately 1,000 songs, a
relatively small portion of our music library. Our architecture provides a
back-up system that allows continuous operation through redundant servers in
the event of occasional component failure. Even in the event of a complete
failure of an array, the system can redeposit the data digitally on the arrays
using high speed backup at a rate of approximately 450 songs per hour.

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musicmaker.com Website.
Musicmaker.com's website is easy to use, graphical in design and allows
custom music selection of titles from our music library. The website has a
built-in full-text search engine to allow customers to search by artist,
title, genre and keyword to find and display appropriate songs or artists.
Furthermore, each song has a 30-second Real Audio sample track which customers
can listen to prior to making a song selection.

The website's personalization capabilities offer the option of printing a
40-character message on the CD surface itself, on the tray card and on the
spines of the jewel box. Musicmaker.com also provides the capability for the
customer to select an occasion-specific graphic such as a birthday cake, rose,
or diploma to be printed on the CD surface, or upload a digital picture or
graphic to the server for printing in color on the CD surface. Digital
uploading of pictures is not part of the automated system.

Quality Assurance and Customer Service

We believe that high levels of consumer service and support are critical to
retaining and expanding our user base. After a CD is manufactured, it is
loaded into our testing facilities where the music is sampled by computer to
assure quality. The system also monitors the production process real time
during fabrication, and performs error checking throughout. Custom CDs are
then shipped within 24 hours of order.

Our representatives respond to inquiries regarding our products and register
consumers' credit card information over the phone. We believe that these
representatives are a valuable source of consumer feedback which we use to
improve our services. Customer service will be assisted by automated e-mails
which notify consumers about the status of their orders.

Competition

The market for providing music on the Internet is highly competitive and
rapidly changing. Since the Internet's commercialization in the early 1990's,
the number of websites on the Internet competing for consumers' attention and
spending has proliferated. With no substantial barriers to entry, we expect
that competition will continue to intensify.

Currently, there are more than 100 music retailing websites on the Internet,
most of which sell pre-recorded music CDs which can be purchased in most
retail music stores. In addition to intense competition from Internet music
retailers, we also face competition from traditional retail stores, including
chains and megastores, mass merchandisers, consumer electronics stores and
music clubs. Our most visible custom compilation competitors include
CustomDisc.com, CDuctive, amplified.com. Additionally, the major record
labels, often with resources greater than musicmaker.com's, may decide to
enter the custom CD business directly and would as a result be potential
competitors.

We also face significant and increasing competition in the growing market to
provide digitally downloaded music, specifically for music files in MP3
format. Competition to provide digitally downloaded music can currently be
found on the websites of existing online music retailers such as Amazon.com,
MP3.com and GoodNoise Corporation (recently renamed EMusic.com). Websites
established by recording artists and record labels have also begun to make
digital downloads available. Catalogs of songs available in MP3 format are
also provided by internet portals such as Lycos. We expect the competition to
provide MP3 files to intensify with further entry by additional record labels,
artists and portals, including those with greater resources and music content
than musicmaker.com. In February 1999, the five major record labels announced
that they have joined with IBM to conduct a market trial of a digital
distribution system, providing over 1,000 albums to cable subscribers in the
San Diego area. In May 1999, Microsoft Corporation and Sony Corporation
announced an agreement to make Sony's music content available for downloading
of singles from the Internet using Microsoft's multimedia technology. In May
1999, RealNetworks Inc. announced the introduction of its RealJukebox product,
for recording and storage of CDs and digital downloads and permitting
customized playback. In June 1999, media company Cox Enterprises Inc.
announced a joint venture and investment in MP3.com. In June 1999, Sony
announced a partnership with Digital On-Demand to provide for digital delivery
of its music catalog to in-store kiosks. We expect additional market trials
and alliances by technology and music

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<PAGE>

industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. We also expect
existing distribution technologies to continue to evolve and advance. See
"Risk Factors--Our industry has encountered and will continue to encounter
rapid and significant changes in music distribution methods."

Our ability to effectively compete in the online music industry will depend
upon, among other things:
. Our ability to expand the list of song titles available from our online
music library.
. Our success in obtaining content under our license agreement with EMI.
. Our continued promotion of the musicmaker.com website and brand.
. Our maintenance and improvement of the technical systems upon which our
operations rely.
. Our ability to attract and retain experienced management, technical,
marketing and sales personnel.
. Our ability to provide a high quality, easy to use mechanism by which
users can customize and purchase music at a reasonable price.

We believe that our primary competitive advantages in providing custom music
entertainment products and services via the Internet are:

. Relationship with EMI. . Expandable, cost-effective
. Brand recognition. technology.
. Ease of use of our customization . High quality custom CDs.
process. . Availability and high level of
. Competitive price of our custom consumer support.
CDs. . Technical expertise and
. Large online library of music experience.
available for custom CDs and . Music industry relationships
digital downloading. and experience of management.

Given the large growth potential of this marketplace, we believe that
competitors will enter the marketplace. We believe, however, that we have a
significant first mover advantage. We have established content and marketing
alliances with music labels, clubs, retailers and broadcasters. Our management
has a strong foundation of technological and music industry expertise. We
believe that our relationship with EMI uniquely positions us to become a
leader in online custom CD compilations. We believe that we will succeed in
building a high level of brand awareness to establish dominance prior to the
market entrance of a significant competitor. See "Risk Factors--Intense
competition for online music sales and entry by parties with greater resources
could harm our financial performance and industry position."

Employees

We believe that our employees and their knowledge and capabilities are a
major asset of musicmaker.com. We have been successful in attracting and
retaining employees skilled in our core business competencies and intend to
continue to employ highly skilled personnel.

As of June 1, 1999, we employed 17 full-time employees and 8 consultants. We
believe that our relations with our employees are good. None of our employees
are covered by collective bargaining agreements.

There is significant competition for employees with the managerial,
technical, marketing and sales skills required to operate our business. Our
success will depend in part upon our ability to attract, retain, train and
motivate highly skilled employees. See "Risk Factors--We depend upon hiring
and retaining qualified employees."

Intellectual Property and Trade Secrets

We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as contractual restrictions to protect our technology. It is our
policy to require that those persons with access to our privately developed
technology and information enter into confidentiality agreements with us upon
the commencement of their employment, consulting or other contractual
relationships.

We seek to protect our storage and fabrication system under patents and our
brand names as trademarks as noted below. Except as noted below, we presently
have no other patents, trademarks or patent/trademark applications pending.
Despite our efforts to protect our intellectual property rights, unauthorized
parties may

<PAGE>

attempt to copy or duplicate aspects of our production system or to obtain and
use information that we regard as privately developed or owned by
musicmaker.com. Policing unauthorized use of our intellectual property is
difficult, and there can be no assurance that our efforts to protect our
intellectual property rights and trade secrets will be adequate or that our
competition will not independently develop and patent similar or superior
technology. In addition, the laws of some foreign countries may not provide
protection of our intellectual property rights or trade secrets to as great an
extent as do the laws of the United States.

We expect that Internet music content providers including musicmaker.com
will be increasingly subject to infringement claims as the number of issued
Internet related and business model patents and music delivery websites
increases and the functionality of music delivery systems based upon new
technologies trend toward a similar appearance. Defending against infringement
claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require us to enter into
additional royalty or licensing agreements. The additional royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, and could have a material adverse effect upon our business,
results of operations, and financial condition.

Patents. We have been issued two notices of allowance for two patent
applications by the U.S. Patent and Trademark Office for a system for and
method of producing custom CDs and a system and method for producing
customized media on demand, which resulting patents will expire in 2016. The
notices of allowance mean that the U.S. Patent and Trademark Office, after
examination of our patent applications, has made a determination that we are
entitled to these patents for new inventions. We are currently using our
privately developed technology in the recording, storage, production and
delivery of our custom compilation CD products. We own an additional U.S.
patent application currently pending in the U.S. Patent and Trademark Office,
that describes variations on the technology and methods described in the
allowed patent applications. We may use these latter variations in our
business, or license them to other companies at a future time. We also own a
pending international counterpart patent application corresponding to the
subject matter of these U.S. patent applications. In addition, we have filed
three U.S. patent applications relating to kiosk technology and CD jewel
cases. We believe that our patent to be issued and other patent applications,
if issued, will be valuable assets in the event a competitor or other person
seeks to use the technology or systems protected by our patent filings. In an
infringement situation, we may be able to recover money damages, enjoin the
infringing activity or negotiate a favorable license with an infringer.

Trademarks. We own a number of trademarks based on our use of those marks in
commerce, and have applied to the U.S. Patent and Trademark Office to
federally register those marks as well as others based on our intent to use
them. We use the marks MUSIC CONNECTIONTM and MUSICMAKERTM, in commerce, and
have applied to register each of these trademarks with the U.S. Patent and
Trademark Office. We have also filed two additional trademark applications for
CD KITTM and MUSICMAGICTM based on our intent to use those marks. See "Risk
Factors--We depend upon intellectual property rights and risk having our
rights infringed."

Property

Our Reston, Virginia headquarters occupy approximately 4,500 square feet of
general office space. The monthly rent for this space is approximately $8,000.
Our current headquarters lease is set to expire in June 2005. In March 1999,
we entered into a ten-year lease for 3,712 rentable square feet of general
office space located in New York City. The rent for this space is
approximately $16,400 per month for the first three years with an
approximately 5% escalation in rent after each of the third and sixth
anniversaries of the lease's commencement. We believe that our current
leasehold facilities are adequate for our intended use for the foreseeable
future.

Legal Proceedings

We are not currently a party to any pending lawsuits, nor do we know of any
threatened claims which, in the aggregate, could have a material adverse
effect on our business, financial condition or results of operations. Some
aspects of our business and potential changes with regard to government
regulation of Internet commerce may, however, increase our risk of liability.
See "Risk Factors."

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MANAGEMENT

The following table sets forth information about our executive officers and
directors:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <S> <C>
Robert P. Bernardi....... 46 Chairman of the Board of Directors and Co-Chief Executive Officer
Devarajan S. Puthukarai.. 55 Director, President, Co-Chief Executive Officer and
Chief Operating Officer
Irwin H. Steinberg....... 78 Director, Vice Chairman of the Board of Directors
William Crowley.......... 45 Vice President of Marketing and Sales
Mark A. Fowler........... 38 Chief Financial Officer and Director of Finance and Administration
Lawrence A. Lieberman.... 38 Vice President of Internet Marketing
Edward J. Mathias........ 57 Director
Jay A. Samit............. 38 Director
Jonathan A.B. Smith...... 36 Director
John A. Skolas........... 47 Director
</TABLE>
- --------

Executive Officers and Directors

Robert P. Bernardi. Mr. Bernardi is musicmaker.com's founder, Chairman of
the Board of Directors and Co-Chief Executive Officer. Mr. Bernardi has served
as a director since Inception. From 1990 to 1996, Mr. Bernardi was a co-
founder, Chairman of the Board of Directors and Chief Executive Officer of
TREEV, Inc. (formerly Network Imaging Corporation), a publicly-held software
company for which he continues to serve as a director. From 1988 to 1990, Mr.
Bernardi was an independent consultant in the document imaging and
telecommunications fields. From 1987 to 1988, Mr. Bernardi was a co-founder,
President and Chief Executive Officer of TranSwitch Corporation, a publicly-
held company that designed high-speed telecommunications chips. From March
1984 to December 1987, Mr. Bernardi was Chairman of the Board of Directors and
Chief Executive Officer of Spectrum Digital Corporation, a publicly-held
telecommunications equipment manufacturing company. From 1984 to 1987, Mr.
Bernardi was a co-founder and director of PictureTel Corporation, a publicly-
held manufacturer of full-motion video conferencing systems. Prior to 1984,
Mr. Bernardi held various executive management positions with MCI
Communications Corporation, Mobil Corporation, Booz, Allen & Hamilton, Inc.
and The MITRE Corporation. Mr. Bernardi earned a Bachelor of Science degree in
Physics and a Master of Science degree in Business and Economics from the
State University of New York at Stonybrook.

Devarajan S. Puthukarai. Mr. Puthukarai is musicmaker.com's President, Co-
Chief Executive Officer and Chief Operating Officer and has served as director
since April 1997. From 1991 to April 1997, Mr. Puthukarai was President of
Warner Music Media, a division of Warner Music Enterprises, a Time Warner Inc.
company engaged in the business of promoting new and upcoming artists. From
1984 to 1990, Mr. Puthukarai was President of RCA Direct Marketing Inc./BMG
Direct Marketing Inc., launching one of the country's first CD music clubs and
building the world's largest classical music club. Mr. Puthukarai earned his
Bachelor of Science and Bachelor of Law degrees from Madras University in
India. Mr. Puthukarai earned a Master of Business Administration degree from
the Indian Institute of Management, a Harvard/Ford Foundation school in
Ahemadabad, India.

Irwin H. Steinberg. Mr. Steinberg has served as a musicmaker.com director
and Vice Chairman of the Board of Directors since January 1997. Mr. Steinberg
also serves as a consultant to musicmaker.com. From 1982 to the present, Mr.
Steinberg has been President of IHS Corporation, a consulting firm
specializing in the music industry. From 1975 to 1982, Mr. Steinberg was
Chairman and Chief Executive Officer of PolyGram Records, Inc. Mr. Steinberg
was co-founder of Mercury Records Corporation. From 1946 to 1975, Mr.
Steinberg was employed with Mercury Records Corporation where he progressed
from Chief Financial Officer to Executive Vice President to President, which
later position he held from 1968-1975. Mr. Steinberg currently serves as an
adjunct Professor at Columbia College of the Arts, in Chicago, where he
teaches graduate courses in music business. Mr. Steinberg holds a Bachelors
degree from the University of Chicago Business School and a Masters degree
from the California State University at Domingo Hills.

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William Crowley. Mr. Crowley has served as musicmaker.com's Vice President
of Marketing and Sales since August 1996. From 1995 to 1996, Mr. Crowley was a
Vice President at Warner Music Enterprises where he was responsible for
advertising, creative services and circulation marketing for its sampling
programs and roster of music magazines. From 1993 to 1995, Mr. Crowley was
Vice President at PolyGram Group Distribution, Inc. where he was responsible
for direct development of both music products and new channels of distribution
for PolyGram labels. From 1990 to 1993, Mr. Crowley was the Director of
Marketing and Product Development at Time Life Music where he was responsible
for new product and business activities for popular and classical music
products. From 1981 to 1990, Mr. Crowley was Director of Artists Repertoire
and Merchandising at BMG Direct Marketing, Inc. where he was responsible for
product selection and development, and merchandising and market research for
BMG music clubs. Mr. Crowley earned a Masters degree in Business
Administration from New York University and a Bachelors degree in Political
Science and Economics from Northwestern University.

Mark Fowler. Mr. Fowler has served as musicmaker.com's Chief Financial
Officer since January 1999 and as its Director of Finance and Administration
since April 1998. From 1995 to 1998, Mr. Fowler was the Controller at
BioReliance Corporation, a publicly-held international contract research
organization. From 1994 to 1995, Mr. Fowler was the Controller at Fusion
Lighting, Inc., an international research and development company. From 1991
to 1994, Mr. Fowler was the Controller at Excalibur Technologies Corporation,
a publicly-held software development firm. Prior to 1991, Mr. Fowler held
several positions, including a consultant position with Booz, Allen &
Hamilton, Inc. Mr. Fowler is a certified public accountant in the State of
Virginia. He earned a Bachelor of Science degree in Finance from Radford
University and is currently enrolled at the Johns Hopkins University pursuing
a Masters degree in Business Administration.

Lawrence A. Lieberman. Mr. Lieberman has served as musicmaker.com's Vice
President of Internet Marketing since May 1999. From September 1996 to May
1999, Mr. Lieberman was Vice President of Strategic Planning and New Business
Development at Comedy Central, a cable television network owned jointly by
Time Warner and Viacom, where he was responsible for business activities
ancillary to its regular cable operations and managed all aspects of the
comedycentral.com site. Mr. Lieberman was the Executive Producer of the multi-
million selling "Chef Aid: The South Park Album," developed the "South Park"
home video line with sales in excess of three million units, and initiated
South Park's worldwide merchandise program including T-shirts, video games,
books and CD-ROMs. From February 1996 to September 1996, Mr. Lieberman was
with Time Inc. New Media developing content for their various Internet sites.
From August 1992 to February 1996, Mr. Lieberman was Vice President of
Marketing and Artist Relations at Warner Music Enterprises, and from April
1989 to August 1992, Mr. Lieberman was Director of Merchandising and Marketing
at MTV. Mr. Lieberman currently serves as an associate overseer at the Leonard
N. Stern School of Business at New York University and as a trustee of the
Hudson Valley Children's Museum. Mr. Lieberman earned a Masters degree in
Business Administration degree from the Leonard N. Stern School of Business at
New York University, and a Bachelors degree in Economics from Union College in
Schenectady, New York.

Edward J. Mathias. Mr. Mathias has served as a musicmaker.com director
since December 1996. Mr. Mathias is a Managing Director and assisted in
founding The Carlyle Group L.P., a Washington, D.C.-based merchant bank. Mr.
Mathias is also a special limited partner in Trident Capital, a partnership
focusing on business and information service companies. Mr. Mathias currently
serves as a director for U.S. Office Products Company, Inc., Condor Technology
Solutions, Inc. and U.S.A. Floral Products, Inc., and has served as a director
for Sirrom Capital Corporation, each a publicly-held company. In addition, Mr.
Mathias sits on a number of advisory committees for private equity
partnerships. From 1971 to 1993, Mr. Mathias held various positions with T.
Rowe Price Associates, Inc., an investment management organization, most
recently as a Managing Director. Mr. Mathias has served on T. Rowe Price's
Board of Directors and was a member of its Management Committee for over ten
years. Mr. Mathias holds a Masters degree in Business Administration from
Harvard Business School and a Bachelors degree from the University of
Pennsylvania.

Jay A. Samit. Mr. Samit has served as a musicmaker.com director since June
1999. Mr. Samit has been the Senior Vice President of Worldwide New Media for
EMI Recorded Music since April 1999, responsible for

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the strategy and implementation of all business development, strategic
alliances, marketing partnerships and creative development of internet, online
and website activities. From October 1996 to March 1999, Mr. Samit was Vice
President of Original Content for Universal Studios New Media Group and also
President of animalhouse.com, a Universal joint venture targeted at the online
college community. Prior to October 1996, Mr. Samit was the President of
Jasmine Multimedia Publishing, a new media publishing company founded by him
in 1981. Mr. Samit graduated magna cum laude from the University of California
at Los Angeles and received the Presidential Fellowship in 1981.

Jonathan A. B. Smith. Mr. Smith has served as a musicmaker.com director
since June 1999. Since January 1999, Mr. Smith has been the Vice President of
Finance and Planning for EMI Recorded Music North America, responsible for
overseeing corporate finance functions for EMI Recorded Music in North
America. From May 1995 to December 1998, Mr. Smith served as the Head of
Business Planning Support for EMI Records (U.K.). Mr. Smith graduated with
honors from The University of Hull, in Hull, United Kingdom, with degrees in
Economics and Politics and he has been a member of the Chartered Institute of
Certified Accountants since 1989.

John A. Skolas. Mr. Skolas has served as a musicmaker.com director since
June 1999. Mr. Skolas recently accepted a position as Chief Financial Officer
of Coelacanth Corporation, responsible for oversight of its financial and
administrative matters. From February 1998 until June 1999, Mr. Skolas served
as Chief Financial Officer and General Counsel of PhytoWorks Inc., responsible
for writing significant portions of the company's business plan, negotiating
transactions, structuring intellectual property licenses and handling a wide
range of financial and administrative matters. From February 1, 1992 until
March 31, 1997, Mr. Skolas served as President/Corporate Officer of the
Americas of EMI Group, Inc., the finance, treasury, tax and administrative
subsidiary of EMI Group plc serving its U.S. subsidiaries. From February 1,
1992 until January 1, 1999, Mr. Skolas also served as President and General
Counsel of EMI Group North America Inc., responsible for overseeing licensing
of semiconductor patents held by EMI Group. Mr. Skolas holds a Masters degree
in Business Administration from Harvard Business School, a Juris Doctor from
the University of Wisconsin Law School and a Bachelor of Arts degree from
Luther College. He holds a Certified Public Accountant certificate from the
Iowa Board of Accountancy and is admitted to practice law in Minnesota and
Wisconsin.

Classified Board of Directors, Stockholders' Agreement and Executive Officers

Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three classes of
directors, designated Class A, Class B and Class C directors, serving
staggered three year terms. With respect to the present Board (consisting of
seven members), the terms of the Class B directors, Mr. Mathias, Mr. Steinberg
and Mr. Smith, will expire at the 2001 annual meeting of stockholders and the
terms of the Class C directors, Mr. Bernardi, Mr. Puthukarai and Mr. Samit,
will expire at the 2002 annual meeting of stockholders. The term of the Class
A director, Mr. Skolas, will expire at the 2000 annual meeting of
stockholders.

Description of Stockholders' Agreement

Musicmaker.com entered into a stockholders' agreement with Virgin Holdings,
Rho Management Trust I, Messrs. Bernardi, Puthukarai, Steinberg and RHL
Ventures, LLC. The parties to the stockholders' agreement are required to vote
their shares of common stock to ensure that the number of directors on the
Board remains at seven and includes three directors designated by Virgin
Holdings, two directors designated by musicmaker.com and two independent
directors. Each class of directors must include one Virgin Holdings director.
Directors will be elected at annual meetings of stockholders to serve a three
year term and until their respective successors are duly elected and qualify,
or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy on the Board of Directors for an
unexpired term.

Executive officers are appointed by and serve at the discretion of the Board
of Directors.

Committees of the Board of Directors and Compensation

The Board of Directors has designated an Audit Committee of the Board of
Directors, which shall consist of Mr. Skolas and Mr. Mathias after the
offering. The Audit Committee is responsible for reviewing, along with our
independent public accountants, the scope of our accounting audits, as well as
our corporate accounting practices and policies. The Audit Committee shall
also review our accounting and financial controls, and be available to our
independent public accountants for any necessary consultation.

43
<PAGE>

The Board of Directors has also designated a Compensation Committee of the
Board of Directors, which shall consist of Mr. Bernardi, Mr. Mathias and Mr.
Samit after the offering. The Compensation Committee shall review the
performance of our management and recommend and approve the compensation of
and the issuance of stock options to executive officers and employees under
our stock option plan.

Musicmaker.com directors currently do not receive a fee for their service on
the Board of Directors or any committee of the board. Directors are eligible
to receive stock options under musicmaker.com's stock option plan. Mr. Samit,
a non-employee, non-consultant director, received 75,000 common stock options
for his service on the Board. Mr. Mathias, a non-employee, non-consultant
director, received 83,250 common stock options for his service on the Board.
Mr. Skolas a non-employee, non-consultant director, received 25,000 common
stock options for his service on the Board. Mr. Smith, a non-employee, non-
consultant director, received 25,000 common stock options for his service on
the Board. All of these options were issued with an exercise price equal to
the fair market value of the common stock on the date of grant. Directors
receive reimbursement to cover their reasonable expenses incurred in attending
Board meetings. Under the terms of his consulting agreement, Mr. Steinberg,
musicmaker.com's Vice Chairman of the Board, receives compensation of $1,200
per meeting of the Board of Directors or any committee.

Compensation Interlocks and Insider Participation

The current members of the Compensation Committee are Mr. Bernardi, Mr.
Mathias and Mr. Samit. Accordingly, to date, the Compensation Committee,
including directors who are or were executive officers of musicmaker.com, has
made all determinations concerning compensation of musicmaker.com's executive
officers. During his term on the Compensation Committee, Mr. Bernardi has
agreed not to participate in decisions regarding his own compensation. See "--
Committees of the Board of Directors and Compensation" and "--Stock Option
Plan."

Executive Compensation

The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to musicmaker.com in all capacities during the
fiscal year ended December 31, 1998, by musicmaker.com's chief executive
officer and other executive officers whose salary and bonus for fiscal year
1998 exceeded $100,000 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation Number of Shares
------------------- Underlying
Name and Principal Position Salary Bonus Options (#)
--------------------------- ------------------- -------------------
<S> <C> <C> <C>
Robert P. Bernardi................. $ 175,000 -- 302,597
Chairman of the Board of Directors
and Co-Chief Executive Officer
Devarajan S. Puthukarai............ $ 250,000 $ 100,000 302,597
President, Co-Chief Executive
Officer and Chief Operating Officer
</TABLE>

The following table sets forth information regarding the grant of options to
purchase musicmaker.com's common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998. Potential realizable value
assumes that the common stock appreciates at the indicated annual rate
(compounded annually) from the grant date until the expiration of the option
term and is calculated based on the requirements of the Securities and
Exchange Commission. Potential realizable value does not represent
musicmaker.com's estimate of future stock price growth.

Option Grants in 1998

<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Individual Grants Term
--------------------------------------------- ---------------------------
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal 1998 Per Share Date 5% 10%
---- ---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Bernardi...... 193,662 21.3% $2.27 2003 $ 1,960,000 $ 3,960,000
108,935 12.0% 2.06 2008 1,125,000 2,250,000
Devarajan S.
Puthukarai............. 193,662 21.3% 2.27 2003 1,960,000 3,960,000
108,935 12.0% 2.06 2008 1,125,000 2,250,000
</TABLE>

44
<PAGE>

The following table sets forth information regarding the number and value of
securities underlying options held by each of the Named Executive Officers at
the end of fiscal 1998. No options were exercised by any of the Named
Executive Officers during 1998.

Aggregate Option Exercises and Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options at December 31, 1998
--------------------------------
Name Exercisable Unexercisable
---- ------------- ---------------
<S> <C> <C>
Robert P. Bernardi........................... 48,417 254,180
Devarajan S. Puthukarai...................... 48,417 254,180
</TABLE>

Employment Agreements and Consulting Agreements

Mr. Bernardi and Mr. Puthukarai each have employment agreements with initial
terms through December 7, 2002. These agreements require that each commit
substantially all of his time and effort to furthering musicmaker.com's
interests and restrict competition with musicmaker.com during the term of the
agreement and for one year following termination. Under their employment
agreements, Mr. Bernardi receives a base salary of $175,000 per annum and Mr.
Puthukarai receives a base salary of $250,000 per annum. Each is eligible for
payment of bonuses and stock options as determined by the Compensation
Committee of the Board of Directors. Mr. Puthukarai is guaranteed a minimum
annual bonus of $100,000. Upon termination by musicmaker.com without cause, or
termination by Mr. Bernardi or Mr. Puthukarai upon non-compliance by
musicmaker.com with a material provision of the employment agreement, their
respective employment agreements provide for payment of all accrued salary,
benefits and bonus plus a sum equal to the salary, benefits and bonus that
would have been received if the initial or any renewal term had been
completed, discounted by three percent. Each agreement is automatically
renewable on a year-to-year basis following expiration of the initial term,
and any renewal term unless written notice of non-renewal is given by either
party 90 days before expiration of any term. Should musicmaker.com decide not
to renew their respective agreements, Mr. Bernardi and Mr. Puthukarai shall be
entitled to a severance payment equal to one year's salary and benefits, as in
effect prior to termination. Each agreement restricts the ability of Mr.
Bernardi and Mr. Puthukarai to solicit customers or call upon employees of
musicmaker.com for one year after the terms of each of their agreements. The
agreements further restrict ownership in excess of 5% of any U.S. publicly
traded company which is engaged in musicmaker.com's business.

Under a consulting agreement between musicmaker.com and IHS Corporation, Mr.
Steinberg is required to provide consulting services to musicmaker.com for not
less than fifteen days in any given month. Mr. Steinberg seeks to obtain, on
musicmaker.com's behalf, additional license agreements and content
relationships with record labels in an effort to expand musicmaker.com's music
library. The Steinberg Consulting Agreement is non-exclusive; however, Mr.
Steinberg is restricted from providing consulting services to any of
musicmaker.com's competitors. For his services, Mr. Steinberg is paid a
minimum monthly payment of $9,000. Mr. Steinberg also receives compensation of
$1,200 per day in connection with his attendance at meetings of
musicmaker.com's Board of Directors or any committee thereof.

Key Man Insurance

Musicmaker.com has key man insurance covering Mr. Bernardi in the amount of
$1 million and naming musicmaker.com as beneficiary.

Stock Option Plan

Musicmaker.com has adopted a stock option plan for the purpose of promoting
our long-term growth and profitability by:

. Providing key people with incentives to improve stockholder value and
contribute to the growth and financial success of musicmaker.com.

45
<PAGE>

. Enabling musicmaker.com to attract, retain and reward talented and
skilled persons for positions of substantial responsibility.

Musicmaker.com has used stock options as a significant component of
compensation for our officers and key employees.

The stock option plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
including non-qualified options and incentive stock options under Section 422
of the Internal Revenue Code. The stock option plan also provides for the
award of stock appreciation rights, including free standing, tandem and
limited stock appreciation rights. Under the stock option plan
4,200,000 shares of common stock are reserved for issuance, representing 14.0%
of the shares of common stock expected to be outstanding immediately
subsequent to this offering. As of the date of this prospectus, options to
purchase a total of 2,044,882 shares of common stock were outstanding, at
exercise prices ranging from $0.17 to $13.00 per share. No options have been
exercised and no stock appreciation rights have been granted to date.

Subsequent to this offering, the stock option plan will be administered by
the Compensation Committee of the Board of Directors, which will include at
least two "disinterested persons," for purposes of Rule 16b-3 under the
Exchange Act, and "outside directors," within the meaning of Section 162(m) of
the Internal Revenue Code. The Compensation Committee will select the
participants and establish the terms and conditions of each option or other
rights granted under the stock option plan, including the exercise price, the
number of shares subject to options or other equity rights and the time at
which the options become exercisable. See "--Committees of the Board of
Directors and Compensation." The exercise price of all "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code,
granted under the stock option plan must be at least equal to 100% of the fair
market value of the option shares on the date of grant. The term of any
incentive stock option granted under the stock option plan may not exceed ten
years. Where the eligible stock option plan participant owns over 10% of the
total combined voting power of all classes of stock of musicmaker.com,
however, the exercise price must be at least equal to 110% of the fair market
value of the option shares on the date of grant and the term cannot exceed
five years.

To the extent required to comply with Rule 16b-3 under the Exchange Act, if
applicable, and in any event in the case of an incentive stock option or stock
appreciation right granted with respect to an incentive stock option, no award
granted under the stock option plan shall be transferable by a grantee
otherwise than by will or by the laws of descent and distribution. Other terms
and conditions of each award are set forth in the grant agreement governing
that award and determined by the Compensation Committee.

Indemnification of Directors and Officers

Musicmaker.com's Charter and Bylaws provide that it shall indemnify all of
its directors and officers to the full extent permitted by the Delaware
General Corporation Law. Under these provisions, any director or officer who,
in his or her capacity as such, is made or threatened to be made a party to
any suit or proceeding, may be indemnified if the Board determines the
director or officer acted in good faith and in a manner the director
reasonably believed to be in, or not opposed to, the best interests of
musicmaker.com. The Charter, Bylaws, and Delaware law further provide that
indemnification is not exclusive of any other rights to which directors and
officers may be entitled under our Charter, Bylaws, any agreement, any vote of
stockholders or disinterested directors, or otherwise.

Musicmaker.com has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of
musicmaker.com, or is or was serving at the request of musicmaker.com as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any expense, liability, or
loss incurred by that person in the capacity he served for musicmaker.com or
arising out of his status as such, whether or not musicmaker.com would have
the power to indemnify that person against similar liability under Delaware
law. Musicmaker.com has director and officer insurance coverage. Our directors
and officers are insured against liability of up to $2,000,000 for each loss,
each policy year, and an additional $3,000,000 in the aggregate each policy
year.

46
<PAGE>

CERTAIN TRANSACTIONS

In July 1996, we sold 1,286,038 shares of common stock to Mr. Bernardi, our
founder, Chairman of the Board of Directors and Co-Chief Executive Officer,
for nominal cash consideration in connection with musicmaker.com's formation.

In July 1996, we acquired CD Kit, S.A. in exchange for 1,512,984 shares of
common stock, payable to the stockholders of CD Kit, S.A. In exchange we
received 8,000 shares of CD Kit, SA, all of its outstanding capital stock. In
connection with the acquisition of CD Kit, S.A., Bruno Costa-Marini and Jean
Francois Dockes, each a former stockholder of CD Kit, S.A., became the
beneficial owners of 665,714 and 438,766 shares of our common stock, in that
order.

Between December 1996 and May 1997, musicmaker.com sold 12% convertible
notes to accredited investors for $650,000. The notes were convertible into
our common stock at $2.89 per share. Of these investors, Mr. Bernardi and Mr.
Mathias, one of our directors, participated in the offering, purchasing notes
and paying aggregate consideration of $50,000 and $150,000, in that order.
These purchases were on the same terms as those applying to non-affiliated
investors participating in the convertible notes offering.

In connection with a private placement of securities, in June and July 1997
we converted the principal and all accrued interest under the terms of the
outstanding convertible notes at a price of $1.65 per share, rather than $2.89
a share as stated in the original offering. In connection with the conversion
of the notes and the private placement of our common stock, Mr. Bernardi
received 32,189 shares of our common stock and Mr. Mathias received 96,569
shares of our common stock. The conversion of the notes belonging to Mr.
Bernardi and Mr. Mathias was conducted on the same terms as that provided to
non-affiliated investors participating in the conversion. In addition to the
common stock received upon the conversion above, Mr. Bernardi purchased an
additional 15,130 shares of common stock in the June 1997 private placement at
$1.65 per share.

In October 1997, we issued 453,896 common stock warrants to Mr. Puthukarai,
musicmaker.com's President, Co-Chief Executive Officer and Chief Operating
Officer, as part of his compensation and in exchange for services previously
rendered to musicmaker.com. The warrants have an exercise price of $1.65 per
share and expire on October 15, 2007.

In December 1997, musicmaker.com issued and sold 875,384 shares of our
Series A outstanding preferred stock, par value $.01, to Rho Management Trust
I, a venture capital firm. Mr. Bernardi and Mr. Puthukarai also purchased
121,038 and 30,259 shares of our Series A outstanding preferred stock, in that
order. The shares were purchased at a price of $1.65 per share. Additionally,
1,667,398, 230,550 and 57,637 Series B outstanding preferred warrants were
issued to Rho, Mr. Bernardi and Mr. Puthukarai, in that order. The Series B
outstanding preferred warrants expire on December 8, 2002 and are exercisable
for Series B outstanding preferred stock, par value $.01 per share, at an
exercise price of $1.98 per share. We also issued 438,280, 60,600 and 15,150
Series C outstanding preferred warrants to Rho, Mr. Bernardi and Mr.
Puthukarai, in that order. The Series C outstanding preferred warrants expire
on December 8, 2001 and are exercisable for Series C outstanding preferred
stock, par value $.01 per share, at an exercise price of $2.48 per share.
Musicmaker.com received $1,696,450 in aggregate consideration from the
investors above in connection with this round of venture financing. In March
and June, 1998, holders of the Series B outstanding preferred warrants
exercised 849,640 warrants which were converted to Series B outstanding
preferred stock at $1.98 per share. Of the 849,640 warrants exercised, Mr.
Bernardi received 96,061 shares and Mr. Puthukarai received 24,015 shares of
Series B outstanding preferred stock. The shares above were issued in exchange
for the relinquishment of $133,334 of Mr. Bernardi's accrued salary and
$33,333 of Mr. Puthukarai's accrued bonus. Rho received an additional 712,753
shares of Series B outstanding preferred stock, in connection with the
exercise of the warrants.

47
<PAGE>

2008. In August 1998, musicmaker.com issued 60,516 common stock warrants to
four members of Mr. Steinberg's family as record holders. The warrants were
granted as compensation for consulting services rendered to musicmaker.com by
Mr. Steinberg and he is the beneficial owner of these warrants. The warrants
are convertible by the holders into common stock at an exercise price of $1.98
per share and expire on August 15, 2008.

In September 1998, we issued 605,194 shares of our common stock to Platinum
at a value of $1,650,000. In exchange for shares of our common stock and in
accordance with the terms of a stock exchange agreement, dated September 30,
1998, and each of a licensing agreement and a marketing agreement of even date
therewith, we entered into a strategic marketing and content alliance under
which we market and sell our custom CDs on Platinum's website and have a
license to use their song library. We also received 111,457 shares of
Platinum's common stock, having an aggregate value of $750,000. In November
1998, an additional 193,662 shares of our common stock were issued to Platinum
in connection with, and as payment under, the stock exchange agreement noted
above. See "Business--Marketing."

In December 1998, we loaned $81,519 to Mr. Puthukarai all of which was
outstanding at December 31, 1998, and all of which is currently outstanding.
The loan is to be repaid without interest and upon demand under a note held by
musicmaker.com. The funds were loaned for payment of federal and state income
taxes.

To date, accrued salary not yet paid by musicmaker.com is owed to Mr.
Bernardi in an amount of approximately $165,417.

On June 8, 1999, we executed a license agreement with EMI. Under this
agreement, we will make royalty payments in connection with sales of our
custom CDs including music content provided by EMI. In exchange for our rights
under the license agreement, we issued 15,170,860 shares of our common stock
to Virgin Holdings. Virgin Holdings shall receive approximately $40,000,000
from the sale of 3,400,000 shares of its stock in this offering. Jay A. Samit
and Jonathan A.B. Smith, newly appointed directors to the musicmaker.com Board
of Directors, serve as executive officers of EMI Recorded Music.

On July 1, 1999, musicmaker.com issued a demand promissory note to Rho
Management Trust I for financing in the principal amount of $1,000,000 in the
form of a subordinated note bearing interest at 12% and maturing on January 1,
2000. We are required to repay the loan from the proceeds of this offering.
The committment letter states that if muscimaker.com has not consummated this
offering by September 30, 1999, the interest payable on the note increases to
14%.

We believe that the above-described transactions are as fair to
musicmaker.com as could have been obtained with unaffiliated parties. We
intend that all future transactions with officers, directors or principal
stockholders of musicmaker.com will be approved or ratified by a majority of
the Board of Directors, including a majority of the disinterested, independent
directors. Moreover, we intend that future transactions with affiliates will
be on terms no less favorable to musicmaker.com than could be obtained from
unaffiliated third parties.

48
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding shares of our common
stock beneficially owned as of July 1, 1999, and as adjusted to reflect the
offering, by:

. Each person or group known to musicmaker.com, that beneficially owns
more than five percent of our outstanding common stock.

. Musicmaker.com's directors and Named Executive Officers.

. All of musicmaker.com's executive officers and directors as a group.

Beneficial ownership is calculated in accordance with Rule 13d-3(d) under
the Securities Exchange Act of 1934. Shares of common stock subject to options
and warrants that are currently exercisable or are exercisable within 60 days
of July 1, 1999, are deemed outstanding with respect to the person holding
those options but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated, each
person possesses sole voting and investment power with respect to the shares
identified as beneficially owned. Except as otherwise indicated in the table,
the address of the stockholders listed below is that of musicmaker.com's
principal executive office. Directors not included in the table below do not
hold musicmaker.com securities. See "Risk Factors--Current management owns a
large percentage of musicmaker.com's voting securities." Shares beneficially
owned prior to the offering are as adjusted to reflect and include the
automatic conversion upon the completion of the offering of:

. All outstanding preferred stock into common stock.

. All outstanding convertible notes into common stock.

. All outstanding preferred warrants into common stock warrants.

<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned Owned After the
Name and Address Prior to the Offering Offering
---------------- ----------------------------------------------------------
Number Percent Number Percent
--------------- ------------------------- ----------
<S> <C> <C> <C> <C>
Virgin Holdings, Inc.... 15,170,860 60.8% 11,770,860 39.3%
338 North Foothill Road
Beverly Hills, CA 90210
Rho Management Trust I.. 2,814,321(1) 10.8% 2,814,321 9.0%
767 Fifth Avenue
New York, NY 10053
Robert P. Bernardi...... 2,144,107(2) 8.4% 2,144,107 7.0%
Devarajan S.
Puthukarai............. 1,045,419(3) 4.1% 1,045,419 3.5%
Irwin H. Steinberg...... 351,008(4) 1.3% 351,008(4) 1.2%
Jay A. Samit............ 18,750(5) * 18,750(5) *
Jonathan A.B. Smith..... 6,250(6) * 6,250(6) *
John A. Skolas.......... 6,250(7) * 6,250(7) *
Edward J. Mathias....... 162,978(8) * 162,978(8) *
All executive officers
and directors as a
group (10 persons)..... 3,939,264(9) 14.9% 3,939,264(9) 12.5%
</TABLE>
- --------
* Less than 1%.

(1) Includes, upon the completion of this offering:

. 875,384 shares of Series A and 712,753 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon completion of the offering.

. 787,904 Series B and 438,280 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon completion of the offering.

Rho Management Partners L.P., a Delaware limited partnership may be deemed
the beneficial owner of shares registered in the name of Rho Management
Trust I, under an investment advisory relationship by which Rho Management
Partners L.P. exercises sole voting and investment control over its shares
and warrants.

49
<PAGE>

(2) Includes:

. 121,038 shares of Series A and 96,061 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon the completion of this offering.

. 272,817 Series B and 60,600 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon the completion of this offering.

. 151,298 vested options for common stock with exercise prices ranging
from $2.06 to $2.27 per share.

(3) Includes:

. 453,896 common stock warrants with an exercise price of $1.65 per share.

. 30,259 shares of Series A and 24,015 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon the completion of this offering.

. 68,204 Series B and 15,150 Series C outstanding preferred warrants to be
automatically converted into the same number of common stock warrants,
upon the completion of this offering.

. 151,298 vested options for common stock with exercise prices ranging
from $2.06 to $2.27 per share.

(4) Includes 229,970 common stock warrants with exercise prices ranging from
$1.65 to $1.98 per share.

(5) Includes 18,750 vested options for common stock.

(6) Includes 6,250 vested options for common stock.

(7) Includes 6,250 vested options for common stock.

(8) Includes 6,250 vested options for common stock.

(9) Includes:

. 151,297 shares of Series A and 120,076 shares of Series B outstanding
preferred stock, to be automatically converted into the same number of
shares of common stock, upon completion of this offering.

. 341,021 Series B and 75,750 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon completion of this offering.

. 683,866 outstanding common stock warrants and 423,560 vested options for
common stock.

Selling Stockholder

Virgin Holdings, Inc., an affiliate of EMI Recorded Music, is the selling
stockholder in this offering. Prior to this offering, Virgin Holdings
beneficially owned 15,170,860 shares of our common stock, a majority interest
in musicmaker.com. Virgin Holdings is selling 3,400,000 shares of its common
stock in this offering. The shares offered to the public by Virgin Holdings
were issued to them in connection with entering into our license agreement
with Virgin Holdings in June 1999. Musicmaker.com is registering Virgin
Holdings' 3,400,000 shares of common stock under the terms of a registration
rights agreement among musicmaker.com, Virgin Holdings, Rho Management Trust
I, Columbia House, Messrs. Bernardi, Puthukarai, Steinberg and RHL Ventures,
LLC. See "Description of Securities--Registration Rights." As required under
the terms of a stockholders' agreement among musicmaker.com, Virgin Holdings,
Rho Management Trust I, Messrs. Bernardi, Puthukarai, Steinberg and RHL
Ventures, LLC, the parties to the agreement are required to vote their shares
to ensure that our Board of Directors remains at seven members, including
three directors designated by Virgin Holdings. Messrs. Samit, Smith and Skolas
are the Virgin Holdings directors currently serving on our Board of Directors
and have received options for common stock in connection with their service as
directors. See "Management--Description of Stockholders' Agreement" and "--
Committees of the Board of Directors and Compensation."

50
<PAGE>

DESCRIPTION OF SECURITIES

General

In our Charter, musicmaker.com is authorized to issue up to 100,000,000
shares of common stock, par value $.01 and 3,606,662 shares of preferred
stock, par value $.01 per share. Prior to this offering, 22,067,733 shares of
common stock were issued and outstanding and an additional 8,425,833 were
reserved for issuance under the terms of outstanding options, warrants and
conversion features of other securities issued. As of June 25, 1999, there
were approximately 100 holders of our common stock.

The following description of our capital stock is a summary and is qualified
in its entirety by the provisions of our Charter, Bylaws and applicable law.
These documents have been filed as exhibits to the registration statement, of
which this prospectus forms a part.

Stock Split and Reverse Stock Split

On June 14, 1999, musicmaker.com effected a 2.33-for-one stock split
reclassifying our authorized and outstanding common stock. On April 8, 1999,
musicmaker.com effected a one-for-3.85 reverse stock split reclassifying our
authorized and outstanding common stock. Both the stock split and the reverse
stock split similarly affected the holders of our outstanding options and
warrants for common stock, and the conversion features of the holders of our
outstanding preferred stock, outstanding preferred warrants, and convertible
notes.

Common Stock

The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Holders of common stock are
entitled to share in any and all dividends that our Board of Directors, in its
discretion, declares from funds legally available for that purpose. In the
event of any liquidation or dissolution of musicmaker.com, the holders of
common stock are entitled to participate in and share pro rata in the assets
available for distribution to stockholders. Any distribution would be
subsequent to payment of our liabilities and may be subject to any
preferential rights of any preferred stock or other senior security then
outstanding. The holders of common stock have no cumulative voting, preemptive
or other subscription rights, and there are no conversion rights or redemption
or sinking fund provisions with respect to the common stock. All outstanding
shares of common stock are, and the shares of common stock in this offering
upon issuance and sale will be, fully paid and non-assessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of any shares of
preferred stock or senior securities which musicmaker.com may designate in the
future.

Preferred Stock

Under musicmaker.com's Charter, our Board of Directors may, without further
action by stockholders, from time to time, issue one or more series of
preferred stock. Blank check preferred stock may be issued with the rights,
preferences, privileges and limitations as the Board of Directors determines
and as permitted by Delaware Law, including:

. The number of shares constituting the series and the distinctive
designation of the series of preferred stock.

. The dividend rate on the preferred stock, the dates of payment and
whether the dividends shall be cumulative.

. The extent of voting rights, if any, to be granted to holders of any
series of preferred stock.

. Other rights, privileges and preferences, including conversion into
common stock, redemption by the holder or musicmaker.com and priority
upon liquidation, dissolution or winding up of musicmaker.com.

Registration Rights

Virgin Holdings, Rho Management Trust I, Columbia House, Messrs. Bernardi,
Puthukarai, Steinberg, and RHL Ventures LLC entered into an agreement with
musicmaker.com governing their registration rights which

51
<PAGE>

replaces and supersedes any registration rights previously granted to those
entities and individuals. Virgin Holdings can require musicmaker.com to effect
an initial public offering and can include in that offering securities up to
an amount that results in Virgin Holdings receiving up to $40 million in
proceeds. Under that agreement, musicmaker.com also granted demand
registration rights to Virgin Holdings, Rho Management Trust I and Columbia
House, allowing them to request registration of all or any of their securities
at any time nine months after an initial public offering, if at least 750,000
shares are requested to be registered. Each one of these entities may
participate in a registration demanded by any one of the others. Messrs.
Bernardi, Puthukarai, Steinberg, and RHL Ventures LLC may participate in
registrations initiated by Virgin Holdings, Rho Management Trust I or Columbia
House. Virgin Holdings can request up to four demand registrations, Rho
Management Trust I three, and Columbia House two. We are not required to
effect a demand registration within 180 days after another demand registration
becomes effective. Except in this offering, if the underwriters determine that
the number of securities requested to be included in a demand registration
exceeds the number that can be sold, then Virgin Holdings, Rho Management
Trust I and Columbia House's securities will be included in the offering pro
rata based upon their percentage ownership of securities included in the
offering. If all Virgin Holdings, Rho Management Trust I and Columbia House's
securities are included in a registration, then Messrs. Bernardi, Puthukarai,
Steinberg and RHL Ventures LLC's securities can be included pro rata based on
their percentage ownership of securities included in the offering.

In addition, each of the holders indicated above, the noteholders,
Christopher T. Linen, Ryan Lee & Company and Boston Financial & Equity
Corporation, an equipment lessor, have "piggyback" registration rights. If
musicmaker.com proposes to register any of its common stock under the
Securities Act, other than in this offering, in connection with the
registration of securities issuable under an employee benefit plan or a
registered exchange offer, then holders of "piggyback" rights may require that
musicmaker.com include all or a portion of their common stock in that
registration. In connection with an underwritten offering, the managing
underwriter shall have the ability to limit the number of securities held by
persons with "piggyback" registration rights to be included in the
registration. All expenses incurred in connection with the registration rights
above, excluding underwriting discounts or commissions, will be borne by
musicmaker.com.

Delaware General Corporation Law and provisions in our Charter

Our Charter provides that musicmaker.com shall indemnify its currently
acting and former directors and officers against any and all liabilities and
expenses incurred in connection with their services in those capacities to the
maximum extent permitted by Delaware law. Our Charter similarly requires
musicmaker.com to advance expenses to our officers and directors entitled to
indemnification to the maximum extent permitted by Delaware law. Advancement
of expenses to directors and officers is conditioned upon receipt of an
undertaking by the director or officer to repay the amount of any advancement
if it shall ultimately be determined that the person is not entitled to be
indemnified by musicmaker.com. The terms and conditions of advancement are to
be determined by musicmaker.com's Board of Directors.

Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors and officers, musicmaker.com has been informed that
in the opinion of the Securities and Exchange Commission this type of
indemnification is against public policy, as expressed in the Securities Act,
and is therefore unenforceable.

Our Charter provides that our directors shall not be personally liable to
musicmaker.com or our stockholders for monetary damages to fullest extent
permitted by Delaware law. Section 102(b)(7) of the Delaware General
Corporation Law currently permits elimination of a director's personal
liability to a corporation and its stockholders except for liability:

. For any breach of the director's duty of loyalty to the corporation or
its stockholders.

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

. Under Section 174 of the Delaware General Corporation Law for unlawful
dividends, distributions or unlawful stock repurchases or redemptions.

52
<PAGE>

. For any transaction from which the director derives an improper personal
benefit.

Under our Charter and Delaware law, our directors will be protected from
monetary damages for other negligent acts on their part. Stockholders and
musicmaker.com seeking redress against directors may bring an action for
equitable remedies such as an injunction or rescission based upon a director's
breach of fiduciary duties, even where monetary remedies are unavailable. Any
amendment to Delaware law that increases or decreases the protection from
monetary damages afforded directors in Delaware shall be automatically
incorporated into our Charter.

Charter provisions that could delay or prevent a change in control

Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three separate classes,
with only one class, or roughly one-third of the Board of Directors, standing
for election in any given year. This "staggered" structure of the Board of
Directors may have the effect of delaying the ability of stockholders to
change the composition of the Board of Directors and possibly delaying or
preventing a corresponding change in control of musicmaker.com.

Musicmaker.com's Charter also contains a provision which enables the Board
of Directors to issue preferred stock without the approval of stockholders.
The Board of Directors may fix the rights, preferences, privileges and
limitations of these securities at its discretion. The provision grants to the
Board of Directors the right to issue what is often called "blank check"
preferred stock. The provision may be used to permit the Board of Directors to
institute a rights plan, or "poison pill" by which the Board of Directors
issues preferred stock or grants rights to acquire preferred stock, often with
voting rights, to the holders of common stock, excluding a hostile acquiror.
The effect of these preferred stock grants may be to deter possible takeovers
or acquisitions, making those transactions prohibitively expensive for
potential acquirers. Issuance of preferred stock could discourage potential
bids for musicmaker.com, deny stockholders a potential premium on their shares
and may make a change in control of musicmaker.com more difficult. See "Risk
Factors--Anti-takeover provisions in our Charter and Bylaws could deter or
delay possible takeovers."

53
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding 29,944,714 shares
of common stock. Of these shares, the 8,400,000 shares of common stock sold in
this offering will be freely tradable in the public market without
restrictions under the Securities Act, except that any shares purchased by
affiliates of musicmaker.com, as defined in Rule 144 under the Securities Act,
may only be sold in compliance with the applicable provisions of Rule 144
discussed below.

In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned "restricted securities" for at least
one year, including a person who may be deemed an affiliate of musicmaker.com,
is entitled to sell within any three-month period the number of shares of
common stock that does not exceed the greater of:

. one percent of the then outstanding shares of common stock of
musicmaker.com, or

. the average weekly trading volume of common stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission.

Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about
musicmaker.com. Generally, a person who is not an affiliate of musicmaker.com
and who has satisfied a two-year holding period will be able to sell without
any volume limitations. As of July 1, 1999, the one-year holding period had
expired with respect to 4,790,460 shares of common stock. As of July 1, 1999,
the two-year holding period had expired with respect to 4,183,228 shares of
common stock.

Shares of outstanding preferred stock, including all outstanding preferred
warrants, shall be automatically converted into shares of common stock and
common stock warrants upon completion of this offering. As a result of this
automatic conversion, 1,908,729 shares of restricted common stock shall be
issued to the former holders of the outstanding preferred stock and 1,697,929
warrants for common stock shall be issued in exchange for the outstanding
preferred warrants. Outstanding convertible notes shall automatically convert
into 968,252 shares of common stock upon completion of this offering.

Stockholders holding approximately 24.6 million shares, or approximately 99%
percent of our outstanding common stock and outstanding options and warrants
for common stock, are expected to agree not to offer, pledge, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of, directly
or indirectly, any securities of musicmaker.com they currently hold without
prior written consent of the representatives for a period of 180 days
following the date of the final prospectus.

Upon completion of this offering, we will sell to Ferris, Baker Watts,
Incorporated and Fahnestock & Co. Inc., for nominal consideration, warrants
entitling them to purchase additional shares of our common stock in an amount
equal to up to 10% of the total number of shares of common stock offered to
the public, less 96,831 shares, at an initial exercise price equal to 110% of
the initial public offering price. The warrants will be exercisable for a
period of four years commencing one year after the effective date of the
registration statement of which this prospectus is a part. Subject to the
limitations of Rule 144, the holders of the warrants may sell shares of common
stock acquired by exercise of the warrant one year from the date of exercise
thereof without registration. See "Underwriting."

Prior to this offering, there has been no market for our common stock. No
predictions can be made as to the effect, if any, that sales of shares of
common stock under Rule 144 will have on the market price of our common stock.
Sales in the public market of restricted common stock under Rule 144 could
adversely affect the market price of our common stock or the ability of
musicmaker.com to raise funds through a public offering of its equity
securities. See "Risk Factors--Shares eligible for future sale by our current
stockholders may adversely affect our stock price."

54
<PAGE>

UNDERWRITING

Subject to the terms and conditions of an underwriting agreement, the
underwriters named below, for whom Ferris, Baker Watts, Incorporated,
Fahnestock & Co. Inc. and C.E. Unterberg, Towbin are acting as the
representatives, have severally agreed to purchase from us and the selling
stockholder, and we and the selling stockholder have agreed to sell to the
underwriters, the respective number of shares of common stock set forth
opposite each underwriter named below:

<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Ferris, Baker Watts, Incorporated.................................
Fahnestock & Co. Inc..............................................
C.E. Unterberg, Towbin............................................
---------
Total........................................................... 8,400,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions, including approval of some
legal matters by their counsel. The nature of the underwriters' obligation is
that they are committed to purchase and pay for all shares of common stock if
any are purchased.

The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of
this prospectus and to selected securities dealers at the same price less a
concession not in excess of $ per share. The underwriters may allow, and
the selected dealers may re-allow, a concession not in excess of $ per
share to selected brokers and dealers. After this offering, the price to the
public, concession, allowance and re-allowance may be changed by the
representatives. The representatives have informed us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.

We have granted the underwriters an option exercisable during the 30-day
period after the date of this prospectus, to purchase additional shares of our
common stock in an amount equal to up to 15% of the total number of shares of
common stock offered to the public at the initial public offering price solely
to cover over-allotments, if any. To the extent that the underwriters exercise
this option, each of the underwriters will be committed, subject to some
conditions, to purchase the additional shares of common stock in approximately
the same proportions as set forth in the above table.

The offering of common stock is made for delivery when, as and if accepted
by the underwriters and subject to prior sale to withdrawal, cancellation or
modification of the offer without notice. The underwriters reserve the right
to reject any order for the purchase of common stock.

We have agreed to issue warrants to the representatives to purchase
additional shares of our common stock in an amount equal to up to 10% of the
total number of shares of common stock offered to the public, including any
over-allotments, less 96,831 shares, at an exercise price per share equal to
110% of the initial public offering price per share. The warrants are
exercisable for a period of four years, commencing one year from the effective
date of the registration statement of which this prospectus is a part. The
warrants will not be sold, offered for sale, transferred, assigned or
hypothecated for a period of one year from the effective date of the
registration statement other than to officers, employees or partners of the
holders of the warrants and members of the selling group and their officers
and partners. The holders of the warrants will have no voting, dividend or
other stockholders' rights until the warrants are exercised. We have granted
Ferris, Baker Watts, Incorporated and Fahnestock & Co. Inc. demand and
piggyback registration rights related to the warrants, which are applicable
during the period that the warrants are exercisable. We also have agreed to
pay Ferris, Baker Watts, Incorporated and Fahnestock & Co. Inc. a
nonaccountable expense allowance of 1% of the gross proceeds of this offering.

We have agreed to enter into a financial advisory agreement with GunnAllen
Financial, Inc. whereby we will pay GunnAllen an advisor fee of $125,000 upon
the completion of the offering. In addition, we issued a

55
<PAGE>

warrant to GunnAllen for 96,831 shares of common stock, with an exercise price
of $2.06 per share, as partial compensation for their assistance with
musicmaker.com's private placement of $2,000,000 of 8% convertible notes.
GunnAllen has agreed not to offer, pledge, sell, contract to sell or otherwise
transfer or dispose of the warrant or the shares of common stock underlying
the warrant for a period of one year after the date of this prospectus.
GunnAllen will be credited an amount equal to the selling concession paid to
broker-dealers for the sale of 350,000 shares of our common stock.

We have agreed not to issue, and all of our officers and directors, and
holders of approximately 99% of our common stock have agreed not to offer,
pledge, sell, contract to sell, or otherwise transfer or dispose of directly
or indirectly any shares of our capital stock or other equity securities of
musicmaker.com for a period of 180 days after the date of this prospectus
without the prior written consent of Ferris, Baker Watts, Incorporated. In
addition, those officers, directors and each security holder of musicmaker.com
to whom we granted registration rights in connection with the issuance of
shares of our common stock or other equity securities of musicmaker.com have
agreed not to make any demand for, exercise any right, or file (or participate
in the filing of) a registration statement with respect to the registration of
any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Ferris, Baker Watts,
Incorporated.

The underwriters have reserved for sale, at the initial public offering
price, 250,000 shares of common stock for some of our directors, officers,
employees, friends and family who have expressed an interest in purchasing
shares of common stock in this offering. These persons are expected to
purchase, in the aggregate, not more than 5% of the common stock offered in
this offering. The number of shares available for sale to the general public
in this offering will be reduced to the extent these persons purchase reserved
shares. Any reserved shares not purchased will be offered by the underwriters
on the same basis as other shares offered in this offering.

We and the selling stockholder have agreed to indemnify the underwriters
against some liabilities including civil liabilities under the Securities Act
of 1933 or to contribute to payments the underwriters may be required to make
in respect thereof.

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
was determined by negotiation among musicmaker.com and the representatives.
Among the factors considered in determining the public offering price were:

. The preliminary demand for our common stock.

. The history of and the prospects for musicmaker.com.

. The condition of the industry and markets in which we compete.

. An assessment of our management.

. Our past earnings and the trend and future prospects of our earnings.

. The present state of our business operations and development.

. The general conditions of the securities market at the time of the
offering; and the market prices of publicly traded common stocks of
comparable companies in related industries in recent periods.

There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.

The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of our
common stock. The price is subject to change as a result of market conditions
and other factors. We cannot assure you that our common stock can be resold at
or above the initial public offering price.

In order to facilitate this offering, some of the persons participating in
the offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after the offering in
accordance with Regulation M under the Securities Exchange Act of 1934.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than have been sold to them by us. The underwriters may elect to
cover

56
<PAGE>

any short position by purchasing shares of common stock in the open market or
by exercising the over-allotment option granted to the underwriters. In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in the offering are
reclaimed if shares of common stock previously distributed in the offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions and use of penalty bids may be to stabilize or
maintain the market price at a level above that which might otherwise prevail
in the open market. The imposition of a penalty bid may also affect the price
of the common stock to the extent that it discourages resales. No
representation is made as to the magnitude or effect of any stabilization or
other transactions. These transactions may be effected on the Nasdaq National
Market or otherwise and, if continued, may be discontinued at any time.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.

LEGAL MATTERS

The legality of the securities in this offering has been passed upon for
musicmaker.com by its counsel, Venable, Baetjer and Howard, LLP of McLean,
Virginia. Agreed upon legal matters will be passed upon for the underwriters
by its counsel Katten Muchin & Zavis, Washington, D.C. Agreed upon matters in
connection with United States patents and trademarks and international patents
will be passed upon for musicmaker.com by Darby & Darby, P.C. of New York, New
York.

EXPERTS

The consolidated financial statements of musicmaker.com, Inc. (formerly The
Music Connection Corporation) at December 31, 1998 and 1997, and for the years
ended December 31, 1998 and 1997 and for the period from April 23, 1996
(inception) through December 31, 1996, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.

Matters dealing with patents and trademarks set forth in "Risk Factors--We
depend upon intellectual property rights and risk having our rights infringed"
and "Business--Intellectual Property and Trade Secrets" have been included in
this prospectus in reliance upon the written opinion of Darby & Darby, P.C. of
New York, New York, as experts in such matters. See "Legal Matters."

ADDITIONAL INFORMATION

Musicmaker.com has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement, as some information is omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to musicmaker.com and this offering, reference is made to the
registration statement, including the exhibits filed therewith, copies of
which may be obtained at prescribed rates from the SEC at the public reference
facilities maintained by the SEC at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, D.C. 20549 and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. The SEC
maintains a website on the Internet that will contain all future reports,
proxy and information statements and other information that musicmaker.com is
required to file electronically with the SEC. The address of the SEC's website
is http://www.sec.gov.

57
<PAGE>

This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications, Forrester Research Inc. and the
Record Industry Association of America. These industry publications generally
indicate that they have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of that
information. While we believe those industry publications to be reliable, we
have not independently verified the data included in the reports. We also have
not sought, in all instances, the consent of these organizations to refer to
their reports in this prospectus.

MUSICMAKER(TM), MUSIC CONNECTION(TM), MUSICMAGIC(TM) and CD KIT(TM) are
trademarks of musicmaker.com, Inc. Musicmaker.com, Inc. has applied for
federal trademark registration for each of the marks above. All other
trademarks or service marks appearing in this prospectus are the property of
their respective holders.

58
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2

Consolidated Balance Sheets................................................. F-3

Consolidated Statements of Operations....................................... F-4

Consolidated Statements of Stockholders' Deficit............................ F-5

Consolidated Statements of Cash Flows....................................... F-6

Notes to Consolidated Financial Statements.................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
musicmaker.com, Inc.
(formerly The Music Connection Corporation)

We have audited the accompanying consolidated balance sheets of
musicmaker.com, Inc. (formerly The Music Connection Corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the period from April
23, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
musicmaker.com, Inc. (formerly The Music Connection Corporation) at December
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for the period from April 23, 1996 (inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP

Vienna, Virginia
February 5, 1999, except Note 12,
as to which the date is June 14, 1999

F-2
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------
December 31, Pro Forma
------------------------ Pro Forma As Adjusted
1997 1998 Actual (Note 10) (Note 11)
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 1,401,982 $ 972,954 $1,685,234 $ 1,685,234 $ 1,685,234
Accounts receivable... 12,750 17,510 29,332 29,332 29,332
Related party account
receivable (Note 8).. -- 81,519 81,519 81,519 81,519
Prepaid expenses and
other current
assets............... 17,503 25,395 56,213 56,213 56,213
----------- ----------- ---------- ----------- -----------
Total current
assets............. 1,432,235 1,097,378 1,852,298 1,852,298 1,852,298
Property and equipment,
net (Note 2)........... 297,140 360,709 407,670 407,670 407,670
Investments (Note 1).... -- 750,000 750,000 750,000 750,000
Intangibles, net (Note
3)..................... -- 967,395 1,037,501 87,663,111 87,435,610
Other assets............ -- 58,481 396,846 396,846 396,846
----------- ----------- ---------- ----------- -----------
Total assets........ $ 1,729,375 $ 3,233,963 $4,444,315 $91,069,925 $90,842,424
=========== =========== ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Accounts payable...... $ 328,450 $ 455,095 $ 795,123 $ 795,123 $ 795,123
Accrued expenses...... 91,369 261,974 119,092 119,092 119,092
Accrued compensation
payable to related
parties (Note 8)..... 761,221 625,219 630,215 630,215 630,215
Current portion of
long-term obligation
(Note 4)............. -- 42,857 42,857 42,857 42,857
Other current
liabilities.......... -- -- 39,453 39,453 39,453
----------- ----------- ---------- ----------- -----------
Total current
liabilities........ 1,181,040 1,385,145 1,626,740 1,626,740 1,626,740
Long-term obligation
(Note 4)............... -- 214,286 214,286 214,286 214,286
Convertible notes
payable (Note 4)....... -- 512,500 2,000,000 2,000,000 --
Commitments (Note 7)
Mandatory redeemable convertible
preferred stock,
$0.01 par value, 3,606,662 shares
authorized (Note 5):
Series A convertible
preferred stock,
1,059,089 shares
designated, issued
and outstanding...... 1,493,568 1,026,682 1,067,788 1,067,788 --
Series B convertible
preferred stock,
2,017,317 shares
designated, 849,640
shares issued and
outstanding.......... -- 1,750,100 1,750,100 1,750,100 --
Series C convertible
preferred stock,
530,256 shares
designated; no shares
issued and
outstanding.......... -- -- -- -- --
Series A convertible
preferred stock
subscribed........... (50,000) -- -- -- --
Stockholders' (deficit)
equity (Note 5):
Common stock, $0.01
par value,
100,000,000 shares
authorized;
4,790,460, 6,309,493,
6,896,873 shares
issued and
outstanding,
respectively
(22,067,733 pro forma
shares and 24,944,714
pro forma as adjusted
shares).............. 47,905 63,095 68,969 220,678 249,448
Additional paid-in
capital.............. 1,261,084 4,739,658 6,019,768 92,493,669 97,964,999
Warrants.............. 259,522 779,059 779,059 779,059 779,059
Accumulated deficit... (2,463,744) (7,236,562) (9,082,395) (9,082,395) (9,992,108)
----------- ----------- ---------- ----------- -----------
Total stockholders'
(deficit) equity... (895,233) (1,654,750) (2,214,599) 84,411,011 89,001,398
----------- ----------- ---------- ----------- -----------
Total liabilities
and stockholders'
(deficit) equity... $ 1,729,375 $ 3,233,963 $4,444,315 $91,069,925 $90,842,424
=========== =========== ========== =========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Pro Forma
As Adjusted
Pro Forma Three
Period from As Adjusted months
April 23, 1996 Three months ended Year ended ended
(inception) to Year ended December 31, March 31, December 31, March 31,
December 31, ------------------------ ------------------------ 1998 1999
1996 1997 1998 1998 1999 (Note 11) (Note 11)
-------------- ----------- ----------- ----------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160 $ 74,028 $ 20,160
Cost of sales........... (2,590) (450,455) (677,700) (232,800) (463,283) (677,700) (463,283)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123) (603,672) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852 929,661 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256 804,811 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629 2,620,708 1,052,130
--------- ----------- ----------- ----------- ----------- ----------- -----------
370,410 1,613,177 4,068,910 1,035,104 1,337,737 4,355,180 1,565,238
--------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860) (4,958,852) (2,008,361)
Other income (expense):
Interest income....... -- -- 17,815 5,250 16,539 17,815 16,539
Interest expense...... (2,667) (33,957) -- -- (40,406) -- (40,406)
--------- ----------- ----------- ----------- ----------- ----------- -----------
(2,667) (33,957) 17,815 5,250 (23,867) 17,815 (23,867)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ (367,312) (2,084,157) (4,654,767) (1,240,238) (1,804,727) (4,941,037) (2,032,228)
Accretion for Series A
preferred stock
warrants............... -- (3,090) (118,051) (12,274) (41,106) (723,318) (723,318)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss available to
common stockholders.... $(367,312) $(2,087,247) $(4,772,818) $(1,252,512) $(1,845,833) $(5,664,355) $(2,755,546)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per common share
(Note 9)............... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
========= =========== =========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital Warrants Deficit Total
--------- ------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 3,092,540 $30,925 $ -- $ -- $ (9,185) $ 21,740
Net loss............... -- -- -- -- (367,312) (367,312)
--------- ------- ---------- -------- ----------- -----------
Balance at December 31,
1996................... 3,092,540 30,925 -- -- (376,497) (345,572)
Issuance of common
stock.................. 1,221,865 12,219 428,721 -- -- 440,940
Issuance of common
stock and warrants
for services to non-
employees............ 60,518 605 149,895 -- -- 150,500
Conversion of notes
payable................ 415,537 4,156 682,468 -- -- 686,624
Issuance of warrants
with preferred
stock................ -- -- -- 259,522 -- 259,522
Accretion for Series A
preferred stock
warrants............. -- -- -- -- (3,090) (3,090)
Net loss............... -- -- -- -- (2,084,157) (2,084,157)
--------- ------- ---------- -------- ----------- -----------
Balance at December 31,
1997................... 4,790,460 47,905 1,261,084 259,522 (2,463,744) (895,233)
Issuance of common
stock.................. 1,519,033 15,190 2,979,112 -- -- 2,994,302
Issuance of warrants
and options to non-
employees............ -- -- 499,462 -- -- 499,462
Exercise of Series B
preferred stock
warrants............. -- -- -- (65,400) -- (65,400)
Modification of
warrants issued with
preferred stock...... -- -- -- 584,937 -- 584,937
Accretion for Series A
preferred stock
warrants............. -- -- -- -- (118,051) (118,051)
Net loss............... -- -- -- -- (4,654,767) (4,654,767)
--------- ------- ---------- -------- ----------- -----------
Balance at December 31,
1998................... 6,309,493 63,095 4,739,658 779,059 (7,236,562) (1,654,750)
Issuance of common stock
(unaudited)............ 587,380 5,874 1,110,489 -- -- 1,116,363
Issuance of warrants and
options (unaudited).... -- -- 169,621 -- -- 169,621
Accretion for Series A
preferred stock
warrants (unaudited)... -- -- -- -- (41,106) (41,106)
Net loss (unaudited).... -- -- -- -- (1,804,727) (1,804,727)
--------- ------- ---------- -------- ----------- -----------
Balance at March 31,
1999 (unaudited)....... 6,896,873 $68,969 $6,019,768 $779,059 $(9,082,395) $(2,214,599)
========= ======= ========== ======== =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Period from
April 23, 1996 Three months ended
(inception) to Year ended December 31, March 31,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.............. $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
Adjustments to
reconcile net loss
to net cash provided
by (used in)
operating
activities:
Depreciation and
amortization........ 7,700 29,887 203,122 23,779 157,769
Conversion of accrued
interest to common
stock............... -- 36,624 -- -- --
Services received in
exchange for stock
and warrants........ -- 150,500 499,462 156,317 169,621
Changes in operating
assets and
liabilities:
Accounts
receivable........ (38,387) 25,637 (4,760) -- (11,822)
Related party
account
receivable........ -- -- (81,519) -- --
Prepaid expenses
and other current
assets............ (8,994) (8,509) (7,892) (23,961) (30,818)
Other assets....... -- -- (58,481) (50,000) (338,365)
Accounts payable... 166,018 162,432 126,645 (10,002) 340,028
Accrued expenses... 46,025 45,344 170,605 13,495 (142,882)
Accrued
compensation
payable to related
parties........... 217,587 543,634 30,665 (193,807) 4,996
Other current
liabilites........ -- -- -- -- 39,453
Long-term
obligation........ 2,667 (2,667) 257,143 -- --
--------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
operating
activities...... 25,304 (1,101,275) (3,519,777) (1,324,417) (1,616,747)
Investing activities
Purchases of property
and equipment......... (34,972) (299,755) (217,961) (137,381) (100,961)
--------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities...... (34,972) (299,755) (217,961) (137,381) (100,961)
Financing activities
Proceeds from issuance
of convertible notes
payable............... 400,000 250,000 512,500 -- 1,487,500
Payment of fees on
convertible notes
payable............... -- -- (116,125) -- (173,875)
Issuance of
convertible preferred
stock................. -- 1,700,000 1,568,033 534,700 --
Issuance of common
stock................. 21,740 440,940 1,344,302 -- 1,116,363
--------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities...... 421,740 2,390,940 3,308,710 534,700 2,429,988
--------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash and
cash equivalents...... 412,072 989,910 (429,028) (927,098) 712,280
Cash and cash
equivalents at
beginning of period... -- 412,072 1,401,982 1,401,982 972,954
--------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 412,072 $ 1,401,982 $ 972,954 $ 474,884 $ 1,685,234
========= =========== =========== =========== ===========
Non-cash investing and
financing activities
Issuance of common
stock................. $ 18,230 $ -- $ -- $ -- $ --
========= =========== =========== =========== ===========
Conversion of notes
payable to common
stock (Note 4)........ $ -- $ 686,624 $ -- $ -- $ --
========= =========== =========== =========== ===========
Common stock issued
for licensing
agreement (Note 5).... $ -- $ -- $ 1,650,000 $ -- $ --
========= =========== =========== =========== ===========
Conversion of accrued
compensation to
preferred stock (Note
5).................... $ -- $ -- $ 166,667 $ -- $ --
========= =========== =========== =========== ===========
Issuance and
modification of
warrants (Note 5)..... $ -- $ 259,522 $ 584,937 $ -- $ --
========= =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998

1. Summary of Significant Accounting Policies

The Company

Musicmaker.com, Inc. (formerly The Music Connection Corporation) (the
"Company") was incorporated in Delaware on April 23, 1996. The Company is an
e-commerce provider of customized music CD compilations on the Internet. The
Company's website, "www.musicmaker.com," as well as mail-order promotions,
allow customers to order custom compiled music CDs. Customers can also
digitally download songs from the Company's online library directly to their
personal computers.

Since inception, management has been primarily involved in recruiting
personnel, developing the technological infrastructure necessary to create
custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. The Company
continues to rely on outside sources of capital to develop and exploit its
products and markets.

In February 1999, the Company filed a registration statement with the
Securities and Exchange Commission relating to the initial public offering
(the "IPO") of the Company's common stock. If the offering is not consummated,
the Company will have to obtain financing from current investors or other
private and public investors, significantly reduce its development activities,
or generate additional revenues from sales of custom CDs.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, CD Kit, as of December 31, 1996
and 1997. As of December 31, 1998, CD Kit was inactive with no remaining
assets or liabilities. All significant inter-company transactions and balances
have been eliminated in consolidation.

Use of Estimates

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

Revenue Recognition

Net sales are recognized at the time merchandise is shipped to customers for
custom CDs and upon execution of orders for digitally downloaded songs.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.

Investments

In connection with exclusive music license, stock exchange and marketing
agreements signed with Platinum Entertainment, Inc. ("Platinum") on September
30, 1998, the Company received 111,457 shares of unregistered common stock of
Platinum (see Note 5). The Company's investment in these equity securities was
recorded at the fair market value on the date of the transaction and is
accounted for using the cost method.

F-7
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cost of Sales

In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to music labels are recorded as an asset if the past
performance and current popularity of the music to which the advance relates
provide a sound basis for estimating the probable future recoupment of such
advances. Advances are then expensed as subsequent royalties are earned. Any
portion of advances that subsequently appear not to be fully recoverable from
future royalties are charged to expense during the period in which the loss
becomes evident.

The Company has included in costs of sales royalty advances that were paid
upon signing of certain initial royalty agreements with independent music
labels, due to management's expectations of minimal revenues expected during
the one year period following the signing of the contracts. These charges
resulted in increases to costs of sales of approximately $447,500 and $614,000
for the years ended December 31, 1997 and 1998, respectively. The Company is
required to make additional advances upon the anniversaries of the signing of
these initial contracts. The Company will capitalize these future advances and
then amortize the expense to match the revenues assuming realizability of such
advances can be established.

Operating and Development Costs

Operating and development costs relating to the Company's proprietary custom
CD compilation software technology are expensed as incurred. The Company
incurred research and development costs of approximately $64,000, $120,000,
and $550,000 in the period from April 23, 1996 (inception) to December 31,
1996 and the years ended December 31, 1997 and 1998, respectively. Operating
and development costs also include recoupable but not returnable advances and
network and website costs.

Advertising Costs

The Company expenses all advertising costs as incurred. The Company incurred
$0, $7,800 and $328,959 in advertising costs for the period from April 23,
1996 (inception) to December 31, 1996, and the years ended December 31, 1997
and 1998, respectively.

Fair Value of Financial Instruments

The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash, accounts receivable,
investments, accounts payable and related party payables, to approximate the
fair value of the respective assets and liabilities.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.

Net Loss Per Share

The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," ("SFAS 128") which established new standards for
computing and presenting net income per share information. Basic net loss per
share was determined by dividing net loss by the weighted average number of
common shares outstanding during each period. Diluted net loss per share
excludes common equivalent shares,

F-8
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

unexercised stock options and warrants as the computation would be anti-
dilutive. A reconciliation of the net loss available for common shareholders
and the number of shares used in computing basic and diluted net loss per
share is in Note 9.

Basic and diluted loss per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an
initial public offering, be included in the calculation of basic and diluted
loss per share as if they were outstanding for all periods presented. To date,
the Company has not had any nominal issuances or grants at nominal prices.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Bulletin No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25 (see Note 5).

Reclassifications

Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the presentation of the 1998 financial
statements.

Recent Pronouncements

In 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.

In 1998, the Company adopted FASB Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes
standards for disclosures about products, geographies and major customers. The
Company's implementation of this standard does not have any effect on its
financial statements.

The Accounting Standards Executive Committee (AcSEC) recently issued SOP 98-
5, "Reporting on the Costs of Start-up Activities." SOP 98-5 is effective for
fiscal years beginning after December 15, 1998 and requires the costs of
start-up activities, including organization costs, to be expensed as incurred.
The Company has elected early adoption of SOP 98-5. However, the early
adoption of the new rules does not have a material effect on the Company's
financial position or results from operations.

Interim Financial Statements

The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.

F-9
<PAGE>

2. Property and Equipment

Property and equipment are stated at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated
useful life or the lease term. The Company is depreciating computer equipment
and software over three years and office furniture and leasehold improvements
over seven years. Depreciation and amortization expense was $7,700, $29,887
and $154,392 for the period from April 23, 1996 (inception) through December
31, 1996, and the years ended December 31, 1997 and 1998, respectively.

Property and equipment consist of the following:

<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Computer equipment and software......................... $328,166 $ 506,120
Leasehold improvements.................................. -- 36,823
Furniture and equipment................................. 6,561 9,745
-------- ---------
334,727 552,688
Less accumulated depreciation and amortization.......... (37,587) (191,979)
-------- ---------
$297,140 $ 360,709
======== =========
</TABLE>

3. Intangibles

In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company recorded an intangible asset for
licensing fees of $900,000 (see Note 5). The asset is the difference in fair
market values of musicmaker.com's 798,856 shares of common stock issued to
Platinum (valued at $1,650,000 or $2.06/share) and Platinum's 111,457 shares
of common stock issued to the Company (valued at $750,000 or $6.73/share). The
Company is amortizing the intangible on a straight-line basis over the five
year period of the license agreement. The carrying value of the intangible
asset will be reviewed if the facts and circumstances suggest impairment. If
such a review indicates that the carrying value will not be recoverable as
determined based on undiscounted cash flows over the remaining amortization
period, the Company will reduce the carrying value by the estimated shortfall
of cash flows.

In connection with the private placement of convertible notes payable, the
Company recorded loan fees of $116,125 (see Note 4). The Company is amortizing
this intangible through December 31, 2000, the maturity date of the
convertible notes payable.

Intangible assets consist of the following:

<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Licensing fees.......................................... $ -- $ 900,000
Loan fees............................................... -- 116,125
------- ----------
-- 1,016,125
Less accumulated amortization........................... -- (48,730)
------- ----------
$ -- $ 967,395
======= ==========
</TABLE>

4. Convertible Notes Payable and Long-term Obligations

In December 1996, the Company received $400,000 and issued 12% convertible
notes to certain investors (including the founding stockholders and a director
of the Company). The Company had the right, at its option, between the date of
issuance and June 15, 1997, to convert all of the principal and accrued
interest owed to note holders into shares of the Company's common stock. In
1997, the Company issued two additional convertible notes totaling $250,000
with the same terms. In June 1997, the Company converted the principal amount
of $650,000 of convertible notes payable plus the accrued interest of $36,624
into 415,537 shares of common stock.

F-10
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In October 1998, the Company initiated an offering for 8% convertible
secured subordinate promissory notes which are convertible at any time at the
election of the holder and are mandatorily convertible upon the closing of an
initial public offering with gross proceeds of $5,000,000 or more or upon
certain mergers and consolidations of the Company subject to certain
requirements. The conversion price is $2.06 per share of common stock, subject
to certain adjustments. The convertible notes payable are secured by a lien on
the assets of the Company pursuant to a security agreement and the principal
and accrued interest are due on December 31, 2000. As of December 31, 1998,
the Company had convertible notes payable of $512,500 and had recorded loan
fees of $116,125 (see Note 3).

On July 1, 1998, the Company entered into a mutual coexistence agreement
with Music Maker Relief Foundation, Inc. ("Music Maker Relief Foundation"), an
unaffiliated not-for-profit corporation that owns the trademark MUSICMAKER and
the Internet domain name MUSICMAKER.ORG. In consideration of avoiding any
possible conflict regarding names, marks, goods and services, the Company
agreed to pay $300,000 to Music Maker Relief Foundation. The Company paid
$42,857 upon signing of the agreement and has a remaining obligation of
$257,143 ($42,857 on April 15th of each of the years 1999 through and
including 2004). The Company expensed $300,000 upon signing of the agreement.

5. Common Stock and Convertible Preferred Stock

Common Stock and Warrants

On July 3, 1996, the two founders of the Company purchased a total of
1,512,986 shares of common stock for $2,500. In July 1996, 1,512,984 shares of
common stock were issued to the former stockholders of CD Kit, S.A., giving
them a 50% interest in the then issued and outstanding common stock of the
Company. Two outside investors purchased 6,051 and 60,519 shares of common
stock in October and December of 1996, respectively.

In 1997, 1,221,865 shares of common stock were issued to both outside
investors and the founding stockholders at prices ranging from $0.017 per
share to $1.65 per share. The Company also issued 60,518 shares of common
stock for services to consultants valued at $50,500. Additionally, the Company
issued 60,519 warrants to purchase common stock at an exercise price of $1.65
per share to a consultant for services related to signing royalty agreements
with record labels and valued at $100,000. The Company recorded $150,500 of
expense related to the issuance of these shares of common stock and warrants
to consultants for services. The Company also issued 453,896 warrants to
purchase common stock at an exercise price of $1.65 per share to a stockholder
and officer of the Company for services related to signing royalty agreements
with record labels. All of these warrants expire on October 15, 2007.

In 1998, the Company issued a total of 720,177 shares of common stock at
$2.06 per share to seven investors for a total of $1,487,500. The Company paid
a finders fee of $143,198 related to this private placement and is obligated
to issue 108,960 warrants in 1999 related to the completion of the private
placement (see Note 12). The Company also issued warrants to purchase 121,038
shares of common stock at an exercise price of $2.06 per share to one of the
investors and recorded an expense of $88,000 for the value of the warrants.

On June 12, 1998, the Company signed an agreement with Columbia House with a
three year term beginning September 1, 1998, under which the Company will
offer custom CDs for sale to Columbia House's customers through Columbia
House's websites and promotional inserts in Columbia House's mailings. The
Company will design and supply promotional material to Columbia House,
manufacture the custom CDs and process all orders (shipping, billing and
collecting) and will pay a share of the net profits derived from the sale of
CDs to Columbia House's customers to Columbia House. In connection with this
agreement, the Company

F-11
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

issued 302,597 warrants to purchase common stock, subsequently increased to
478,226 warrants to purchase common stock, at an exercise price of $1.98 per
share to Columbia House and recorded an expense of $160,000 for the value of
the warrants. The value of the increased number of warrants was deemed
immaterial. These warrants expire on September 1, 2001.

In January 1998, a stockholder and officer of the Company returned 169,454
stock options to the Company in exchange for warrants to purchase 169,454
shares of common stock with an exercise price of $1.65 per share and valued at
$148,400. These warrants expire on January 15, 2008. This individual is also
the beneficial owner of warrants for 60,516 shares of common stock granted to
members of his family as compensation for his consulting services in August
1998 with an exercise price of $1.98 per share valued at $64,000. The Company
recorded an expense of $212,400 related to the issuance of these warrants.
These warrants expire on August 15, 2008.

In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company issued 798,856 shares of common
stock to Platinum (valued at $1,650,000) and Platinum issued 111,457 shares of
its unregistered common stock to the Company (having an aggregate value of
$750,000). The Company recorded the difference in the fair market values of
the two stocks as licensing fees (see Note 3).

Convertible Preferred Stock and Warrants

On December 8, 1997, the Company sold 907,792 shares of the Company's Series
A preferred stock at $1.65 per share. Additionally, 151,297 shares of the
Company's Series A preferred stock were purchased by two existing stockholders
at $1.65 per share. The Company did not receive payment for 30,259 shares of
the Series A preferred stock until 1998 and has therefore shown a reduction to
the preferred stock on the accompanying December 31, 1997 balance sheet. In
connection with the issuance of the Series A preferred stock, the Company
issued 2,017,314 warrants to purchase Series B preferred stock at a price of
$1.98 per share, and 530,256 warrants to purchase Series C preferred stock at
a price of $2.48 per share. The warrants to purchase Series B preferred stock
were initially exercisable, in whole or in part, at any time commencing on the
date of grant through the first anniversary thereof. The warrants to purchase
Series C preferred stock are exercisable, in whole or in part, at any time
commencing on the date of grant through the fourth anniversary thereof. Upon
issuance of the warrants, the Company allocated $259,522 to stockholders'
deficit based upon their relative fair values. In June 1998 the Company
extended the term of the Series B preferred stock warrants from one year to
five years. Upon this modification, the Company allocated the difference
between the fair value of the modified warrants, $766,755, and the fair value
of the original warrants, $181,818, to stockholders' deficit.

Each holder of preferred stock is entitled to vote on all matters as if
their shares of preferred stock were converted to voting common stock. All
outstanding shares of preferred stock have an automatic conversion feature
upon the consummation of a firm commitment underwritten public offering of at
least $15 million with a valuation of the Company greater than $50 million
immediately prior to the initial public offering, or upon an affirmative vote
of the holders of at least 50.1% of the outstanding shares of preferred stock
to complete such a conversion. The conversion ratio is initially on a one-for-
one basis for all series of preferred stock; however, the conversion price of
each series shall be subject to adjustment for certain diluting issues as
described in the Company's Restated Certificate of Incorporation.

The preferred stock is redeemable at the election of at least 50.1% of the
preferred stock holders in two equal installments, if notice is provided to
the Company on or before October 8, 2002. The redemption price would be $1.65
per share, $1.98 per share and $2.48 per share plus a further amount per share
equal to any

F-12
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

declared and unpaid dividends for Series A, Series B and Series C preferred
stock, respectively. The first installment would be on or about December 8,
2002, and the second installment would be on or about December 8, 2003,
subject to the Company having funds legally available. If sufficient funds are
not legally available for redeeming the preferred stock at either of the
installment dates, the Company will have to apply the available funds to
redeem the preferred stock on a ratable basis and then redeem the remaining
shares as soon as practicable after the Company has the funds legally
available.

In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the preferred stock shall be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to holders of the common stock, $1.65 per share plus declared
and unpaid dividends on Series A preferred stock, $1.98 per share plus
declared and unpaid dividends on Series B preferred stock and $2.48 per share
plus declared and unpaid dividends on Series C preferred stock.

On March 16, 1998, an investor exercised 208,425 warrants to purchase Series
B preferred stock at a price of $1.98 per share for $413,272 in cash. Two
officers of the Company were required to exercise 36,022 warrants to purchase
Series B preferred stock at the same price.

On June 30, 1998, two investors exercised 521,139 warrants to purchase
Series B preferred stock at a price of $1.98 per share for $1,033,333 in cash.
Two officers of the Company were required to exercise 84,054 warrants to
purchase Series B preferred stock at the same price. The exercise of the
84,054 warrants was offset by a reduction to accrued liabilities for
consulting services.

Stock Option Plan

The 1996 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in 1996. The purpose of the Plan is
to promote the long-term growth and profitability of the Company by providing
key people with incentives to contribute to the growth and financial success
of the Company. The aggregate number of shares of common stock for which
options may be granted under the Plan shall not exceed 1,815,585 shares (see
Note 12). Additional information with respect to stock option activity is
summarized as follows:

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1998
---------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 45,387 $0.17 501,639 $1.52
Options granted....................... 456,252 $1.65 907,789 $2.11
Options exercised..................... -- $ -- -- $ --
Options canceled or expired........... -- $ -- (169,453) $1.65
------- ----- --------- -----
Outstanding at end of year............ 501,639 $1.52 1,239,975 $1.93
======= ===== ========= =====
Exercisable at end of year............ 45,387 $0.17 294,304 $1.63
======= ===== ========= =====
</TABLE>

The options outstanding at December 31, 1998 range in price from $0.17 per
share to $2.27 per share and have a weighted average remaining contractual
life of 7.6 years.

F-13
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company applies APB 25 in accounting for its stock option plan and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS 123's fair value method to the
Company's stock-based awards results in net losses of $369,271, $2,091,960 and
$4,990,504 in 1996, 1997 and 1998, respectively, with a net loss per share of
$0.19, $0.52 and $0.98, respectively. The weighted average fair value of the
options granted in 1997, used as a basis for the above pro forma disclosures,
was estimated as $1.69 as of the date of grant using a minimum value method
option pricing model. The weighted average fair value of the options granted
during 1998 was estimated as $1.95 as of the date of grant using the Black-
Scholes option-pricing model with the following assumptions: dividend yield
0%, volatility of 25%, risk-free interest rate of 6.5% and expected lives of 5
or 10 years. The effect of applying SFAS 123 on 1997 and 1998 pro forma net
loss as stated above is not necessarily representative of the effects on
reported net income for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years.

Warrants

The following table summarizes all common and preferred stock warrant
activity:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Outstanding at beginning of year..................... -- 3,061,985
Warrants issued...................................... 3,061,985 829,234
Warrants exercised................................... -- 849,640
----------- -----------
Outstanding at end of year........................... 3,061,985 3,041,579
=========== ===========
</TABLE>

The weighted average fair value of the warrants granted during 1998 was
estimated as $1.66 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 25%, risk-free
interest rate of 6.5% and expected lives ranging from 3.5 to 10 years.

6. Income Taxes

At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $4,260,000. The timing and manner in which the operating loss
carry-forwards may be utilized in any year will be limited to the Company's
ability to generate future earnings and by limitations imposed due to change
in ownership. Current net operating loss carry-forwards will expire in the
year 2018. As the Company has not generated earnings and no assurance can be
made of future earnings, a valuation allowance in the amount of the deferred
tax assets has been recorded. The change in the valuation allowance was
$1,748,542. There was no current or deferred provision for income taxes for
the period from April 23, 1996 (inception) through December 31, 1996 or the
years ended December 31, 1997 or 1998.

F-14
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net deferred tax assets consist of:

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Start up expenses................................. $ 555,944 $ 460,108
Deferred compensation............................. 287,365 237,583
Warrants.......................................... 57,189 227,795
Trademark expense................................. -- 114,000
Net operating loss carry-forward.................. 10,985 1,620,539
--------- -----------
Deferred tax assets before valuation allowance.... 911,483 2,660,025
Less valuation allowance............................ (911,483) (2,660,025)
--------- -----------
Net deferred tax assets............................. $ -- $ --
========= ===========
</TABLE>

The Company has not paid any income taxes since inception.

The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to the loss before income taxes due to the
effects of the following:

<TABLE>
<CAPTION>
Period from
April 23, 1996
(inception) to Year ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Expected tax benefit at federal
statutory tax rate.............. $(124,886) $ (708,613) $ (1,582,621)
Future state benefit, net of
federal benefit................. (16,305) (79,801) (186,191)
Nondeductible expenses and
other........................... (12,943) 31,065 20,270
Increase in valuation allowance.. 154,134 757,349 1,748,542
--------- ---------- ------------
$ -- $ -- $ --
========= ========== ============
</TABLE>

7. Commitments

Royalty Agreements

The Company has signed contracts with record labels for non-exclusive rights
to manufacture, advertise, market, promote, distribute and sell custom CDs and
digitally downloaded songs over the Internet. The agreements contain a master
use royalty rate of 15% of the selling price less any sales, excise or similar
taxes. If the Company enters into a more favorable royalty rate with another
licensor, the majority of these contracts contain clauses allowing the
licensor to also receive the more favorable royalty terms. As discussed in
Note 1, the majority of the contracts require advances upon the anniversary
dates of the signing of the contracts. The more recent agreements provide for
the Company to pay advances based on actual royalties earned by the label in
the previous year, as opposed to a fixed amount.

Fixed royalty commitments on contracts entered into as of December 31, 1998
are as follows:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999.............................................................. $527,500
2000.............................................................. 183,333
--------
$710,833
========
</TABLE>

F-15
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Of the total fixed royalty commitments, $462,500 relates to four contracts.
Two contracts were signed in April 1997 with Alligator Records and Cakewalk,
LLC with three year terms. Through December 31, 1998 the Company had advanced
$200,000 and $162,500, respectively, to each of these labels in royalty
payments and had remaining commitments of $100,000 and $62,500, respectively.
In June 1997, the Company signed a three year contract with Fantasy Records
under which, as of December 31, 1998, the Company had advanced $200,000 in
royalty payments and had a remaining commitment of $100,000. In October 1997,
the Company signed a three year contract with Rounder Records Corporation
under which, as of December 31, 1998, the Company had advanced $100,000 in
royalty payments and had a remaining commitment of $200,000.

Upon payment of the future fixed royalty commitments, management will assess
whether sufficient revenues will be generated to recover the royalty advances.
It is anticipated that the future fixed royalty commitments will be written
off as costs of sales upon payment of the advances. The write off is due to
management's expectation of minimal revenues during the one year period
following the payment of these advances. If significant revenues are
generated, the Company will amortize the expense to match the revenues.

Operating Leases

The Company leases its office facility, certain computer equipment and
office furniture under operating lease agreements that were entered into
during 1998. Operating lease expense for the period from April 23, 1996
(inception) to December 31, 1996, and the years ended December 31, 1997 and
1998 was $1,800, $21,000, and $110,000, respectively.

Financial Consulting Agreement

In connection with the Company's planned IPO, the Company signed an
agreement on December 23, 1998 obligating it to pay $125,000 at the closing of
the IPO.

Future minimum lease payments as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999.............................................................. $188,912
2000.............................................................. 164,656
2001.............................................................. 115,297
2002.............................................................. 118,584
2003.............................................................. 116,258
Thereafter........................................................ 183,360
--------
$887,067
========
</TABLE>
8. Related Party Transactions

Accrued compensation of $761,221 and $625,219 as of December 31, 1997 and
1998, respectively, are amounts due to stockholders for salaries and
consulting services rendered to the Company since inception, including
assistance with obtaining financing, negotiations with record labels and
corporate and technical development. Additionally, in December 1998, the
Company advanced a stockholder and officer $81,519 against his 1999 bonus.

F-16
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss
per share:

<TABLE>
<CAPTION>
Period from Pro Forma
April 23, 1996 Pro Forma Three
(inception to Year ended Three months ended Year ended months ended
December 31, December 31, March 31, December 31, March 31,
1996 1997 1998 1998 1999 1998 1999
-------------- ----------- ----------- ----------- ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727) $(4,941,037) $(2,032,228)
Less: Accretion of
Series A preferred
stock.................. -- (3,090) (118,051) (12,274) (41,106) (723,318) (723,318)
Net loss available to
common
--------- ----------- ----------- ----------- ----------- ----------- -----------
stockholders.......... $(367,312) $(2,087,247) $(4,772,818) $(1,252,512) $(1,845,833) $(5,664,355) $(2,755,546)
========= =========== =========== =========== =========== =========== ===========
Denominator:
Denominator for basic
net loss per share--
weighted average
shares............... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
Effect of dilutive
securities:
Preferred stock....... -- -- -- -- -- --
Stock options......... -- -- -- -- -- --
Warrants.............. -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
Dilutive potential
common shares.......... -- -- -- -- -- --
Denominator for diluted
net loss per share--
adjusted weighted
average shares......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
========= =========== =========== =========== =========== =========== ===========
Basic net loss per
share.................. $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
Diluted net loss per
share.................. $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
</TABLE>

The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
<TABLE>
<CAPTION>
Year ended Three Months ended
December 31, March 31,
Pro Forma
As Adjusted
Period from Pro Forma As Three
April 23, 1996 Adjusted Months
(inception) to Year ended ended
December 31, December 31, March 31,
1996 1997 1998 1998 1999 1998 1999
-------------- --------- --------- ----------- ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Convertible notes
payable: -- -- 248,129 -- 968,311 -- --
Preferred stock:
Series A.............. -- 1,059,089 1,059,089 1,059,089 1,059,089 -- --
Series B.............. -- -- 849,640 244,447 849,640 -- --
Preferred stock
warrants:
Series B.............. -- 2,017,314 1,167,674 1,772,867 1,167,674 -- --
Series C.............. -- 530,256 530,256 530,256 530,256 -- --
Stock options........... 45,387 501,639 1,239,975 622,677 1,330,752 1,239,975 1,330,752
Warrants................ -- 514,415 1,343,649 683,869 1,563,964 3,041,579 3,261,894
</TABLE>

F-17
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Pro Forma Financial Information (unaudited)

The pro forma financial information as of March 31, 1999 gives effect to (i)
the one-for-3.85 reverse stock split effected April 8, 1999, (ii) the 2.33-
for-one stock split effected June 14, 1999 and (iii) the issuance of
15,170,860 shares of common stock in exchange for licensing rights with Virgin
Holdings, Inc., an affiliate of EMI Recorded Music ("EMI"), valued at
approximately $87 million. The pro forma financial information does not give
effect to the demand promissory note in the principal amount of $1,000,000.

11. Pro Forma As Adjusted Financial Information (unaudited)

The pro forma as adjusted financial information as of March 31, 1999, for
the year ended December 31, 1998 and for the three months ended March 31, 1999
gives effect to (i) the one-for-3.85 reverse stock split effected April 8,
1999, (ii) the automatic conversion, upon the completion of the IPO, of all
outstanding shares of convertible preferred stock into 1,908,729 shares of
common stock, (iii) the automatic conversion upon completion of the IPO, of
all outstanding convertible notes payable into 968,252 shares of common stock
($2,000,000 of convertible notes payable outstanding at March 31, 1999),
(iv) the write-off of all capitalized loan fees related to the convertible
notes payable ($227,501 capitalized at March 31, 1999), (v) the 2.33-for-one
stock split effected June 14, 1999, and (vi) the issuance of 15,170,860 shares
of common stock in exchange for licensing rights with EMI valued at
approximately $87 million. The pro forma as adjusted financial information
does not give effect to the demand promissory note in the principal amount of
$1,000,000.

12. Subsequent Events

In January 1999, the Company completed its private placement of convertible
notes payable to outside investors and received an additional $1,487,500. See
Note 4 for the nature and terms of the convertible notes payable. In
connection with the convertible notes payable issued in January, the Company
recorded loan fees of $173,875 and issued a warrant to purchase 96,831 shares
of common stock at an exercise price of $2.06, which expires on January 11,
2004. The Company recorded an expense of $70,649 for the fair value of this
warrant.

In January 1999, the Company completed its common stock private placement to
outside investors and issued an additional 587,380 shares of common stock at
$2.06 per share for a total of $1,213,250 in cash. The Company paid a
commission of approximately $97,000 related to this private placement and
issued a warrant to purchase 108,960 shares of common stock with an exercise
price of $2.06, which expires on January 14, 2004. The Company recorded an
expense of $79,499 related to the issuance of this warrant.

On January 8, 1999, the Company signed a lease line agreement which provides
leasing for computer and related equipment as well as CD fabrication equipment
up to $200,000 between the signing of the agreement and June 8, 1999. Any
equipment leased under this agreement will have a 24 month lease term, and at
the end of the lease term the Company will either be obligated to buy the
equipment at 10% of the original equipment cost or extend the lease term for
an additional 24 months. The Company also signed the first lease under this
agreement which will have a monthly rental payment of $8,261. As part of the
lease line agreement, the Company issued a warrant to purchase 14,524 shares
of its common stock at $2.06 per share which expires on January 8, 2009. The
Company recorded an expense of $16,021 related to the issuance of this
warrant.

On February 12, 1999, the Company signed a loan and security agreement with
a financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. The credit
facility matures six months from the date of the loan unless $5,000,000 in new
equity has been raised prior to maturity. In that case, the portion of the
credit facility used for equipment and software purchases will automatically
convert to a 24 month term loan. If the term of the credit facility is
extended, the financial institution will have the right to purchase warrants
equal to 4% of the commitment amount.

F-18
<PAGE>

musicmaker.com, Inc.
(formerly The Music Connection Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In February 1999, the Board of Directors approved a one-for-3.85 reverse
stock split of the Company's common stock, which was effective on April 8,
1999. All references in the accompanying financial statements to the number of
shares of common stock and per-share amounts have been restated to reflect the
split. Additionally, all references in the accompanying financial statements
to the number of shares of preferred stock and per-share amounts have been
restated to reflect the split in accordance with the Company's Restated
Articles of Incorporation.

Immediately upon completion of the IPO, all outstanding shares of Series A,
Series B and Series C convertible preferred stock will convert into 1,908,729
shares of common stock and all outstanding convertible notes payable will
convert into 968,252 shares of common stock. Upon conversion of the Series A
preferred stock into common stock, the remaining discount on the Series A
preferred stock will be recorded as accretion and is anticipated to have a
material effect on net income (loss) available to common stockholders in the
quarter and year in which this public offering is completed. This accretion
will not affect the Company's cash flows. The Series B and Series C preferred
stock warrants will convert to common stock warrants upon completion of the
IPO.

On April 8, 1999, the Company issued a warrant to purchase 242,077 shares of
common stock at $1.98 per share to a consultant for services rendered. The
Company recorded an expense of $464,415 related to the issuance of this
warrant.

On June 8, 1999, the Board of Directors approved an increase in the
aggregate number of shares of common stock for which options may be granted
under the Stock Option Plan up to 4.2 million. Also on June 8, 1999, the
stockholders authorized the Company's Amended and Restated Certificate of
Incorporation, which increased the total number of authorized shares of common
stock to 100 million shares.

On June 8, 1999, the Company executed a license agreement with EMI whereby
EMI agreed to make certain of its content available to the Company in EMI's
sole discretion in exchange for 50% of the Company's common stock, calculated
on a fully diluted basis on the effective date of the transaction. Under this
agreement, the Company will make royalty payments in connection with the
inclusion of music content provided by EMI in the Company's custom CDs. In
exchange for the Company's rights under the license agreement, the Company
issued 15,170,860 shares of common stock valued at $86,625,610 or estimated
the fair value of the Company's common stock at $5.71 per share. The
measurement date for this valuation was determined to be April 27, 1999, the
date when all material terms and conditions of the transaction had been
specified, negotiated and agreed to by both parties.The Company is amortizing
the intangible asset on a straight-line basis over the five year period of the
license agreement.

On June 8, 1999, the Board of Directors approved a 2.33-for-one stock split
of the Company's common stock, which was effective on June 14, 1999. All
references in the accompanying financial statements to the number of shares of
common stock and per-share amounts have been restated to reflect the split.
Additionally, all references in the accompanying financial statements to the
number of shares of preferred stock and per-share amounts have been restated
to reflect the split in accordance with the Company's Restated Articles of
Incorporation.

F-19
<PAGE>

[At top of the page of the inside back cover, "musicmaker.com" and the slogan,
"Freedom of Choice in Music" appear. Below the "musicmaker.com" and slogan is
a custom CD with two children on the face of the CD and the text "Happy
Father's Day!" Below the Custom CD, appears "Your Custom Personalized CD."]
<PAGE>

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

No dealer, salesperson or any other person is authorized to give any
information or make any representations in connection with this offering other
than those contained in this prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the underwriter. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction
in which such offer or solicitation is not authorized or is unlawful. The
delivery of this prospectus shall not, under any circumstances, create any
implication that the information herein is correct as of any time subsequent
to the date of this prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Dividend Policy.......................................................... 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 41
Certain Transactions..................................................... 47
Principal and Selling Stockholders....................................... 49
Description of Securities................................................ 51
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 55
Transfer Agent and Registrar............................................. 57
Legal Matters............................................................ 57
Experts.................................................................. 57
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
</TABLE>

Until , 1999, (25 days after the date of this prospectus), all dealers
effecting transactions in the shares of common stock offered hereby, whether
or not participating in the distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

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

8,400,000 Shares

[MUSICMAKER.COM LOGO APPEARS HERE]

Common Stock

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

PROSPECTUS

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

Ferris, Baker Watts
Incorporated
Fahnestock & Co. Inc.
C.E. Unterberg, Towbin

, 1999

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

Part II

Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution.

We estimate that our expenses to be paid in connection with the offering
(other than underwriting discounts, commissions and reasonable expense
allowances) will be as follows:

<TABLE>
<S> <C>
SEC registration fee....................................... $ 37,597
NASD filing fee............................................ $ 13,524
Nasdaq National Market listing fee......................... $ 95,000
Printing and engraving expenses............................ $ 350,000
Accounting fees and expenses............................... $ 250,000
Legal fees and expenses of the Company and Selling
Stockholder............................................... $ 400,000
Miscellaneous.............................................. $ 153,879
----------
Total................................................ $1,300,000
==========
</TABLE>

Item 14. Indemnification of Directors and Officers.

Musicmaker.com is organized under the laws of the State of Delaware.
Musicmaker.com's Charter and Bylaws provide that musicmaker.com shall
indemnify and advance expenses to its directors, officers, employees and
agents, and all persons who at any time served as directors, officers,
employees or agents of musicmaker.com, to the fullest extent permitted, and in
the manner provided under the laws of the State of Delaware.

The Delaware General Corporation Law provides that a Delaware corporation
has the power generally to indemnify its directors, officers, employees and
other agents serving, or who have served, musicmaker.com (each, a "Corporate
Agent") against expenses and liabilities (including amounts paid in
settlement) in connection with any proceeding involving a person by reason of
his being a Corporate Agent, other than a proceeding by or in the right of the
corporation, if that person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal proceeding, the person had no reasonable cause to
believe his conduct was unlawful.

In the case of an action brought by or in the right of the corporation,
indemnification of a Corporate Agent is permitted if that person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation; however, no indemnification is permitted in
respect of any claim, issue or matter as to which a person shall have been
adjudged to be liable to the corporation, unless and only to the extent that
the Court of Chancery or the court in which such proceeding was brought shall
determine upon application that despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to such indemnification.

To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in the defense of a proceeding,
whether or not by or in the right of the corporation, or in the defense of any
claim, issue or matter therein, the corporation is required to indemnify that
person for expenses in connection therewith. Expenses incurred by a Corporate
Agent in connection with a proceeding may, under certain circumstances, be
paid by the corporation in advance of the final disposition of the proceeding
as the corporation deems appropriate. Musicmaker.com's Charter permits the
advancement of expenses by musicmaker.com to officers or directors defending a
qualified civil or criminal action upon receipt of an undertaking by such
director or officer to repay the advancement amount if it shall ultimately be
determined that such person is not entitled to indemnification. The terms and
conditions of advancement are to be determined by musicmaker.com's Board of
Directors.

II-1
<PAGE>

The power to indemnify and advance the expenses under Delaware Law does not
exclude other rights to which a Corporate Agent may be entitled to under the
certificate of incorporation, bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.

Under Delaware law and musicmaker.com's Charter, a director, officer,
employee or agent of musicmaker.com that is successful on the merits or
otherwise in defense of any action, suit or proceeding, or in defense of any
claim, issue or matter therein, may require musicmaker.com to provide
indemnification for expenses (including attorneys' fees) actually and
reasonably incurred by that person in connection therewith.

Unless ordered by a relevant court, indemnification for qualified persons
shall be authorized on behalf of musicmaker.com by: (i) a majority of a quorum
of the Board of Directors, if a quorum consisting of the directors not party
to such action, suit or proceeding can be obtained; or (ii) by independent
legal counsel in a written opinion, if a quorum of (i) above is not obtainable
or if the disinterested quorum so directs; or (iii) stockholder approval.

Under the DGCL and musicmaker.com's Charter, musicmaker.com is permitted to
purchase and maintain insurance on behalf of Corporate Agents of
musicmaker.com or persons serving at the request of musicmaker.com as
Corporate Agents of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and
incurred by him or her in such capacity or arising out of his or her status as
such, whether or not musicmaker.com would have had the power to indemnify such
person. Musicmaker.com has director and officer insurance coverage. Our
directors and officers are insured against liability of up to $2,000,000 for
each loss, each policy year, and an additional $3,000,000 in the aggregate
each policy year.

The purpose of these provisions is to assist musicmaker.com in retaining
qualified individuals to serve as officers, directors or other Corporate
Agents by limiting their exposure to personal liability for serving as such.

Item 15. Recent Sales of Unregistered Securities.

During the past three years, the following securities were issued by
musicmaker.com without registration under the Securities Act:

In July 1996, in connection with its formation, musicmaker.com issued and
sold 1,286,038 and 226,948 shares of common stock to Mr. Bernardi,
musicmaker.com's founder, Chairman of the Board of Directors and Co-Chief
Executive Officer, and an accredited investor, respectively, for nominal
consideration.

In July 1996, musicmaker.com issued 1,512,984 shares of common stock to
seven foreign stockholders in connection with the acquisition of all of the
outstanding securities of CD Kit, S.A.

Between December 1996 and May 1997, musicmaker.com issued and sold 12%
convertible notes to eight accredited investors for $650,000. The notes were
convertible into common stock.

Between October 1996 and May 1997, musicmaker.com issued and sold 823,057
shares of common stock to various accredited investors for total aggregate
consideration of approximately $13,510. In May 1997, 30,259 shares of common
stock were issued in exchange for, and as compensation for, services rendered
to musicmaker.com.

Between June 1997 and November 1997, musicmaker.com issued and sold 389,729
shares of common stock to twenty-two investors, the only offerees, for total
aggregate consideration of $303,440. In July 1997, 30,259 shares of common
stock were issued to a consultant in exchange for, and as compensation for
services rendered to musicmaker.com.

In June and July 1997, the outstanding notes issued between December 1996
and May 1997 were converted to 415,537 shares of common stock at a conversion
price of $1.65 per share. Also, five note holders including one of our
officers invested $25,000 each and each received 15,130 shares.

In October 1997, musicmaker.com issued 453,896 common stock warrants to Mr.
Puthukarai, musicmaker.com's President, Co-Chief Executive Officer and Chief
Operating Officer and a warrant for 60,519

II-2
<PAGE>

shares of common stock to another investor. The warrants are exercisable by
the holders into common stock at an exercise price of $1.65 per share.

In December 1997, musicmaker.com issued and sold 1,059,089 shares of Series
A preferred stock to Rho, Mr. Bernardi and Mr. Puthukarai, and another
investor at a price of $1.65 per share. Additionally, musicmaker.com issued
2,017,314 Series B and 530,256 Series C preferred warrants to the persons
above. The Series B preferred warrants are exercisable into Series B preferred
stock at an exercise price of $1.98 per share and the Series C preferred
warrants are exercisable into Series C preferred stock at an exercise price of
$2.48 per share. Musicmaker.com's outstanding preferred stock and outstanding
preferred warrants shall automatically convert into common stock and common
stock warrants upon completion of the offering.

In January 1998, 169,454 common stock warrants, with an exercise price of
$1.65 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to obtaining
license agreements with record labels on behalf of musicmaker.com. These
warrants expire January 15, 2008. In August 1998, musicmaker.com issued 60,516
common stock warrants to four members of Mr. Steinberg's family as record
holders. The warrants were granted as compensation for consulting services
rendered to musicmaker.com by Mr. Steinberg. The warrants are convertible by
the holders into common stock at an exercise price of $1.98 per share and
expire on August 15, 2008.

In June 1998, musicmaker.com issued a warrant for 478,226 shares of common
stock to Columbia House in connection with entering into a marketing alliance.
The warrant is convertible by the holder into common stock at an exercise
price of $1.98 per share.

In September 1998, musicmaker.com issued 605,194 shares of common stock to
Platinum at a value of $1,650,000 in connection with a marketing agreement,
licensing arrangement and a stock exchange agreement under which
musicmaker.com purchased 111,457 shares of common stock of Platinum. In
November 1998, an additional 193,662 shares of common stock were issued under
the terms of the stock exchange agreement above.

Between September 1998 and January 1999, musicmaker.com issued shares of its
common stock in a private placement to 38 accredited investors at $2.06 per
share. Approximately 100 offers were made to accredited investors and no
general advertising or solicitation was used. Musicmaker.com used the
financial advisory services of Ryan, Lee & Company, Incorporated, on a best
efforts basis, which received a 7% commission and warrants for 108,960 shares
of our common stock exercisable at $2.06 per share as compensation for their
assistance in the private placement. Musicmaker.com received consideration of
approximately $2,500,000 in connection with this private placement of
approximately 1,307,557 shares. The offering closed on January 14, 1999.

Between November 1998 and January 1999, musicmaker.com issued an aggregate
value of $2,000,000 8% convertible notes to 64 accredited investors.
Approximately 100 offers were made to accredited investors and no general
advertising or solicitation was used. The convertible notes were issued at a
cost of $25,000 per note and each note is convertible into 12,103 shares of
musicmaker.com's common stock at $2.06 per share. Musicmaker.com received
consideration in connection with the above sale of convertible notes of
approximately $1,800,000. Musicmaker.com utilized the services of GunnAllen
Financial, Inc., on a best efforts basis, which received a 10% discount and
commission for their assistance in the sale above, and 96,831 warrants for our
common stock with an exercise price of $2.06 per share. The offering of
convertible notes above closed on January 11, 1999.

On April 8, 1999, musicmaker.com issued 242,077 common stock warrants with a
four year term to an individual who assisted in arranging the Columbia House
alliance. The warrant is exercisable at a price of $1.98 per share.

On June 8, 1999, musicmaker.com issued 15,170,860 shares to Virgin Holdings,
Inc., pursuant to the terms of an Agreement between musicmaker.com and Virgin
Holdings, Inc. dated June 8, 1999.

II-3
<PAGE>

Effective June 14, 1999, musicmaker.com's stockholders approved and adopted
an amendment to our stock option plan which authorized musicmaker.com to grant
options to purchase up to 4,200,000 shares of common stock. As of July 1,
1999, 2,044,882 options for shares of common stock were granted and
outstanding. No shares of common stock have been issued from the exercise of
options under the stock option plan. The exercise price of the options for
musicmaker.com's common stock ranges from $0.17 to $13.00 per share. The
issuances under the stock option plan were exempt pursuant to (S)3(b) of the
Securities Act.

Unless otherwise noted, all the above transactions were exempt from
registration under Section 4(2) of the Securities Act.

Item 16. Exhibits.

The following exhibits are filed as part of this registration statement:

<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement between musicmaker.com,
Virgin Holdings, Inc. and Ferris, Baker Watts,
Incorporated, Fahnestock & Co. Inc. and C. E. Unterberg,
Towbin as Representatives.+
3.1 Form of Amended and Restated Certificate of
Incorporation.+
3.2 Bylaws.#
4.1 Form of Common Stock Certificate.+
4.2 Form of Warrant Agreement.+
5.1 Opinion of Venable, Baetjer and Howard, LLP regarding
legality.+
10.1 Amended and Restated Employment Agreement between the
Company and Robert P. Bernardi dated December 8, 1997,
amended on February 12, 1999.#
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai dated December 8,
1997, amended on February 12, 1999 and on May 19, 1999.#
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, amended on January 1,
1998, and amended by letters to the Company dated August
28, 1998 and August 31, 1998.#
10.4 Letter Agreement dated June 12, 1998, between the Company
and The Columbia House Company.#
10.5 The Company's Amended Stock Option Plan.#
10.6 Marketing Agreement dated September 30, 1998, between
Platinum Entertainment, Inc. and the Company.#
10.7 Memorandum of Understanding between the Company and Audio
Book Club, Inc. dated January 18, 1999.#
10.8 Office/Warehouse/Showroom Lease dated January 15, 1998
between the Company and Century Properties Fund XX.#
10.9 Form of Lock-up Agreement.#
10.10.1 Loan and Security Agreement between the Company and
Imperial Bank dated March 12, 1999.#
10.10.2 Standby Letter of Credit and Security Agreement dated
March 9, 1999, and Addendum thereto dated March 5, 1999.#
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.#
10.12 Agreement of Lease between 570 Lexington Company, L.P.
and the Company dated February 26, 1999.#
10.13 License Agreement between the Company and Virgin
Holdings, Inc. dated June 8, 1999.++
10.14 Agreement between the Company and Virgin Holdings, Inc.
dated June 8, 1999.#
10.15 Stockholders' Agreement between the Company, Virgin
Holdings, Inc. and the other Stockholders listed on
Schedule I dated June 8, 1999.#
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
10.16 Registration Rights Agreement between the Company, Virgin
Holdings, Inc., Rho Management Trust I, The Columbia
House Company and the other Stockholders listed on
Schedules I and II dated June 8, 1999.#
10.17 Co-Branding and Media Purchase Agreement between the
Company and Spinner Networks, Inc. dated March 26, 1999.#
10.18 Note Purchase Agreement between Rho Management Trust I
and the Company dated as of June 23, 1999.+
10.19 Demand Promissory Note in the aggregate principal amount
of $1,000,000 issued by the Company to Rho Management
Trust I dated as of June 23, 1999.+
23.1 Consent of Ernst & Young LLP, independent auditors.+
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5.1).+
23.3 Consent of Darby & Darby, P.C.+
24 Power of Attorney (Contained on the signature page).#
27 Financial Data Schedule.#
</TABLE>
- --------

+ Filed herewith.
# Previously filed.

++ Confidential treatment received for portions of this document which was
previously filed with the Securities and Exchange Commission.

Item 17. Undertakings.

(a) The undersigned musicmaker.com hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement). Notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.

II-5
<PAGE>

(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(d) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Reston, Virginia, on
the 1st day of July 1999.

MUSICMAKER.COM, INC.

/s/ Robert P. Bernardi
By__________________________________:

Robert P. Bernardi

Chairman and Co-Chief Executive
Officer

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>
* Co-Chief Executive July 1, 1999
______________________________________ Officer, President, Chief
Devarajan S. Puthukarai Operating Officer and
Director

/s/ Robert P. Bernardi Chairman and Co-Chief July 1, 1999
______________________________________ Executive Officer
Robert P. Bernardi (Principal Executive
Officer)

* Director of Finance and July 1, 1999
______________________________________ Administration and Chief
Mark A. Fowler Financial Officer
(Principal Financial and
Accounting Officer)

* Vice Chairman July 1, 1999
______________________________________
Irwin H. Steinberg

* Director July 1, 1999
______________________________________
Edward J. Mathias

* Director July 1, 1999
______________________________________
Jay A. Samit

* Director July 1, 1999
______________________________________
Jonathan A.B. Smith

</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Director July 1, 1999
______________________________________
John A. Skolas

</TABLE>

*By:

/s/ Robert P. Bernardi
- ---------------------------------

Robert P. Bernardi

Attorney-in-fact

II-8
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement between musicmaker.com,
Virgin Holdings, Inc. and Ferris, Baker Watts,
Incorporated, Fahnestock & Co. Inc. and C.E. Unterberg,
Towbin as Representatives.+
3.1 Form of Amended and Restated Certificate of
Incorporation.+
3.2 Bylaws.#
4.1 Form of Common Stock Certificate.+
4.2 Form of Warrant Agreement.+
5.1 Opinion of Venable, Baetjer and Howard, LLP regarding
legality.+
10.1 Amended and Restated Employment Agreement between the
Company and Robert P. Bernardi dated December 8, 1997,
amended on February 12, 1999.#
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai dated December 8,
1997, amended on February 12, 1999 and on May 19, 1999.#
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, amended on January 1,
1998, and amended by letters to the Company dated August
28, 1998 and August 31, 1998.#
10.4 Letter Agreement dated June 12, 1998, between the Company
and The Columbia House Company.#
10.5 The Company's Amended Stock Option Plan.#
10.6 Marketing Agreement dated September 30, 1998, between
Platinum Entertainment, Inc. and the Company.#
10.7 Memorandum of Understanding between the Company and Audio
Book Club, Inc. dated January 18, 1999.#
10.8 Office/Warehouse/Showroom Lease dated January 15, 1998
between the Company and Century Properties Fund XX.#
10.9 Form of Lock-up Agreement.#
10.10.1 Loan and Security Agreement between the Company and
Imperial Bank dated March 12, 1999.#
10.10.2 Standby Letter of Credit and Security Agreement dated
March 9, 1999, and Addendum thereto dated March 5, 1999.#
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.#
10.12 Agreement of Lease between 570 Lexington Company, L.P.
and the Company dated February 26, 1999.#
10.13 License Agreement between the Company and Virgin
Holdings, Inc. dated June 8, 1999.++
10.14 Agreement between the Company and Virgin Holdings, Inc.
dated June 8, 1999.#
10.15 Stockholders' Agreement between the Company, Virgin
Holdings, Inc. and the other Stockholders listed on
Schedule I dated June 8, 1999.#
10.16 Registration Rights Agreement between the Company, Virgin
Holdings, Inc., Rho Management Trust I, The Columbia
House Company and the other Stockholders listed on
Schedules I and II dated June 8, 1999.#
10.17 Co-Branding and Media Purchase Agreement between the
Company and Spinner Networks, Inc. dated March 26, 1999.#
10.18 Note Purchase Agreement between Rho Management Trust I
and the Company dated as of June 23, 1999.+
10.19 Demand Promissory Note in the aggregate principal amount
of $1,000,000 issued by the Company to Rho Management
Trust I dated as of June 23, 1999.+
23.1 Consent of Ernst & Young LLP, independent auditors.+
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5.1).+
23.3 Consent of Darby & Darby, P.C.+
24 Power of Attorney (Contained on the signature page).#
27 Financial Data Schedule.#
</TABLE>
<PAGE>

- --------

+ Filed herewith.
# Previously filed.

++ Confidential treatment received for portions of this document which was
previously filed with the Securities and Exchange Commission.

<PAGE>

EXHIBIT 1.1

MUSICMAKER.COM, INC.

[8,400,000] Shares
Common Stock
($.01 par value)

Form of Underwriting Agreement

[July ], 1999

Ferris, Baker Watts, Incorporated
Fahnestock & Co. Inc.
C.E. Unterberg, Towbin
As Representatives of the several Underwriters,
c/o Ferris, Baker Watts, Incorporated
100 Light Street
8th Floor
Baltimore, Maryland 21202

Ladies and Gentlemen:

Musicmaker.com, Inc., a Delaware corporation (the "Company") and Virgin
Holdings, Inc., a Delaware corporation (the "Selling Stockholder"), severally
propose to sell to the several under writers named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, [8,400,000] shares of Common Stock, $ .01 par value ("Common
Stock") of the Company, of which [5,000,000] shares are to be issued and sold by
the Company and [3,400,000] shares are to be sold by the Selling Stockholder
(said shares to be issued and sold by the Company and sold by the Selling
Stockholder being hereinafter called the "Underwritten Securities"), plus an
option to purchase additional shares of Common Stock from the Company in an
amount equal to fifteen percent (15%) of the Underwritten Securities to cover
over-allotments (the "Option Securities"). The Company also proposes to issue
and sell to Ferris, Baker Watts and Fahnestock warrants (the "Warrants")
pursuant to the Warrant Agreement between the Company, Ferris, Baker Watts and
Fahnestock (the "Warrant Agreement") for the purchase of additional shares of
Common Stock in an amount equal to up to ten percent (10%) of the aggregate
number of shares comprising the Underwritten Securities plus the Option
Securities (the additional shares of Common Stock issuable upon the exercise of
the Warrants are hereinafter referred to as the "Warrant Securities"). The
Underwritten Securities, the Option Securities, the Warrants and the Warrant
Securities are hereinafter collectively referred to as the "Securities." The
Company and the Selling Stockholder are hereinafter sometimes referred to
collectively as the "Sellers." To the extent there are no additional
Underwriters listed on Schedule I other than you, the term Representatives as
used herein shall mean you, as Underwriters, and the terms Representatives and
Underwriters shall mean either the singular or plural as the context requires.
Certain terms used herein are defined in Section 17 hereof.
<PAGE>

1. Representations and Warranties.
------------------------------

(a) The Company represents and warrants to, and agrees with, each
Underwriter as set forth below in this Section 1(a) that as of the Effective
Date, the Closing Date and each Settlement Date:

(i) The Company has prepared and filed with the Commission a
registration statement (file number333-72685) on Form S-1, including a related
preliminary prospectus, for the registration under the Act of the offering and
sale of the Securities. The Company may have filed one or more amendments
thereto, including a related preliminary prospectus, each of which has
previously been furnished to you. The Company will next file with the
Commission either (A) prior to the Effective Date of such registration
statement, a further amendment to such registration statement (including the
form of final prospectus) or (B) after the Effective Date of such registration
statement, a final prospectus in accordance with Rules 430A and 424(b). In the
case of clause (B), the Company has included in such registration statement, as
amended at the Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to be included in such
registration statement and the Prospectus. As filed, such amendment and form of
final prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, and, except to
the extent the Representatives shall agree in writing to a modification, shall
be in all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised you,
prior to the Execution Time, will be included or made therein.

(ii) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in accordance with
Rule 424(b) and on the Closing Date (as defined in Section 3 hereof) and on any
date on which Option Securities are purchased, if such date is not the Closing
Date (each such date a "Settlement Date"), the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable requirements
of the Act and the rules thereunder; on the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to
Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and
on the Closing Date and any Settlement Date, the Prospectus (together with any
supplement thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
- -------- -------
the information contained in or omitted from the Registration Statement, or the
Prospectus (or any supplement thereto) in reliance upon and in conformity with
information furnished herein or in writing to the Company by or on behalf of the
Selling Stockholder or any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectus (or any supplement
thereto).

(iii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction in
which it is chartered or organized

2
<PAGE>

with full corporate power and authority to own or lease, as the case may be, and
to operate its properties and conduct its business as described in the
Prospectus, and is duly qualified and in good standing as a foreign corporation
authorized to business in each jurisdiction in which the nature of its business
or its ownership or leasing of property requires such qualification, except
where failure to be so qualified would not have a Material Adverse Effect.

(iv) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly and validly authorized and
issued and are fully paid and nonassessable; the Securities (including the
Securities to be sold by the Selling Stockholder) have been duly and validly
authorized, and, when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be fully paid and nonassessable; the
Underwritten Securities, Option Securities and Warrant Securities have been
approved for quotation, and admitted and authorized for trading, subject to
official notice of issuance on the Nasdaq National Market; the certificates for
the Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemp tive or other
rights to subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or ownership interests
in the Company are outstanding.

(v) There is no contract or other document of a character
required pursuant to the Act and the related published rules and regulations
with respect to Form S-1 to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not described or
filed as required; and the statements in the Prospectus under the headings
"Business -Music Content," "Business - Marketing -- Marketing Alliances, -- The
Columbia House Company Alliance, -- Platinum Entertainment, Inc. Alliance, --
Audio Book Club, -- Trans World Entertainment Corporation Alliance, -- Spinner
Networks, Inc. Alliance" and "Business - Intellectual Property and Trade
Secrets" fairly summarize the matters therein described.

(vi) This Agreement and the Warrant Agreement have been duly
authorized, executed and delivered by the Company and, assuming each is a
binding agreement of yours, each constitutes a valid and binding obligation of
the Company enforceable in accordance with its respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles relating to the availability of remedies and except as rights to
indemnity or contribution may be limited by federal or state securities laws.

(vii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940, as amended.

(viii) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under the
Act and the Exchange Act and such as may be required under the state securities
or blue sky laws of any jurisdiction in connection with the purchase and

3
<PAGE>

distribution of the Securities by the Underwriters in the manner contemplated
herein and in the Prospectus.

(ix) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a breach or
violation of, or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to, (A) the charter or bylaws of the Company,
(B) the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which the Company is a party or bound or to which its property is
subject (except, with respect to this clause (B), where such breach, violation,
lien, charge or encumbrance would not result in a Material Adverse Effect), or
(C) any statute, law, rule, regulation, judgment, order or decree applicable to
the Company of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the Company or any
of its properties.

(x) No holders of securities of the Company have rights to
the registration of such securities under the Registration Statement, except as
set forth in Schedule 1(a)(x) attached hereto.

(xi) The consolidated historical financial statements and
schedules of the Company included in the Prospectus and the Registration
Statement present fairly in all material respects the financial condition,
results of operations and cash flows of the Company as of the dates and for the
periods indicated, comply as to form with the applicable accounting requirements
of the Act and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as otherwise noted therein). The selected financial data set
forth under the captions "Summary Financial Data" and "Selected Financial Data"
in the Prospectus and Registration Statement fairly present, on the basis stated
in the Prospectus and the Registration Statement, the information included
therein. The Pro Forma and Pro Forma as Adjusted financial statements included
in the Prospectus and the Registration Statement include assumptions that
provide a reasonable basis for presenting the significant effects directly
attributable to the transactions and events described therein, the related Pro
Forma and Pro Forma as Adjusted adjustments give appropriate effect to those
assumptions, and the Pro Forma and Pro Forma as Adjusted adjustments reflect the
proper application of those adjustments to the historical financial statement
amounts in the Pro Forma and Pro Forma as Adjusted financial statements included
in the Prospectus and the Registration Statement. The Pro Forma and Pro Forma as
Adjusted financial statements included in the Prospectus and the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of Regulation S-X under the Act and the Pro Forma and
Pro Forma as Adjusted adjustments have been properly applied to the historical
amounts in the compilation of those statements.

(xii) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the Company
or its property is pending or, to the best knowledge of the Company, threatened
that (A) could reasonably be expected to have a material adverse effect on the
performance of this Agreement, the Warrant Agreement or the consummation of any
of the transactions contemplated hereby or (B) could reasonably be expected to
have a Material Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).

4
<PAGE>

(xiii) The Company owns or leases all such properties (other
than intellectual properties described in Section 1(a)(xxvii) below) as it deems
necessary to the conduct of its operations as presently conducted. The Company
has good and marketable title to all properties and assets described in the
Prospectus or Registration Statement as owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are described in
the Registration Statement or the Prospectus or are not material to the business
of the Company. The Company has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it, with such exceptions as
are not material and do not materially interfere with the use made and proposed
to be made of such properties by the Company.

(xiv) The Company is not in violation or default of (A) any
provision of its charter or bylaws, (B) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is a party
or bound or to which its property is subject (except, with respect to this
clause (B), could not reasonably be expected to have a Material Adverse Effect
or a material adverse effect on the performance of this Agreement, the Warrant
Agreement or the consummation of any of the transactions contemplated hereby),
or (C) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any of its properties,
as applicable.

(xv) Ernst & Young, LLP, who have certified certain financial
statements of the Company and delivered their report with respect to the audited
consolidated financial statements and schedules included in the Prospectus, are
independent public accountants with respect to the Company within the meaning of
the Act and the applicable published rules and regulations thereunder.

(xvi) [Reserved]

(xvii) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have a
Material Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto)) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as would not have a Material Adverse Effect, except as set forth
in or contemplated in the Prospectus (exclusive of any supplement thereto).

(xviii) No labor problem or dispute with the employees of the
Company exists or is threatened or imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its principal
suppliers, contractors or customers, that could have a Material Adverse Effect,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).

(xix) The Company is insured against such losses and risks and
in such amounts as it reasonably believes to be adequate for the business in
which it is engaged; all policies of insurance insuring the Company and its
business, assets, employees, officers and directors are in full force and
effect; the Company is in compliance with the terms of such policies and
instruments

5
<PAGE>

in all material respects; and there are no claims by the Company under any such
policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause; and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).

(xx) The Company has no subsidiaries.

(xxi) The Company possesses all licenses, certificates, permits
and other authorizations issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct its business as described in the
Prospectus or the Registration Statement, and the Company has not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).

(xxii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (A) transactions are
executed in accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(xxiii) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company in
order to facilitate the sale or resale of the Securities.

(xxiv) The Company is (A) in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants applicable to its business as
described in the Prospectus ("Environmental Laws"), (B) has received and is in
compliance with all permits, licenses or other approvals required under
applicable Environmental Laws to conduct its business and (C) has not received
notice of any actual or potential liability for the investigation or remediation
of any disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with Environmental
Laws, failure to receive required permits, licenses or other approvals, or
liability would not, individually or in the aggregate, have a Material Adverse
Effect, except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto). The Company has not received notice that it has been
named as a "potentially responsible party" under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.

(xxv) [Reserved].

6
<PAGE>

(xxvi) The Company has fulfilled its obligations, if any, under
the minimum funding standards of Section 302 of the United States Employee
Retirement Income Security Act of 1974 ("ERISA") and the regulations and
published interpretations thereunder with respect to each "plan" (as defined in
Section 3(3) of ERISA and such regulations and published interpretations) in
which employees of the Company are eligible to participate and each such plan is
in compliance in all material respects with the presently applicable provisions
of ERISA and such regulations and published interpretations. The Company has not
incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such plan
under Title IV of ERISA.

(xxvii) The Company owns, possesses, licenses or, to its
knowledge, otherwise has sufficient rights to use, all patents, patent
applications, trade and service marks, trade and service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets, technology, know-
how and other intellectual property which it deems necessary for the conduct of
the Company's business as currently conducted or as described in the Prospectus
(collectively, the "Intellectual Property"). Except as set forth in the
Prospectus under the caption "Business--Intellectual Property and Trade
Secrets," (a) to the Company's knowledge, there are no rights of third parties
to any such Intellectual Property; (b) to the Company's knowledge, there is no
infringement by third parties of any such Intellectual Property except where
such infringement would not individually or in the aggregate result in a
Material Adverse Effect; (c) there is no pending or, to the Company's knowledge,
threatened action, suit, proceeding or claim by others challenging the Company's
rights in or to, or the validity or scope of, any such Intellectual Property,
and the Company is unaware of any facts which would form a reasonable basis for
any such claim except where the Company has requested and obtained a non-
infringement opinion from its intellectual property counsel; (d) there is no
pending or, to the Company's knowledge, threatened action, suit, proceeding or
claim by others alleging that the Company infringes or otherwise violates any
patent, trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim except where the Company has requested and
obtained a non-infringement opinion from its intellectual property counsel or
where such claim, if asserted, would not have a Material Adverse Effect; and (e)
the Company has requested and arranged for Darby & Darby, P.C., its special
intellectual property counsel, to render an opinion letter as to certain
intellectual property matters in the form attached hereto as Exhibit 6(c),
including whether the Company's custom CD system and its kiosk technology
infringe any of the claims in U.S. Patent No. 5,860,068 dated January 12, 1999
to Cook: "Method and System for Custom Manufacture and Delivery of a Data
Product."

(xxviii) To its knowledge, the Company (A) does not have any
material lending or other relationship with any lending affiliate of any of
Ferris, Baker Watts, Fahnestock or C.E. Unterberg, Towbin and (B) does not
intend to use any of the proceeds from the sale of the Securities hereunder to
repay any outstanding debt owed to any affiliate of Ferris, Baker Watts,
Fahnestock or C.E. Unterberg, Towbin.

(xxix) Neither the Company nor any of the Company's officers,
employees, agents or any other person acting on behalf of, at the direction of
or for the benefit of the Company has, directly or indirectly, (A) used any
corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity, (B) made any unlawful
contribution to any candidate for foreign or domestic office, or to any foreign
or domestic

7
<PAGE>

government officials or employees or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof or to foreign or domestic
political parties or campaigns from corporate funds, or failed to disclose fully
any contribution in violation of law, (C) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (D) made any other unlawful
payment which, if not given in the past or if not continued in the future would
have a Material Adverse Effect.

(xxx) The Company is in compliance with the Commission's
revised staff legal bulletin No. 5 dated January 12, 1998, related to Year 2000
compliance to the extent described in the Prospectus.

(xxxi) [Reserved].

(xxxii) Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.

(b) The Selling Stockholder represents and warrants to, and agrees
with, each Under writer as set forth below in this Section 1(b).

(i) The Selling Stockholder is the lawful owner of the
Underwritten Securities to be sold by the Selling Stockholder pursuant to this
Agreement and has, and on the Closing Date will have, good and valid title to
such Underwritten Securities, free and clear of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.

(ii) [Reserved].

(iii) The Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement and the Custody Agreement
signed by the Selling Stockholder and American Securities Trust & Transfer,
Inc., as Custodian, relating to the deposit of the Underwritten Securities to be
sold by the Selling Stockholder (the "Custody Agreement") and to sell, assign,
transfer and deliver the Underwritten Securities to be sold by the Selling
Stockholder in the manner provided herein and therein.

(iv) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder.

(v) The Custody Agreement has been duly authorized, executed
and delivered by the Selling Stockholder and is a valid and binding agreement of
the Selling Stockholder, enforceable in accordance with its terms.

(vi) [Reserved].

(vii) Assuming the Underwriters are purchasing the
Underwritten Securities in good faith and without notice of any adverse claim to
such Underwritten Securities, upon delivery

8
<PAGE>

of and payment for the Underwritten Securities to be sold by the Selling
Stockholder pursuant to this Agreement, the Underwriters will acquire good and
valid title to such Underwritten Securities, free and clear of all restrictions
on transfer, liens, encumbrances, security interests, equities and claims
whatsoever.

(viii) The execution, delivery and performance of this
Agreement and the Custody Agreement by the Selling Stockholder, the compliance
by the Selling Stockholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will not (i)
require any consent, approval, authorization or other order of, or qualification
with, any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (ii) conflict with
or constitute a breach of any of the terms or provisions of, or a default under,
the organizational documents of the Selling Stockholder, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder or any property of
the Selling Stockholder is bound or (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over the Selling
Stockholder or any property of the Selling Stockholder.

(ix) The information in the Registration Statement under the
caption "Principal and Selling Stockholders" to the extent that such information
specifically relates to the Selling Stockholder does not, and will not on the
Closing Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(x) At any time prior to 10:00 A.M., New York City time, on
the first business day after the Execution Time and from time to time thereafter
for such period as in the opinion of counsel for the Underwriters a prospectus
is required by law to be delivered in connection with sales by an Underwriter or
a dealer, if there is any change in the information referred to in Section
1(b)(ix), the Selling Stockholder will immediately notify you of such change.

(xi) The certificate signed by or on behalf of the Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Selling Stockholder
to the Underwriters as to the matters covered thereby.

2. Purchase and Sale.
------------------

(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, (i) the Company agrees to issue
and sell [5,000,000] Underwritten Securities to each Underwriter, (ii) the
Selling Stockholder agrees to sell [3,400,000] Underwritten Securities and(iii)
each Underwriter agrees, severally and not jointly, to purchase from the
Sellers, at a purchase price of $ ______ per share, the amount of the
Underwritten Securities set forth opposite such Underwriter's name in Schedule I
hereto.

(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several Underwriters to purchase, severally and not jointly,
Option Securities, in an amount equal to up to fifteen percent (15%) of the
Underwritten Securities, at the same purchase price per share as the
Underwriters shall

9
<PAGE>

pay for the Underwritten Securities. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the Underwriters.
Said option may be exercised in whole or in part at any time (but not more than
once) on or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to the Company setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the Settlement Date. Delivery of certificates for
the shares of Option Securities by the Company, and payment therefor to the
Company, shall be made as provided in Section 3 hereof. The number of Option
Securities to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Securities to be purchased by the
several Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute discretion shall
make to eliminate any fractional shares.

3. Delivery and Payment. Delivery of and payment for the Underwritten
---------------------
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on July [_],
1999, or at such time on such later date not more than three Business Days after
the foregoing date as the Representatives shall designate, which date and time
may be postponed by agreement between the Representatives and the Sellers or as
provided in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the
Underwritten Securities and Option Securities shall be made to the
Representatives for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of either Seller, by wire transfer payable in
federal same-day funds to an account specified by such Seller. Delivery of the
Underwritten Securities and the Option Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.

If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) to the Representatives on the
date specified by the Representatives (which shall be within three Business Days
after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. If settlement for the Option Securities occurs after the Closing
Date, the Company will deliver to the Representatives on the settlement date for
the Option Securities, and the obligation of the Underwriters to purchase the
Option Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.

On the Closing Date, the Company shall issue and sell to Ferris, Baker
Watts and Fahnestock, Warrants at an aggregate purchase price of $100, which
Warrants shall entitle the holders thereof to purchase Warrant Securities in an
amount equal to ten percent (10%) of the aggregate number of shares comprising
the Underwritten Securities plus the Option Securities pursuant to the terms and
provisions of the Warrant Agreement. The Warrants shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at an initial exercise price equal to one hundred and ten
percent (110%) of the initial public offering price of the Underwritten
Securities. The Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibits 4.1 and 4.2 to the Registration

10
<PAGE>

Statement. Payment for the Warrants shall be made on the Closing Date.

4. Offering by Underwriters. Upon the authorization by the
-------------------------
Representatives, it is understood that the several Underwriters propose to offer
the Securities for sale to the public as set forth in the Prospectus.

5. Agreements.
-----------

(a) The Company agrees with the several Underwriters that:

(i) The Company will use its best efforts to cause the
Registration Statement, if not effective as promptly as practicable at the
Execution Time, and any amendment thereof, to become effective. Prior to the
termination of the offering of the Securities, the Company will not file any
amendment of the Registration Statement or supplement to the Prospectus or any
Rule 462(b) Registration Statement unless the Company has furnished you and the
Selling Stockholder a copy for your review prior to filing and will not file any
such proposed amendment or supplement to which you and the Selling Stockholder
reasonably object promptly in writing. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will cause the Prospectus, properly completed, and any supplement thereto to be
filed with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period pre scribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly advise the
Representatives (1) when the Registration Statement, if not effective at the
Execution Time, shall have become effective, (2) when the Prospectus, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement shall
have been filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement shall
have been filed or become effective, (4) of any request by the Commission or its
staff for any amendment of the Registration Statement, or any Rule 462(b)
Registration Statement, or for any supplement to the Prospectus or for any
additional information, (5) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Securities for sale in any jurisdiction or the institution or threatening
of any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the withdrawal
thereof.

(ii) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which (in the judgment of the Company's or your counsel or counsel for
the Selling Stockholder) the Prospectus as then supplemented would include any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under which
they were made not misleading, or if it shall be necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act or
the rules thereunder, the Company promptly will (A) notify the Representatives
of any such event; (B) prepare and file with the Commission, subject to the
second sentence of paragraph (i) of this Section 5, an amendment or supplement
which will correct such statement or omission or effect such compliance; and (C)
supply any supplemented Prospectus to

11
<PAGE>

you in such quantities as you may reasonably request.

(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company which will satisfy the provisions of
Section 11(a) of the Act and to so advise you in writing when such statement has
been so made available.

(iv) The Company will furnish to the Representatives and counsel
for the Underwriters one (1) signed copy of the Registration Statement as first
filed with the Commission and of each amendment to it, including all exhibits,
and will furnish to you and each Underwriter designated by you such number of
conformed copies of the Registration Statement as so filed and of each amendment
to it, without exhibits but including documents incorporated therein by
reference, as you may reasonably request and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act or Rule 174
promulgated thereunder, as many copies of each Preliminary Prospectus and the
Prospectus and any supplement thereto as the Representatives may reasonably
request.

(v) The Company will cooperate with the Representatives and
their counsel, if necessary, for the qualification of the Securities for sale
under the laws of such jurisdictions as the Representatives may designate and
will maintain such qualifications in effect so long as required for the
distribution of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action that would subject it to service of process in
suits, other than those arising out of the offering or sale of the Securities,
in any jurisdiction where it is not now so subject.

(vi) The Company will not, without the prior written consent of
Ferris Baker Watts, for a period of 180 days following the Execution Time,
offer, sell or contract to sell, or otherwise dispose of (or enter into any
transaction which is designed to, or might reasonably be expected to, result in
the disposition (whether by actual disposition or effective economic disposition
due to cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, or announce the offering of, or file or cause
to be filed a registration statement under the Act to register any shares of
Common Stock or any securities convertible into, or exchangeable for, shares of
Common Stock; provided, however, that the Company may issue and sell Common
-------- -------
Stock pursuant to the 1996 Stock Option Plan ("Option Plan") as in effect at the
Execution Time and may file a registration statement under the Act on Form S-8
with respect to the registration of such shares issued and sold pursuant to such
Option Plan. The Company also may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding at the
Execution Time.

(vii) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.

(viii) The Company agrees to pay the costs and expenses relating
to the following matters: (A) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Preliminary

12
<PAGE>

Prospectus, the Prospectus, and each amendment or supplement to any of them; (B)
the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and all
amendments or supplements to any of them, as may, in each case, be reasonably
requested for use in connection with the offering and sale of the Securities
during the period specified in Section 5(a)(iv) but not to exceed six (6) months
after the Effective Date; (C) the preparation, printing, authentication,
issuance and delivery of certificates for the Securities, including any stamp or
transfer taxes or similar fees or charges in connection with the original
issuance and/or sale of the Securities; (D) the printing (or reproduction) and
delivery of this Agreement, any blue sky memorandum and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Securities; (E) the registration of the Securities under the Exchange Act
and the listing of the Securities on the Nasdaq National Market; (F) any
registration or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to such
registration and qualification); (G) any filings required to be made with the
National Association of Securities Dealers, Inc. (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to such
filings); (H) the transportation and other expenses incurred by or on behalf of
Company representatives in connection with presentations to prospective
purchasers of the Securities; (I) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company; and (J) all other costs and expenses incident to the
performance by the Company of its obligations hereunder.

(ix) As soon as practicable after the Closing and at the
Company's expense, the Company will request and arrange for Darby & Darby, P.C.,
its special intellectual property counsel to render an opinion as to the matters
described in Section 1(a)(xxvii) above in the form attached hereto as Exhibit
6(c).

(x) The Company will use its best efforts to list for quotation
and maintain such listing of the Underwritten Securities and the Option
Securities (if any) on the Nasdaq National Market for a period of three years
after the Execution Time.

(b) The Selling Stockholder agrees with you and the Company:

(i) To use commercially reasonable efforts to cause the Company
to be pay all transfer taxes payable in connection with the transfer of the
Underwritten Securities to be sold by the Selling Stockholder to the
Underwriters.

(ii) To do and perform all things to be done and performed by
the Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Underwritten Securities
to be sold by the Selling Stockholder pursuant to this Agreement.

6. Conditions to the Obligations of the Underwriters. The obligations of
--------------------------------------------------
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Sellers contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Sellers made in any
certificates pursuant

13
<PAGE>

to the provisions hereof, to the performance by the each of the Sellers of their
respective obligations hereunder and to the following additional conditions:

(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later time,
the Registration Statement will become effective not later than (i) 6:00 PM New
York City time on the date of determination of the public offering price, if
such determination occurred at or prior to 3:00 PM New York City time on such
date or (ii) 9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after 3:00 PM New
York City time on such date; if filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b), the Prospectus, and any such
supplement, will be filed in the manner and within the time period required by
Rule 424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.

(b) The Company shall have furnished to the Representatives the
opinion of Venable, Baejter and Howard, LLP, counsel for the Company
(satisfactory to you and your counsel), dated the Closing Date and addressed to
the Representatives, a form of which is attached hereto as Exhibit 6(b), which
opinion shall be rendered to the Underwriters at the request of the Company and
shall so state therein.

(c) The Company shall have furnished to the Representatives the
opinion of Darby & Darby, special intellectual property counsel for the Company
(satisfactory to you and your counsel), dated the Closing Date and addressed to
the Representatives, a form of which is attached hereto as Exhibit 6(c), which
opinion shall be rendered to the Underwriters at the request of the Company and
shall so state therein. The Company shall have received the consent of Darby &
Darby to be included in the Registration Statement as Exhibit 23.3.

(d) The Representatives shall have received from Katten Muchin &
Zavis, counsel for the Underwriters, such opinion or opinions, dated the Closing
Date and addressed to the Representatives, with respect to the issuance and sale
of the Securities, the Registration Statement, the Prospectus (together with any
supplement thereto) and other related matters as the Represen tatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters. The opinion or opinions of such counsel shall be rendered to the
Underwriters at the request of the Company and shall so state therein.

(e) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:

(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the Closing
Date with the same effect as if made on the Closing Date and the Company has
complied with all the provisions herein and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date;

14
<PAGE>

(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or, to the Company's knowledge, threatened; and

(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto), there has been
no Material Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto) and other than operating losses
consistent with the Company's business plan as described in the Prospectus.

(f) At the Execution Time and at the Closing Date, Ernst & Young, LLP
shall have furnished to the Representatives and the Board of Directors of the
Company letters, dated respectively as of the Execution Time and as of the
Closing Date, in form and substance satisfactory to the Representatives,
confirming that they are independent accountants within the meaning of the Act
and the applicable published rules and regulations thereunder and that they have
performed a review of the unaudited interim financial information of the Company
for the three-month period ended March 31, 1999, and as at March 31, 1999, in
accordance with Statement on Auditing Standards No. 71, and stating in effect
that:

(i) in their opinion the audited financial statements and
financial statement schedules and pro forma and pro forma as adjusted financial
statements included in the Registration Statement and the Prospectus and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations with respect to registration statements on Form S-1;

(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company; their limited review, in accordance
with standards established under Statement on Auditing Standards No. 71, of the
unaudited interim financial information for the three-month period ended March
31, 1999, and as at March 31, 1999; carrying out certain specified procedures
(but not an examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of significance with
respect to the comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and the compensation and audit
committees of the Company; and inquiries of certain officials of the Company who
have responsibility for financial and accounting matters of the Company as to
transactions and events subsequent to December 31, 1998, nothing came to their
attention which caused them to believe that:

(A) any unaudited financial statements included in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with applicable accounting requirements of the Act and with
the published rules and regulations of the Commission with respect to
registration statements on Form S-1; or said unaudited financial statements are
not in conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial statements
included in the Registration Statement and the Prospectus;

(B) with respect to the period subsequent to December 31,
1998, there were any changes, at a specified date not more than five days prior
to the date of the letter, in the long-term debt of the Company or capital stock
of the Company, or decreases in the stockholders' equity of the Company as
compared with the amounts shown on the December 31, 1998

15
<PAGE>

consolidated balance sheet included in the Registration Statement and the
Prospectus, or for the period from January 1, 1999 to such specified date there
were any decreases, as compared with the corresponding period in the preceding
year in net sales, gross profit or loss from operations, or net loss in total or
per share amounts of net loss of the Company, except in all instances for
changes or decreases set forth in such letter;

(C) the information included in the Registration Statement
and Prospectus in response to Regulation S-K, Item 301 (Selected Financial
Data), Item 302 (Supplementary Financial Information), Item 402 (Executive
Compensation) and Item 503(d) (Ratio of Earnings to Fixed Charges) is not in
conformity with the applicable disclosure requirements of Regulation S-K;

(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus, including
the information set forth under the captions "Selected Financial Data" and
"Summary Financial Data" in the Prospectus, agrees with the accounting records
of the Company, excluding any questions of legal interpretation; and

(iv) on the basis of a reading of the unaudited pro forma and
pro forma as adjusted financial statements included in the Registration
Statement and the Prospectus; carrying out certain specified procedures;
inquiries of certain officials of the Company who have responsibility for
financial and accounting matters; and proving the arithmetic accuracy of the
application of the pro forma and pro forma as adjusted adjustments to the
historical amounts in the pro forma and pro forma as adjusted financial
statements, nothing came to their attention which caused them to believe that
the pro forma and pro forma as adjusted financial statements do not comply as to
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X or that the pro forma and pro forma as adjusted
adjustments have not been properly applied to the historical amounts in the
compilation of such statements.

References to the Prospectus in this paragraph (f) include any supplement
thereto at the date of the letter.

(g) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (other than operating losses consistent with the
Company's business plan as described in the Prospectus) (i) any change or
decrease specified in the letter or letters referred to in paragraph (f) of this
Section 6 or (ii) any Material Adverse Effect, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto) the effect
of which, in any case referred to in clause (i) or (ii) above, is, in the sole
judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto).

(h) The Securities shall have been approved for quotation, admitted
and authorized

16
<PAGE>

for trading, subject to official notice of issuance on the Nasdaq National
Market; listed and admitted and authorized for trading on the Nasdaq National
Market and satisfactory evidence of such actions shall have been provided to the
Representatives.

(i) At the Execution Time, the Company shall have furnished to the
Representatives a letter substantially in the form of Exhibit A hereto from each
officer and director of the Company and the stockholders listed on Schedule A-1
addressed to the Representatives.

(j) Prior to the Closing Date, the Company shall have furnished to
the Representatives such further information, certificates and documents as the
Representatives may reasonably request, including, among other things and
without limitation, a duly filed, authorized and approved amendment to its
Certificate of Incorporation providing for an increase in the authorized capital
of the Company from 15,584,415 authorized shares of Common Stock to a total of
100,000,000 shares of Common Stock authorized as a result of a 2.33-to-one stock
split effected on June 14, 1999.

(k) The representations and warranties of the Selling Stockholder
contained in Section 1(b) of this Agreement shall be true and correct in all
material respects on the Closing Date with the same force and effect as if made
on and as of the Closing Date and you shall have received a certificate to such
effect, dated the Closing Date, from the Selling Stockholder.

(l) The Selling Stockholder shall have furnished to the
Representatives an opinion (satisfactory to you and your counsel), dated the
Closing Date and addressed to the Representatives, of Paul, Weiss, Rifkind,
Wharton and Garrison, counsel for the Selling Stockholder, in form and substance
satisfactory to counsel for the Representatives, a form which is attached hereto
as Exhibit 6(l), which opinion shall be rendered to the Underwriters at the
request of the Selling Stockholder and shall so state therein.

(m) Neither of the Sellers shall have failed on or prior to the
Closing Date to perform or comply with any of the provisions herein contained
and required to be performed or complied with by the Company or the Selling
Stockholder, as the case may be, on or prior to the Closing Date.

If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.

The documents required to be delivered by this Section 6 shall be
delivered at the offices of Katten Muchin & Zavis, counsel for the Underwriters,
at 1025 Thomas Jefferson Street, N.W., Suite 700 East, Washington, D.C. 20007,
on the Closing Date.

7. Reimbursement of Underwriters' Expenses. If the sale of the
----------------------------------------
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because

17
<PAGE>

of any refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Ferris, Baker Watts on demand for all reasonable out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities.

8. Indemnification and Contribution.
---------------------------------

(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person who controls any Underwriter within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities (collectively, "Losses"), to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement for
the registration of the Securities or the Prospectus if used during the period
specified in Section 5(a)(iv) hereof, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any expenses (including legal fees as
prescribed in Section 8(d) below) reasonably incurred by them in connection with
investigating or defending against any such Losses; provided, however, that the
-------- -------
Company will not be liable in any such case to the extent that any such Loss
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Selling Stockholder or any Underwriter through the Representatives
specifically for inclusion therein. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.

(b) The Selling Stockholder agrees severally and not jointly with the
Company, to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company to the Underwriters but only
with reference to information relating to the Selling Stockholder furnished in
writing to the Company or to the Underwriters by the Selling Stockholder
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus. Notwithstanding the foregoing, the aggregate liability of the
Selling Stockholder pursuant to this Section 8(b) shall be limited to the
aggregate purchase price received by it from the sale of its Securities
hereunder.

(c) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, and the Selling
Stockholder, each of its directors and officers and each person who controls the
Selling Stockholder within the meaning of either the Act or the Exchange Act, to
the same extent as the foregoing indemnity to each Underwriter, but only (I)
with reference to written information relating to such Underwriter furnished to
the Company by or on behalf of such Underwriter through

18
<PAGE>

the Representatives specifically for inclusion in the documents referred to in
the foregoing indemnity and (II) for any Losses caused by any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto, or caused by an omission or
alleged omission to state therein in a material fact required to be stated
therein or necessary to make the statements therein not misleading, if the
person asserting such Losses purchased Securities from such Underwriter and a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Securities to such person, and if the Prospectus as so amended or supplemented)
would have cured the defect giving rise to such Losses. This indemnity agreement
will be in addition to any liability which any Underwriter may otherwise have.
The Company acknowledges that the statements set forth in paragraphs on related
to stabilization, syndicate covering transactions and penalty bids and, under
the heading "Underwriting", (i) the sentences related to concessions and
reallowances and (ii) the paragraph related to stabilization, syndicate covering
transactions and penalty bids in any Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of the
several Underwriters for inclusion in any Preliminary Prospectus or the
Prospectus.

(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a), (b) or (c) above unless and to the extent it did
not otherwise learn of such action and such failure results in the material
prejudice to the indemnifying party by impairing substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a), (b) or (c) above. The indemnifying party shall be
entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
- -------- -------
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel, and the indemnifying party
shall bear the reasonable fees, costs and expenses of such separate counsel if
(i) the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest, (ii)
the actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded based on the advice of counsel that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, (iii)
the indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the indemnifying
party shall authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceeding in the same
jurisdiction, be liable for (I) the reasonable fees and expenses of more than
one separate firm for all Underwriters and all

19
<PAGE>

persons, if any, who control Underwriters within the meaning of either Section
15 of the Act or Section 20 of the Exchange Act, (II) the reasonable fees and
expenses of more than one separate firm of the Company, its directors, officers
who sign the Registration Statement and each person, if any, who controls the
Company within the meaning of either Section and (III) the reasonable fees and
expenses of more than one separate firm for the Selling Stockholder, its
officers, directors and all persons, if any, who control the Selling Stockholder
within the meaning of either such section. In the case of any such separate firm
for the Underwriters and such control persons of the Underwriters, for the
Company, and such directors, officers and control persons of the Company, or for
the Selling Stockholder, and such directors, officers and control persons of the
Selling Stockholder, respectively, such firm or firms shall be designated in
writing by such party or parties. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceeding.

(e) In the event that the indemnity provided in paragraph (a), (b) or
(c) of this Section 8 is unavailable to an indemnified party or insufficient to
hold harmless an indemnified party for any reason, the Sellers and the
Underwriters severally agree to contribute to the aggregate Losses, (including
legal expenses subject to the limitations set forth in Section 8(d) herein and
other expenses reasonably incurred in connection with investigating or defending
same) to which the Sellers and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Sellers and the Underwriters from the offering of the Securities; provided,
--------
however, that in no case shall (i) any Underwriter (except as may be provided in
- -------
any agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder or (ii) the
Selling Stockholder be responsible for any amount in excess of the aggregate
purchase price received by it from the sale of its Securities hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Sellers and the Underwriters severally shall contribute in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Sellers and the Underwriters in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company and the
Selling Stockholder shall be deemed to be equal to the total net proceeds from
the offering (before deducting expenses) received by each of them, respectively,
and benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company or the Selling Stockholder or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Sellers and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (e), no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.

20
<PAGE>

For purposes of this Section 8, each person who controls an Underwriter within
the meaning of either the Act or the Exchange Act and each director, officer,
employee and agent of an Underwriter shall have the same rights to contribution
as such Underwriter, and each person who controls the Company or the Selling
Stockholder within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (e).

9. Default by an Underwriter. If any one or more Underwriters shall fail
--------------------------
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
-------- -------
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 15% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, or
other arrangements satisfactory to you and the Sellers for purchase of such
Securities are not made within 48 hours after a default, this Agreement will
terminate without liability to any nondefaulting Underwriter, the Selling
Stockholder or the Company. In the event of a default by any Underwriter as set
forth in this Section 9, the Closing Date shall be postponed for such period,
not exceeding seven (7) Business Days, as the Company shall determine, in order
that the required changes in the Registration Statement and the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability in respect
of any default of any such Underwriter under this Agreement.

10. Termination. This Agreement shall be subject to termination in the
------------
absolute discretion of the Representatives, by notice given to the Sellers prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on either of
such Exchange or National Market, (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or crisis the
effect of which on financial markets is such as to make it, in the sole judgment
of the Representatives, impractical or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Prospectus (exclusive of
any supplement thereto). In the event this Agreement is terminated for any of
the foregoing reasons after the Closing Date with respect to the Underwritten
Securities but before the Closing Date with respect to the Option Securities,
the Company shall not be responsible for any costs and expenses as described in
Sections 5(a)(viii) or 7 with respect to the public offering of such Option
Securities.

11. Representations and Indemnities to Survive. The respective agreements,
-------------------------------------------

21
<PAGE>

representations, warranties, indemnities and other statements of the Sellers or
their respective officers and of the Underwriters set forth in or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Sellers or any of
the officers, directors or controlling persons referred to in Section 8 hereof,
and will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.

12. Notices. All communications hereunder will be in writing and
--------
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Ferris, Baker Watts General Counsel (fax no.:
(410) 659-4632) and confirmed to the General Counsel, Ferris, Baker Watts, at
100 Light Street, 8/th/ Floor, Baltimore, Maryland 21202, Attention: General
Counsel; if sent to the Company, will be mailed, delivered or telefaxed to
musicmaker.com, Inc. (fax no.: (703) 904-4117) and confirmed to it at 1831
Wiehle Avenue, Suite 138, Reston Virginia 20190, attention Robert P. Bernardi;
or, if sent to the Selling Stockholder, will be mailed, delivered or tele faxed
to Virgin Holdings, Inc. (fax no.: (310) 288-2477) and confirmed to it at 338
North Foothill Road, Beverly Hills, California 90210, Attention: Susan Feingold.

13. Successors. This Agreement will inure to the benefit of and be
-----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder. For purposes of this
Section 13, the term "successor" does not include any purchaser of the
Underwritten Securities merely as a result of such purchase.

14. Applicable Law. This Agreement will be governed by and construed in
---------------
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.

15. Authority and Counterparts. Ferris, Baker Watts represents that it
--------------------------
has been authorized by the several Underwriters to sign this Agreement and act
on their behalf. This Agreement may be signed in one or more counterparts, each
of which shall constitute an original and all of which together shall constitute
one and the same agreement.

16. Headings. The section headings used herein are for convenience only
---------
and shall not affect the construction hereof.

17. Definitions. The terms which follow, when used in this Agreement,
------------
shall have the meanings indicated.

"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.

"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City or Baltimore,
Maryland.

"Commission" shall mean the Securities and Exchange Commission.

22
<PAGE>

"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.

"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.

"Fahnestock" shall mean Fahnestock & Co. Inc.

"Ferris, Baker Watts" shall mean Ferris, Baker Watts, Incorporated.

"Material Adverse Effect" shall mean any event, development, change or
effect that is materially adverse to the condition (financial or
otherwise), assets, liabilities, businesses, operations, results of
operations of such party and its subsidiaries taken as a whole, whether or
not arising from transactions in the ordinary course of business.

"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus included
in the Registration Statement at the Effective Date that omits Rule 430A
Information.

"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing pursuant to Rule 424(b) is required, shall mean the form of final
prospectus relating to the Securities included in the Registration
Statement at the Effective Date.

"Registration Statement" shall mean the registration statement
referred to in para graph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided
by Rule 430A.

"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.

"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.

"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the initial registration statement.

If the foregoing is in accordance with your understanding of our
agreement, please

23
<PAGE>

sign and return to us the enclosed duplicate hereof, whereupon this letter and
your acceptance shall represent a binding agreement among the Company, the
Selling Stockholder and the several Underwriters.

Very truly yours,

musicmaker.com, Inc.

By: ........................................
Robert P. Bernardi
Co-Chief Executive Officer

Virgin Holdings, Inc.

By: ........................................
Alisdair J. McMullan
Authorized Signatory

The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.

Ferris, Baker Watts, Incorporated.
Fahnestock & Co. Inc.
C.E. Unterberg, Towbin

By: Ferris, Baker Watts, Inc.

By:
.........................................
Name:
Title:

For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.

24
<PAGE>

SCHEDULE I
----------

Number of Underwritten
Underwriters Securities to be Purchased
- ------------ --------------------------

Ferris, Baker Watts, Inc.

Fahnestock & Co. Inc.

C.E. Unterberg, Towbin

____________

Total..................
============

25
<PAGE>

EXHIBIT A

LOCK-UP LETTER
FOR MUSICMAKER.COM, INC.
DIRECTORS, OFFICERS AND STOCKHOLDERS

[Date]

Ferris, Baker Watts, Incorporated
100 Light Street
8/th/ Floor
Baltimore, Maryland 21202

Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004

Dear Sirs:

The undersigned understands that Ferris, Baker Watts, Incorporated and
Fahnestock & Co. Inc., as Representatives of the several underwriters (the
"Underwriters"), propose to enter into an Underwriting Agreement with
musicmaker.com, Inc., a Delaware corporation (the "Company"), providing for the
public offering (the "Public Offering") of common stock, par value $0.01 per
share (the "Common Stock") of the Company.

To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned,
during the period commencing on the date hereof and ending 180 days after the
date of the final prospectus relating to the Public Offering:

(i) agrees not to (x) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position within
the meaning of Section 16 of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder or otherwise transfer or
dispose of, directly or indirectly, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for any shares
of capital stock of the Company or (y) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any shares of capital stock of the Company, or publicly announce an
intention to effect any such transaction (regardless of whether any of the
transactions described in clause (x) or (y) is to be settled by the delivery of
Common Stock, or such other securities, in

26
<PAGE>

cash or otherwise), without the prior written consent of Ferris, Baker Watts,
Incorporated;

(ii) agrees not to make any demand for, exercise any right, or file (or
participate in the filing of) a registration statement with respect to the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, without the prior written consent
of Ferris, Baker Watts, Incorporated; and

(iii) authorizes the Company to cause the transfer agent to decline to
transfer and/or to note stop transfer restrictions on the transfer books and
records of the Company with respect to any shares of Common Stock and any
securities convertible into or exercisable or exchangeable for Common Stock for
which the undersigned is the record holder and, in the case of any such shares
or securities for which the undersigned is the beneficial but not the record
holder, agrees to cause the record holder to cause the transfer agent to decline
to transfer and/or to note stop transfer restrictions on such books and records
with respect to such shares or securities.

The undersigned hereby represents and warrants that all of the shares of
capital stock held by such person are listed on the attached Annex 1 and that
the undersigned has full power and authority to enter into the agreements set
forth herein, and that, upon request, the undersigned will execute any
additional documents necessary or desirable in connection with the enforcement
hereof. All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned and any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors, and assigns of the undersigned.

Very truly yours,

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

- ------------------------------------------------
(Name - Please Type)

- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(Address)

- ------------------------------------------------
(Social Security or Taxpayer Identification No.)

27
<PAGE>

Annex 1

Number (and type) of shares of capital stock owned: ____________

Certificate Numbers: ____________

____________

28
<PAGE>

SCHEDULE A-1
STOCKHOLDERS

List of Stockholders

29
<PAGE>

SCHEDULE 1(a)(x)
REGISTRATION RIGHTS

30
<PAGE>

Exhibit 6(b) to the Underwriting Agreement

July ___, 1999

FERRIS, BAKER WATTS, INCORPORATED
FAHNESTOCK & CO. INC.
C.E. UNTERBERG, TOWBIN
As Representatives of the Several Underwriters
Identified in Schedule I Hereto,
c/o Ferris, Baker Watts, Incorporated
1720 Eye Street, N.W.
Washington, D.C. 20006

Re: musicmaker.com, Inc.
Registration Statement on Form S-1
File No. 333-72685
------------------

Ladies and Gentlemen:

We have acted as counsel to musicmaker.com, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of (i) 8,400,000 shares (the " Firm Shares") of
the Company's common stock, par value $.01 per share (the "Common Stock"),
consisting of 5,000,000 shares (the "Company Shares") of Common Stock to be sold
by the Company and 3,400,000 shares (the "Selling Stockholder Shares") of Common
Stock to be sold by Virgin Holdings, Inc., a Delaware corporation (the "Selling
Stockholder"), and (ii) up to an additional 1,260,000 shares of Common Stock
(the "Option Shares"), pursuant to an overallotment option granted by the
Company to the underwriters listed in Schedule I hereto (the "Underwriters"),
-----------
and the public offering thereof pursuant to an underwriting agreement, dated
July [ ], 1999, by and among Company, the Underwriters and the Selling
Stockholder (the "Underwriting Agreement"). This opinion is delivered pursuant
to Section 6(b) of the Underwriting Agreement. Capitalized terms not otherwise
defined herein have the meanings ascribed to them in the Underwriting Agreement.
The Firm Shares and the Option Shares are collectively referred to herein as the
"Shares."

Although we act as counsel to the Company with respect to specific matters
on a regular basis, we do not act as counsel to the Company as to all matters
and, therefore, we may be unaware of certain of its business dealings. Our
knowledge of
<PAGE>

factual matters regarding the Company is based upon those matters with respect
to which we have rendered advice and matters which the Company has disclosed to
us, upon inquiry or otherwise. We have acted as counsel to the Company in the
preparation of a registration statement, filed on Form S-1 on July [ ], 1999
(File No. 333-72685) (the "Registration Statement"), and the final prospectus
contained therein and dated July [], 1999 (the "Prospectus"). In our capacity as
counsel to the Company and in connection with this Opinion we have acted as
counsel for the Company and have examined and relied upon the following:

1. executed originals or counterparts of the Underwriting Agreement;

2. the Company's Amended and Restated Certificate of Incorporation,
certified by the Secretary of State of the State of Delaware, and the
Bylaws of the Company;

3. records and minutes of the corporate proceedings of the Company's
Board of Directors relating to the Company's organization, the
authorization of the Company's outstanding capital stock, the
authorization, sale and registration of the Shares under the Act, the
execution and delivery of the Underwriting Agreement, and the authorization
of the transactions contemplated thereunder;

4. a certificate of the Secretary of State of the State of Delaware
to the effect that the Company is duly incorporated and validly existing
and in good standing under the laws of the State of Delaware;

5. a certificate of the Virginia State Corporation Commission to the
effect that the Company is qualified and has authority to transact business
in the Commonwealth of Virginia;

6. a certificate of the Special Deputy Secretary of State of the
State of New York to the effect that the Company is qualified and has
authority to transact business in the State of New York;

7. an executed copy or counterparts of the Registration Statement
and the Prospectus, in the form it was filed with the Securities and
Exchange Commission;

8. a specimen certificate for the Shares;

9. certificates of the officers of the Company as to certain factual
matters delivered on the date hereof;

10. certain agreements and instruments as identified on Schedule II
-----------
(the "Identified Agreements"); and
<PAGE>

11. the legal opinion of Darby & Darby delivered pursuant to
Section 6(c) of the Underwriting Agreement;

12. such other certificates, documents and records as we deemed
necessary and appropriate to express the opinions herein set forth.

In basing the opinions and other matters set forth herein on "our
knowledge," the words "our knowledge" signify that, in the course of our
representation of the Company in matters with respect to which we have been
engaged by the Company as counsel, no information has come to our attention that
would give us actual knowledge or actual notice that any such opinions or other
matters are not accurate. Except as otherwise stated herein, we have undertaken
no independent investigation or verification of such matters. The words "our
knowledge" and similar language used herein are limited to the knowledge of the
lawyers within our firm who have recently provided substantive attention to
matters on behalf of the Company.

In reaching the opinions set forth below, with your permission we have
assumed, and to our knowledge there are no facts inconsistent with, the
following:

(a) the genuineness of all signatures and the authenticity of all
instruments, documents and agreements submitted to us as originals;

(b) the conformity to original documents (and the authenticity of such
original documents) of all instruments, documents and agreements submitted to us
as certified, telecopy, or photostatic copies;

(c) that each of the parties thereto (other than the Company) has duly and
validly executed and delivered each of the Underwriting Agreement and the
Identified Agreements, and such party's obligations as set forth therein are its
legal, valid, and binding obligations, enforceable in accordance with their
respective terms, subject to (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws affecting the rights of creditors
generally, and (ii) the exercise of judicial discretion in accordance with
general principles of equity;

(d) that each person executing the Underwriting Agreement and any of the
Identified Agreements on behalf of any such party (other than the Company ) is
duly authorized to do so;

(e) that each natural person executing any such instrument, document, or
agreement is legally competent to do so at the time of execution;

(f) that there are no oral or written waivers, modifications of or
amendments to the Underwriting Agreement and any Identified Agreements, by
actions or conduct of the parties thereto or otherwise, and;
<PAGE>

(g) that there are no records of any proceedings or actions of the
stockholders or the Board of Directors of the Company which have not been
provided to us.

Based upon and subject to the foregoing, we are of the opinion and so
advise you that:

(i) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware, with the
corporate power and authority to own or lease its properties and to conduct
its business as described in the Registration Statement and the Prospectus,
and based solely upon the certificates noted as items 5 and 6 on page 2 of
this Opinion, has been qualified as a foreign corporation authorized to
transact business and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, except, as the case may
be, in such jurisdictions in which the failure to so qualify has not had
and will not have a material adverse effect on the business of the Company.

(ii) The shares of Common Stock of the Company, issued and
outstanding immediately prior to the Closing Date as set forth in the
Prospectus, have been duly and validly authorized and issued, and are fully
paid and non-assessable. The Shares have been duly and validly authorized
and will be validly issued, fully paid and non-assessable when issued and
delivered against payment therefor as provided in the Underwriting
Agreement. The Company has the duly authorized capital stock as set forth
in the Prospectus under the heading "Description of Securities." The
Common Stock of the Company, including the Shares, conform in all material
respects to the statements relating thereto appearing under the heading
"Description of Securities" in the Prospectus. Subject to notice of
issuance, the Shares have been duly approved for quotation on the Nasdaq
National Market. The shares of Common Stock underlying the Warrant have
been included in the Company's Nasdaq National Market Listing Application.

(iii) The form of certificate used to evidence the Shares complies in
all material respects with the General Corporation Law of the State of
Delaware and with any applicable requirements of the Amended and Restated
Certificate of Incorporation and Bylaws of the Company. The holders of the
Company's outstanding Common Stock are not entitled to any preemptive
rights or other rights to subscribe for Common Stock arising by operation
of law, under the Amended and Restated Certificate of Incorporation or
Bylaws or, to our knowledge, under any Identified Agreement. To our
knowledge, except as included in the Registration Statement and Prospectus,
no options, warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into or exchange
any securities for, shares of capital stock of or ownership interests in
the Company are outstanding.
<PAGE>

(iv) Except as set forth in the Prospectus, to our knowledge, there
are no material legal or governmental actions, suits or proceedings pending
or threatened against, or involving the properties of the Company before
any court or government agency, authority or body or any arbitrator and
required to be disclosed in the Registration Statement or to be filed as an
exhibit thereof; provided that for this purpose we do not regard any
litigation or governmental actions, suits or proceedings to be "threatened"
unless and until the potential litigant or governmental authority has
manifested to the Company, or to its executive officers, a present
intention to initiate such actions, suits or proceedings.

(v) The Registration Statement has become effective under the Act
and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and, to our knowledge, no
proceedings with respect thereto have been commenced or threatened. Any
required filing of the Registration Statement and Prospectus, and any
supplements thereto, pursuant to Rule 424(b) and pursuant to Rule 462(b)
has been made in the manner and within the required time period.

(vi) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company, and the Warrant Agreement and the Warrant
have each been duly authorized, executed and delivered by the Company and
constitute valid and binding agreements of the Company enforceable against
the Company in accordance with their terms, except that (1) such
enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights, (2) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses
and to the discretion of the court before which any proceeding therefor may
be brought, and (3) rights to indemnity or contribution hereunder may be
limited by federal or state securities laws or by any court sitting with
appropriate jurisdiction.

(vii) As of the time of the execution of the Underwriting Agreement
and as of Effective Date, the Registration Statement and the Prospectus
(except as to the financial statements and other financial and statistical
data contained in such Registration Statement or Prospectus, as to which we
express no opinion) complied as to form in all material respects with the
applicable requirements of the Act and the regulations promulgated
thereunder.

(viii) The Company is not, and upon the sale of the Shares and the
Warrant, as herein contemplated, will not be an investment company, or an
entity controlled by an investment company, required to be registered under
the Investment Company Act of 1940, as amended.

(ix) No approval, authorization, consent or order of or filing
with any federal or state court, governmental agency or body is required in
connection with the execution, delivery and performance of the Underwriting
<PAGE>

Agreement, the Warrant Agreement, the consummation of the transactions
contemplated thereby, and the sale and delivery of the Shares by the
Company as contemplated thereby, other than such as have been obtained or
made under the Act. We express no opinion as to any necessary
qualification under the rules of the National Association of Securities
Dealers or the state securities or blue sky laws of the various
jurisdictions in which the Shares are being offered by the Underwriters.

(x) The sale of the Shares and the consummation of the transactions
contemplated under the Underwriting Agreement and the Warrant Agreement do
not and will not (a) result in a material breach or constitute a default
under, or constitute an event which, without giving of notice, lapse of
time, or both would constitute a breach or default under (1) any presently
existing federal or Virginia statute, law or regulation, or the General
Corporation Law of the State of Delaware, or (2) to our knowledge, any
judgment, order or decree of any court, governmental or regulatory body,
administrative agency, or arbitrator having jurisdiction over the Company
or its properties, to which the Company is a party and presently bound, or
(3) to our knowledge, any Identified Agreement, except for such breaches or
defaults which, individually or in the aggregate, would not have a material
adverse effect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company taken as a whole, and (b) to our
knowledge, result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or assets of the Company. The Company is
not in violation of any provision of its Amended and Restated Certificate
of Incorporation and Bylaws and the sale of the Shares and the consummation
of the transactions contemplated under the Underwriting Agreement and the
Warrant Agreement do not and will not result in a violation of any
provision of the Company's Amended and Restated Certificate of
Incorporation and Bylaws.

(xi) The statements under the captions "Risk Factors Shares held
by our current stockholders may adversely affect our stock price,"
"Management--Indemnification of Directors and Officers," "Description of
Securities," and "Shares Eligible for Future Sale," in the Registration
Statement and the Prospectus, insofar as such statements constitute a
summary of the legal matters referred to therein, constitute accurate
summaries thereof in all material respects;

(xii) To our knowledge, there are no pending legal or governmental
proceedings to which the Company is a party required to be described in the
Registration Statement or Prospectus, and, to our knowledge, there are no
contracts or documents of a character which are required to be filed as
exhibits to the Registration Statement or to be described or summarized in
the Prospectus which have not been so filed, summarized or described.
<PAGE>

(xiii) The Warrant is exercisable for Common Stock in accordance with
the terms of the Warrant Agreement and at the prices therein provided. The
shares of Common Stock issuable upon the exercise of the Warrant have been
duly authorized and reserved for issuance upon such exercise and such
shares, when issued upon such exercise in accordance with the terms of the
Warrant Agreement, will be duly authorized, validly issued, fully paid and
non-assessable. There are no preemptive or other rights to subscribe for or
to purchase, nor any restriction upon voting or transfer of, any share of
the Common Stock of the Company issuable upon exercise of the Warrant
pursuant to the Company's Amended and Restated Certificate of Incorporation
or Bylaws or, to our knowledge, any Identified Agreement.

(xiv) We have participated in the preparation of the Prospectus and
the Registration Statement, and in conferences with officers and other
representatives of the Company and representatives of the independent
public accountants for the Company and with Ferris, Baker Watts,
Incorporated, Fahnestock & Co. Inc. and C.E. Unterberg, Towbin as
representatives of the Underwriters (the "Representatives") at which the
contents of the Prospectus and the Registration Statement and related
matters were discussed and, although we are not passing upon and do not
assume responsibility for the accuracy, completeness or fairness of the
statements contained in the Prospectus and the Registration Statement and
have not made any independent investigation or verification thereof,
nothing has come to our attention during the course of such participation
that leads us to believe that on the Effective Date the Registration
Statement became effective, the Prospectus and the Registration Statement
(other than the financial statements and schedules and other financial and
statistical data and information included therein or omitted therefrom, as
to which we express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

With respect to paragraphs (xii) and (xiv) above, this opinion is based
upon participation in the preparation of the Registration Statement and
Prospectus and review and discussion of the contents thereof with officers of
the Company and the Company's independent accountants, including statements and
representations of such persons, upon which we have relied, related to the
materiality of information which was or was not included in the Registration
Statement.

We are members of the Bar of the Commonwealth of Virginia and the opinions
expressed herein are limited to the laws of the Commonwealth of Virginia (not
including the state securities or blue sky laws of Commonwealth of Virginia),
the General Corporation Law of the State of Delaware, and the federal laws of
the United States of America.

With respect to paragraphs (xii) and (xiv), we note that though we have
reviewed and participated in group drafting and due diligence sessions relating
to all
<PAGE>

portions of the Registration Statement and the Prospectus, in our role as
counsel to the Company we have not had responsibility for the information
concerning the intellectual property of the Company set forth in the
Registration Statement and the Prospectus. We understand that you are receiving
a separate opinion letter regarding those matters from Darby & Darby pursuant to
Section 6(c) of the Underwriting Agreement.

The opinions expressed herein are solely for the benefit of the addressee
hereof and may be relied upon solely by such addressee for the purposes for
which this letter is intended. No other person may rely on this opinion without
our prior written consent.

Very truly yours,

<PAGE>

Exhibit 6(c)

[Form Of Opinion
of
DARBY & DARBY]

Ferris, Baker Watts, Incorporated
Fahnestock & Co. Inc.
C.E. Unterberg, Towbin
As Representatives of the several Underwriters,
c/o Ferris, Baker Watts Incorporated
100 Light Street
8th Floor
Baltimore, Maryland 21202

Gentlemen:

We have acted as patent and trademark counsel to musicmaker.com, Inc. f/k/a
The Music Connection Corporation (together, the "Company") in connection with
the prosecution of the Company's patent applications and trademark applications
described in the Company's Registration Statement, as amended (No. 333-72685),
on Form S-1, filed by the Company with the Securities and Exchange Commission
("SEC") under the Securities Act of 1933 on July, ___ 1999 (the "Registration
Statement"). This opinion is being delivered to you pursuant to section 6(c) of
that certain Underwriting Agreement between the Company and the above-named
Representatives, dated even date herewith, a form of which is included as
Exhibit 1.1 to the Registration Statement, as amended ("Underwriting
Agreement"). All capitalized terms used herein have the respective meanings set
forth in the Underwriting Agreement unless otherwise defined herein.

Based upon and subject to the foregoing, and subject to further
qualifications set forth at the end of this opinion, we are of the opinion that:

1. To our knowledge, the statements relating to the Company's patent
applications and trademark applications described in the sections of the
Prospectus captioned "Business-Intellectual Property and Trade Secrets" insofar
as such statements constitute a summary of the Company's patent applications,
trademark applications and unregistered trademarks are in all material respects
accurate summaries.

2. To our knowledge, but without our having conducted an investigation or
search, there is no pending or threatened litigation or governmental proceedings
by or against the Company relating to patents, patent applications, trade
secrets, trademarks, trademark applications, copyrights, intellectual property
licenses or other intellectual property or know-how or proprietary information
of the Company. The Company has received three letters from the respective
owners of certain patents and trademarks advising the Company of possible
infringement. However, there is no pending or threatened litigation regarding
these matters. Moreover, we have reviewed these potential claims and have
determined that they are without merit.
<PAGE>

3. To our knowledge, based on the investigation and searches we conducted
through March __, 1999, the Company is not infringing any U.S. patents or
trademarks of another that have come to our attention in the course of our
limited representation of the Company, except with respect to certain
technologies licensed by the Company where the Company is contractually
indemnified by the licensor for any potential infringing use of such
technologies.

4. As of the date of this opinion, the Company is listed in the title
records of the United States Patent and Trademark Office ("PTO") as the sole
assignee of record of each of its patent applications and as the owner of each
of its trademark applications. To our knowledge, as of July ____, 1999 there
are no asserted or unasserted claims of any persons relating to the ownership of
the Company's patent applications or trademark applications; there are no
material defects of form in the preparation or filing of the Company's patent
applications or trademark applications; the Company's patent applications and
trademark applications are being diligently prosecuted in accordance with
accepted practice; and none of the patent applications nor the trademark
applications has been finally rejected or abandoned.

5. Based on information available to us, but without having conducted an
investigation or search, we have no knowledge of any facts that would cause us
to believe that the Company lacks sufficient patent or trademark rights
necessary to conduct the business now being conducted by the Company as
described in the Prospectus.

6. To our knowledge, but without having conducted an investigation or
search, there are no asserted or unasserted claims by any persons relating to
the scope, breadth or validity of the Company's patent applications or trademark
applications.

7. To our knowledge, all relevant prior art references known to us during
the prosecution of the Company's patent applications were disclosed to the PTO,
and we have not made any material misrepresentation to, or concealed any
relevant material fact from the PTO during such prosecution.

This opinion speaks only at and as of its date and is based solely on the
facts and circumstances known to us at and as of such date.

The investigations and searches we conducted in preparation for this
opinion did not include an independent search of the prior art relating to the
Company's patent applications, however, we did conduct a search which concluded
March __, 1999 to determine whether products or processes made or used by the
Company's patent applications would infringe any patents of a third party. This
opinion is furnished to you in connection with the execution and delivery of the
Underwriting Agreement and is solely for your benefit and may not be given to,
or relied upon by, any other person without our prior written consent.
Specifically, this opinion is not to be relied upon in support of a defense of
patent or trademark invalidity or noninfringement and is not to be quoted in
whole or in part or otherwise referred to (except in a list of closing
documents) nor is it to be filed with any governmental agency (except as
required by law) or other person without our prior written consent.

All information provided in this opinion is accurate, to our best
knowledge, as of July __, 1999.
<PAGE>

We are members of the Bar of the State of New York and do not hold
ourselves as being conversant with the laws of any other jurisdiction except the
patent and trademark laws of the United States of America and the laws of the
State of New York.

Very truly yours,

Darby & Darby P.C.
<PAGE>

Exhibit 6(l)

[PAUL, WEISS, RIFKIND, WHARTON & GARRISON LETTERHEAD]

July __, 1999

FERRIS, BAKER WATTS, INCORPORATED
FAHNESTOCK & CO., INC.
C.E. UNTERBERG, TOWBIN
As Representatives of the several Underwriters
c/o Ferris, Baker Watts, Incorporated
100 Light Street
8th Floor
Baltimore, MD 21202

Virgin Holdings, Inc.
---------------------

Ladies and Gentlemen:

We have acted as special counsel to Virgin Holdings, Inc., a Delaware
corporation (the "Selling Stockholder"), in connection with the Underwriting
-------------------
Agreement (the "Underwriting Agreement"), dated July __, 1999, among
----------------------
musicmaker.com, Inc., a Delaware corporation (the "Company"), the Selling
-------
Stockholder and Ferris, Baker Watts, Incorporated, Fahnestock & Co., Inc. and
C.E. Unterberg, Towbin, as Representatives of the several Underwriters named on
Schedule I of the Underwriting Agreement (the "Underwriters"), and the related
------------
purchase today by the Underwriters from the Selling Stockholder of an aggregate
of ________ shares (the "Shares") of common stock, par value $.01 per share, of
------
the Company. We are providing this opinion to you at the request of the Selling
Stockholder as contemplated by Section 6(l) of the Underwriting Agreement.
<PAGE>

In connection with the furnishing of this opinion, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
the Underwriting Agreement.

In addition, we have examined (i) those corporate records of the
Selling Stockholder that we have considered appropriate, including copies of the
certificate of incorporation and by-laws of the Selling Stockholder certified by
it as in effect on the date of this letter (collectively, the "Charter
-------
Documents") and copies of resolutions of the board of directors of the Selling
- ---------
Stockholder certified by it, and (ii) those other certificates, agreements and
documents as we deemed relevant and necessary as a basis for the opinions
expressed below. We have also relied upon the factual matters contained in
certificates provided to us by the Selling Stockholder and upon certificates of
public officials.

In our examination of the Underwriting Agreement and the other
documents referred to above, we have assumed, without independent investigation,
the genuineness of all signatures, the legal capacity of all individuals who
have executed any of the documents reviewed by us, the authenticity of all
documents submitted to us as certified, photostatic, reproduced or conformed
copies of valid existing agreements or other documents, the authenticity of the
latter documents and that the statements regarding matters of fact in the
certificates, records, agreements, instruments and documents that we have
examined are accurate and complete. We have also assumed, without independent
investigation, (a) the enforceability of the Underwriting Agreement and the
other documents referred to above against each party other than the Selling
<PAGE>

Stockholder and (b) that the execution, delivery and performance of the
Underwriting Agreement does not violate any law not covered by our opinion.

Based upon the above, and subject to the stated assumptions,
exceptions and qualifications, we are of the opinion that:

1. The Underwriting Agreement has been duly authorized, executed and
delivered by the Selling Stockholder.

2. The Selling Stockholder has all requisite corporate power and
authority to execute and deliver the Underwriting Agreement and to perform the
provisions of the Underwriting Agreement. The execution and delivery by the
Selling Stockholder of each of the Underwriting Agreement and its performance of
the transactions contemplated by it have been duly authorized by all necessary
corporate action.

3. The Selling Stockholder has full legal right, power and authority
to sell, assign, transfer and deliver good and valid title to the Shares.

4. Assuming the Underwriters are purchasing the Shares in good faith
and without notice of any lien, encumbrance, equity or other adverse claim
(within the meaning of the Uniform Commercial Code as in effect in the State of
New York) to the Shares, upon delivery of and payment for the Shares as
contemplated by the Underwriting Agreement, the Underwriters will acquire good
and valid title to the Shares, free and clear of any such liens, encumbrances,
equities or adverse claims.

5. The execution and delivery by the Selling Stockholder of the
Underwriting Agreement and its performance of the transactions contemplated by
the
<PAGE>

Underwriting Agreement do not violate the terms of the Charter Documents, any
Covered Law (as defined below) or any agreement listed on Schedule I to which
the Selling Stockholder is a party or by which the Selling Stockholder is bound.

Our opinions expressed above are limited to the laws of the State of
New York, the General Corporation Law of the State of Delaware and the Federal
laws of the United States that, in each case, in our experience, are normally
applicable to transactions of the type contemplated by the Underwriting
Agreement (the "Covered Laws"). Our opinions are rendered only with respect to
------------
the Covered Laws, and the rules, regulations and orders under those laws, that
are currently in effect. Please be advised that no member of this firm is
admitted to practice in the State of Delaware.

This letter is furnished solely for your benefit in connection with
the transactions referred to in the Underwriting Agreement and may not be
circulated to, or relied upon by, any other person.

Very truly yours,

PAUL, WEISS, RIFKIND, WHARTON & GARRISON

<PAGE>

SCHEDULE I

1. Agreement, dated June 8, 1999, between the Selling Stockholder and the
Company.

2. License Agreement, dated June 8, 1999, between the Selling Stockholder and
the Company.

3. Stockholders Agreement, dated June 8, 1999, among the Selling Stockholder,
the Company and the other Stockholders listed on Schedule I.

4. Registration Rights Agreement, dated June 8, 1999, among the Selling
Stockholder, the Company, Rho Management Trust I, The Columbia House
Company and the other Stockholders listed on Schedules I and II.

5. Agreement, dated June 16, 1999, between the Selling Stockholder and Liquid
Audio, Inc.

<PAGE>

Exhibit 3.1

FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

MUSICMAKER.COM, INC.

FIRST: The name of the corporation is musicmaker.com, Inc. (the
"Corporation").

SECOND: The address of the Corporation's registered office in the
State of Delaware is 919 Market Street, Suite 1600, New Castle County,
Wilmington, Delaware 19801. The name of its registered agent at such address is
The Delaware Corporation Agency, Inc.

THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law.

FOURTH: The Corporation shall have authority to issue two (2) classes
of shares to be designated respectively "Preferred Stock" and "Common Stock."
The total number of shares of Common Stock that the Corporation shall have
authority to issue is One Hundred Million (100,000,000) shares, par value $.01
per share. The total number of shares of Preferred Stock that the Corporation
shall have authority to issue is Five Million Nine Hundred Fifty-Nine Thousand
Five Hundred Nine (5,959,509) shares, par value $.01.

The Board of Directors is authorized, subject to limitations
prescribed by law and within the limitations and restrictions stated in this
Restated Certificate of Incorporation, to provide for the issuance of the shares
of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences, and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:

(1) The number of shares constituting that series and the distinctive
designation of that series;

(2) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;

(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
<PAGE>

(4) Whether that series shall have conversion obligations or
privileges, and, if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as the Board of
Directors shall determine;

(5) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;

(6) Whether that series shall have a sinking fund for the redemption
or purchases of shares of that series, and, if so, the terms and amount of such
sinking fund;

(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series;
and

(8) Any other relative rights, preferences and limitations of that
series.

FIFTH: This Article is reserved for any future certificate of
designation of rights, limitations and preferences of the Corporation's
Preferred Stock as authorized by the Board of Directors.

SIXTH: The following provisions are inserted for purposes of the
management of the business and conduct of the affairs of the Corporation and for
creating, defining, limiting and regulating the powers of the Corporation and
its directors and stockholders:

(a) The number of directors of the Corporation shall be fixed and may
be altered from time to time in the manner provided in the Bylaws and that
certain Securities Purchase Agreement, dated as of December 8, 1997, among the
Corporation and the parties listed therein as investors (the "Purchase
Agreement"), and vacancies in the Board of Directors and newly created
directorships resulting from any increase in the authorized number of directors
may be filled, and directors may be removed, as provided in the Bylaws, the
Purchase Agreement and this Restated Certificate of Incorporation.

(b) The Board of Directors shall be divided into three (3) classes,
as nearly equal as possible, with the term of office of the first class to
expire at the 2000 annual meeting of stockholders (the "Class A Directors"), the
term of office of the second class to expire at the 2001 annual meeting of
stockholders (the "Class B Directors"), and the term of office of the third
class to expire at the 2002 annual meeting of stockholders (the "Class C
Directors"). At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election.

(c) The election of directors may be conducted in any manner approved
by the stockholders or as required by law at the time when the election is held
and need not be by ballot.

2
<PAGE>

(d) All corporate power and authority of the Corporation (except as
at the time otherwise provided by law, by this Certificate of Incorporation or
by the Bylaws) shall be vested in and exercised by the Board of Directors.

SEVENTH: To the fullest extent permitted by the Delaware General
Corporation Law, no director of the Corporation shall have personal liability to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that nothing in this article shall eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under (S)174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. In
the event the Delaware General Corporation Law is amended after the date hereof
so as to authorize corporate action further eliminating or limiting the
liability of directors of the Corporation, the liability of the directors shall
thereupon be eliminated or limited to the maximum extent permitted by the
Delaware General Corporation Law, as so amended from time to time.

EIGHTH: The Corporation shall indemnify, and advance expenses to, its
directors, officers, employees and agents, and all persons who at any time
served as directors, officers, employees or agents of the Corporation, to the
extent permitted, and in the manner provided by, Section 145 of the Delaware
General Corporation Law, as amended, or any successor provisions, and shall have
power to make any other or further indemnity permitted under the laws of the
State of Delaware.

NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the or class of stockholders of this Corporation, as the case may be, to be
summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation. Nothing contained herein shall affect or impair the Corporation's
ability to avail itself of any other state or federal law concerning insolvency
and/or reorganization, including but not limited to Title 11 of the U.S. Code.

<PAGE>

EXHIBIT 4.1

NUMBER SHARES
COMMON STOCK
CUSIP 62757C 10 8
SEE REVERSE FOR CERTAIN DEFINITIONS

MUSICMAKER.COM, INC. [LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
100,000,000 SHARES COMMON STOCK $.01 PAR VALUE

THIS CERTIFIES THAT _____________________________________
IS THE RECORD OWNER OF _________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
MUSICMAKER.COM, INC.

transferable only on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.

IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Corporation.

Dated:

/s/ Robert Bernardi /s/ Devarajan S. Puthukarai
- -------------------------- ----------------------------------
ROBERT BERNARDI, SECRETARY DEVARAJAN S. PUTHUKARAI, PRESIDENT

[MUSICMAKER.COM, INC. CORPORATE SEAL]

COUNTERSIGNED AND REGISTERED:
American Securities Transfer & Trust, Inc.
P.O. Box 1596
Denver, Colorado 80201

By ____________________________________________
Transfer Agent & Registrar Authorized Signature
<PAGE>

MUSICMAKER.COM, INC.

The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN
ACT -....... Custodian.........
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform
Gifts to Minors Act .........................
(State)

JT TEN - as joint tenants with right of survivorship and not as tenants in
common
Additional abbreviations may also be used though not in the above list

For value received, _____ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - --------------------------------------

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

- - ---------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)

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

- - -------------------------------------------------------------- Shares of the
Common Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint

- - ---------------------------------------------------- attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.

Dated
-------------------

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

NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

The Corporation will furnish without charge to each stockholder who so
requests, a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights, as established, from time-to-time, under the
certificate of incorporation and by any certificate of designation. Such
requests shall be made in writing to the Secretary of the Corporation at the
Corporation's principal office.

Signature(s) Guaranteed:

- --------------------------------------------------------------------------------
The signature(s) must be guaranteed by an eligible guarantor institution (Banks,
Stockbrokers, Savings and Loan Associations and Credit Unions with membership in
an approved signature guarantee Medallion Program), pursuant to Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended.

<PAGE>

EXHIBIT 4.2
[Form of Warrant Agreement]
-----------------------------------------------------------------

MUSICMAKER.COM, INC.

AND

FERRIS, BAKER WATTS, INCORPORATED

AND

FAHNESTOCK & CO. INC.

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

WARRANT AGREEMENT

Dated as of , 1999
<PAGE>

WARRANT AGREEMENT, dated as of _____________, 1999, between MUSICMAKER.COM,
Inc., a Delaware corporation (the "Company"), FERRIS, BAKER WATTS, INCORPORATED
("FBW") and FAHNESTOCK & CO. INC. ("Fahnestock" and, together with FBW, the
"Representatives").

W I T N E S S E T H:
- - - - - - - - - -

WHEREAS, pursuant to the underwriting agreement (the "Underwriting
Agreement"), dated as of the date hereof, between the Representatives and C.E.
Unterberg, Towbin, as representatives of the several Underwriters (as such term
is defined in the Underwriting Agreement), and the Company, the Representatives
and the other Underwriters have agreed to purchase _______________ shares of
common stock, $.01 par value per share, of the Company, at a public offering
price of $______ per share in connection with the Company's proposed public
offering (the "Public Offering");

WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate of ten percent (10%) of the total
number of shares of Common Stock (as defined in Section 8.3 hereof) offered to
the public through the Public Offering, including any over-allotments, less
96,831 shares; and

WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the performance of
the Representatives pursuant to the Underwriting Agreement.

NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate of one hundred dollars ($100.00),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1. Grant. The Representatives are hereby granted the right to purchase,
-----
at any time from July __________, 2000 until 5:30 p.m., New York time, on July
______, 2004 (the "Exercise Period"), up to an aggregate number of shares of
Common Stock (the "Shares") equal to ten percent (10%) of the total number of
shares of Common Stock offered to the public through the Public Offering,
including any over-allotments, less 96,831 shares, at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $______ per share of
Common Stock subject to the terms and conditions of this Agreement. Except as
set forth herein, the Shares issuable upon exercise of the Warrants are in all
respects identical to the shares of Common Stock being purchased by the
Underwriters for resale to the public pursuant to the terms and provisions of
the Underwriting Agreement.

2. Warrant Certificates. The warrant certificates (the "Warrant
--------------------
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A,
<PAGE>

attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions and other variations as required or permitted by this
Agreement.

3. Exercise of Warrant.
-------------------

3.1 Method of Exercise. The Warrants initially are exercisable at an
------------------
aggregate initial exercise price per share of Common Stock set forth in Section
6 hereof (subject to adjustment as provided in Section 8 hereof) payable by wire
or certified or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Purchase Price (as hereinafter
defined) for the shares of Common Stock purchased at the Company's principal
offices in Virginia (presently located at 1831 Wiehle Avenue, Reston, Virginia
20190) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part for all or part of the shares of Common Stock represented thereby (but not
as to fractional shares of the Common Stock underlying the Warrants). In the
case of the purchase of less than all the shares of Common Stock purchasable
under any Warrant Certificate, the Company shall cancel said Warrant Certificate
upon the surrender thereof and shall execute and deliver a new Warrant
Certificate of like tenor for the balance of the shares of Common Stock
purchasable thereunder.

3.2. Exercise by Surrender of Warrants. In addition to the method of
---------------------------------
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in whole or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 in exchange for
the number of shares of Common Stock equal to (x) the number of shares as to
which the Warrants are being exercised multiplied by (y) a fraction, the
-------------
numerator of which is the Market Price (as defined below) of the Common Stock
less the Exercise Price and the denominator of which is such Market Price.
Solely for the purposes of this paragraph, Market Price shall be calculated
either (i) on the date which the form of election attached hereto is deemed to
have been sent to the Company pursuant to Section 13 hereof ("Notice Date") or
(ii) as the average of the Market Prices for each of the five consecutive
trading days preceding the Notice Date, whichever of (i) or (ii) is greater.

4. Issuance of Certificates. Upon the exercise of the Warrants, the
------------------------
issuance of certificates for shares of Common Stock or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
-------- -------
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver

2
<PAGE>

such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

The Warrant Certificates and the certificates representing the Shares
(and/or other securities, property or rights issuable upon the exercise of the
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then present Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or Assistant Secretary of the Company. Warrant Certificates
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.

5. Restriction on Transfer of Warrants. The Holder of a Warrant
-----------------------------------
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof, and that the Warrants will not be sold, offered for sale, transferred,
assigned or hypothecated for a period of one year from the date of this
agreement other than to officers, employees or partners of the respective
Representatives and members of the selling group and their officers and
partners, in which case, such officers, employees or partners shall be entitled
to receive a replacement Warrant Certificate in accordance with Section 9 hereof
upon presentment of a properly executed Form of Assignment (in the form included
in Exhibit A attached hereto), provided, however, that any such transfer
permitted hereunder shall be for an amount equal to no less than 25,000 Warrant
Shares (as defined in Section 7 below). In no event shall any transfer
hereunder violate applicable federal or state securities laws and the Company
may reasonably request an opinion of counsel to such effect.

6. Exercise Price.
--------------

6.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $[_____] [110% of the initial public offering price] per share of Common
Stock. The adjusted exercise price shall be the price which shall result from
time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.

6.2 Exercise Price. The term "Exercise Price" as used herein shall
--------------
mean the initial exercise price or the adjusted exercise price, depending upon
the context.

7. Registration Rights.
-------------------

7.1 Registration under the Securities Act of 1933. The Warrants, the
---------------------------------------------
Shares and any of the other securities issuable upon exercise of the Warrants
have not been registered under the Securities Act of 1933, as amended (the
"Act"). Upon exercise of the Warrants, in part or in whole, the certificates
representing the Shares underlying the Warrants and any of the other

3
<PAGE>

securities issuable upon exercise of the Warrants (collectively, the "Warrant
Shares") shall bear the following legend:

The securities represented by this certificates have not been
registered under the Securities Act of 1933, as amended ("Act") or any
state securities laws, and may not be offered or sold except pursuant
to (i) an effective registration statement under the Act and
registration under applicable state securities laws, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule under
the Act relating to the disposition of securities) and any similar
exemption under state securities laws, or (iii) another available
exemption from registration under the Act and applicable state
securities laws.

7.2 Piggyback Registration. From the date hereof and expiring seven
----------------------
(7) years thereafter, whenever the Company proposes to register any of its
securities under the Act and such registration is a "Piggyback Registration" as
defined in that certain Registration Rights Agreement made as of June 8, 1999
("Registration Rights Agreement") by and among the Company and the "Registration
Rights Holders" (as such term is defined in the Registration Rights Agreement
(as included as Exhibit 10.16 to the Company's Registration Statement filed on
Form S-1 (File No. 333-72685)), the Representatives and each other Holder(s) of
the Warrants and/or the Warrant Shares (the "Registrable Securities") are hereby
granted registration rights pari passu with the Registration Rights Holders
under the Registration Rights Agreement and, therefore, shall be entitled to the
same rights and benefits with respect to the registration of such Registrable
Securities as the Company has granted to the Registration Rights Holders in
Section 3 of the Registration Rights Agreement.

7.3 Demand Registration.
-------------------

(a) From the date hereof and expiring five (5) years hereafter, the
Holders of the Warrants and/or Warrant Shares representing a "Majority" (as
hereinafter defined) of such securities (assuming the exercise of all of the
warrants) not previously sold pursuant to this Section 7 shall have the right
(which right is in addition to the registration rights granted under Section 7.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on not more than one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Representatives and the Holders, in
order to comply with the provisions of the Act, so as to permit a public
offering and sale of their respective Warrant Shares for six (6) consecutive
months by such Holders and any other Holders of the Warrants and/or Warrant
Shares who notify the Company within twenty (20) days after receiving notice
from the Company of such request. In the event of a registration request and
registration hereunder, (i) the Registration Rights Holders shall be entitled to
participate in such registration in accordance with their respective rights to
participate in a

4
<PAGE>

Demand Registration (as such term is defined in the Registration Rights
Agreement) under the Registration Rights Agreement, and (ii) the Representatives
and each other Holder(s) of Registrable Securities hereunder shall be subject to
the same priority as Virgin, Rho and Columbia House with respect to any
cutbacks.

(b) In the event that a Registration Rights Holder makes a request for
a "Demand Registration" as defined in the Registration Rights Agreement, the
Representatives and each other Holder(s) of Registrable Securities are hereby
granted registration rights pari passu with Virgin, Rho and Columbia House (as
such parties are defined in the Registration Rights Agreement) and, therefore,
shall be entitled to the same rights and benefits with respect to the
registration of such Registrable Securities (which shall also be deemed
"Registrable Securities" under the Registration Rights Agreement") as the
Company has granted to Virgin, Rho and Columbia House.

(c) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Shares within ten (10)
days from the date of the receipt of any such registration request.

(d) No right of the Holders under Section 7.3(a) shall be deemed to
have been exercised if with respect to such right:

(A) the requisite notice given by Holders pursuant to this
Section 7.3 is withdrawn prior to the date of filing of a registration
statement or if a registration statement filed by the Company under
the Securities Act pursuant to this Section 7.3 is withdrawn prior to
its effective date, in either case, by written notice to the Company
from the Holders of fifty percent (50%) or more of the Warrants and/or
Warrant Shares to be included or which are included in such
registration statement stating that such Holders have elected not to
proceed with the offering contemplated by such registration statement
because (i) a development in the Company's affairs has occurred or has
become known to such Holders subsequent to the date of the notice by
the Holders to the Company requesting registration of the Warrant
Shares of the filing of such registration statement which, in the
judgment of such Holders or the managing underwriter of the proposed
public offering, adversely affects the market price of such Warrant
Shares (provided, however, that the exception under this clause (i)
shall not be available more than once where the withdrawal is at the
election of the Holders) or (ii) a registration statement filed by the
Company pursuant to this Section 7.3, in the reasonable opinion of
counsel for such Holders or the managing underwriter of the proposed
public offering, contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not

<PAGE>

misleading in light of the circumstances under which made (other than
any such statement or omission relating to such Holders and based on
information supplied or failed to be supplied by such Holders) and the
Company has not, promptly after written notice thereof, corrected such
statement or omission in an amendment filed to such registration
statement pursuant to Section 7.4(m); or

(B) a registration statement pursuant to this Section 7.3 shall
have become effective under the Securities Act and (i) the
underwriters shall not purchase any Warrant Shares because of a
failure of condition contained in the underwriting agreement (other
than a condition to be performed by or within the control of the
Holders) relating to the offering covered by such registration
statement or (ii) less than 85% of the Warrant Shares included therein
shall have been sold as a result of any stop order, injunction or
other order or requirement of the Commission or other governmental
agency or court.

(e) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Shares
within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) hereof of a Majority of the Holders
of Warrants or Warrant Shares, the Company shall have the option, upon the
consent of a Majority of the Holders of Warrants or Warrant Shares, to
repurchase (i) any and all Warrant Shares at the higher of the Market Price per
share of Common Stock on (A) the date of the notice sent pursuant to Section
7.3(a) or (B) the expiration of the period specified in Section 7.4(a) and (ii)
any and all Warrants at such Market Price less the Exercise Price of such
Warrant. Such repurchase, if elected by the Company, shall be in immediately
available funds and shall close within two (2) days after the later of (x) the
expiration of the period specified in Section 7.4(a) or (y) the delivery of
written notice of election specified in this Section 7.3(e).

7.4 Covenants of the Company with Respect to Registration. In
-----------------------------------------------------
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:

(a) Consistent with the Registration Rights Agreement, the Company
shall use its best efforts to file a registration statement within ninety (90)
days of receipt of any request therefor, shall use its best efforts to have any
registration statements declared effective at the earliest possible time, and
shall furnish each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested.

Notwithstanding the foregoing, the Company shall be entitled to
postpone, for a period of not more than ninety (90) days after receipt of a
request to effect a registration, the filing of any registration statement
otherwise required to be prepared and filed by it pursuant to Section 7.3 hereof
if, at any time it receives a request for registration, the Board of Directors
of the Company determines in its reasonable business judgment that such
registration and offering would

6
<PAGE>

interfere with any material financing, acquisition, corporate reorganization or
other material transaction or development involving the Company and promptly
gives the Holders demanding registration written notice of such determination;
provided that (i) upon such postponement by the Company, the Company shall be
- --------
required to file such registration statement as soon as practicable after the
Board of Directors of the Company shall determine, in its reasonable business
judgment, that such registration and offering will not interfere with the
aforesaid material financing, acquisition, corporate reorganization or other
material transaction or development involving the Company, (ii) the Company may
utilize this right once each year; (iii) the Holders who made such written
request to effect such registration, may, at any time in writing, withdraw such
request for such registration and therefore preserve the right provided in
Section 7.3 hereof for such Holders to again request such registration, and (iv)
the Exercise Period shall automatically be extended by an additional one hundred
and twenty (120) days.

(b) The Company shall pay all costs (including fees and expenses of
one counsel to the Holder(s) up to a maximum amount of $25,000 in the case of a
Demand Registration or $15,000 in the case of a Piggyback Registration, but not
underwriting or selling commissions), fees and expenses in connection with all
registration statements filed pursuant to Sections 7.2 and 7.3 hereof including,
without limitation, the Company's legal and accounting fees, printing expenses,
blue sky fees and expenses. If the Company shall fail to comply with the
provisions of Section 7.4(a), the Company shall, in addition to any other
equitable or other relief available to the Holder(s), extend the Exercise Period
by such number of days as shall equal the delay caused by the Company's failure,
and be liable for any or all damages as the Holder(s) may be entitled to as a
matter of law.

(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky laws of a
reasonable number of states as the Holder(s) shall designate; provided that the
--------
Company shall not be obligated to qualify to do business in any such
jurisdiction or to file any general consent to service of process in any
jurisdiction in any action other than one arising out of the offering or the
sale of the Warrant Shares.

(d) The Company shall indemnify each Holder of the Warrant Shares to
be sold pursuant to any registration statement and each person, if any, who
controls such Holder within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement, but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Representative, in its capacity as an Underwriter,
contained in Section 8 of the Underwriting Agreements.

7
<PAGE>

(e) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 8 of the Underwriting
Agreement pursuant to which the Representative, in its capacity as an
Underwriter, has agreed to indemnify the Company.

(f) Nothing contained in this Agreement shall be construed as
requiring a Holder to exercise its Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.

(g) [Reserved].

(h) In connection with any registration statement filed pursuant to
Section 7.2 hereof, the Company shall furnish to each Holder participating in
any underwritten offering and to each underwriter, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel to the
Company, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under the underwriting agreement), and (ii) a "cold comfort"
letter, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement), signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.

(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within fifteen (15) months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least twelve (12) consecutive months beginning after the effective date of the
registration statement.

(j) Subject to reasonable confidentiality and privilege
considerations, the Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence and memoranda described below, and
to the managing underwriters, copies of all

8
<PAGE>

correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the registration statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. ("NASD"). Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder or underwriter shall reasonably request.

(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Shares requested to be included in such underwriting,
which may be any of the Underwriters. Such agreement shall be reasonably
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders' ownership
of the Warrants and the Warrant Shares and their intended methods of
distribution.

(l) [Reserved].

(m) For purposes of this Agreement, the term "Majority," in reference
to the Holders of Warrants or Warrant Shares, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Shares that (i) are
not held by the Company, an officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith or (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under the Act.

(n) The Company shall promptly notify each Holder of Warrants and/or
Warrants Shares covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Act, upon the
Company's discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made, and at the request of any such Holder promptly prepare and furnish to such
Holder and each underwriter, if any, a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made.

9
<PAGE>

8. Adjustments to Exercise Price and Number of Shares.
--------------------------------------------------

8.1 Subdivision and Combination. In case the Company shall at any
---------------------------
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall be decreased, in the case of subdivision, or increased, in the case
of combination, in the same proportions as the Common Stock is subdivided or
combined, in each case effective automatically upon, and simultaneously with,
the effectiveness of the subdivision or combination which gives rise to the
adjustment.

8.2 Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 8, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted by
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Shares issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.

8.3 Definition of Common Stock. For the purpose of this Agreement,
--------------------------
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as may be amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.

8.4 Merger or Consolidation. (a) In case the Company after the date
-----------------------
hereof (i) shall consolidate with or merge into any other person and shall not
be the continuing or surviving corporation of such consolidation or merger, or
(ii) shall permit any other person to consolidate with or merge into the Company
and the Company shall be the continuing or surviving person but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, or (iii) shall transfer all or substantially all of its properties or
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common Stock for
which adjustment in the Exercise Price is provided in Section 8), then, and in
the case of each such transaction, proper provision shall be made so that, upon
the basis and the terms and in the manner provided in this Agreement and the
Warrants, the Holders of the Warrants, upon the exercise thereof at any time
after the consummation of such transaction, shall be entitled to receive (at the
aggregate Exercise Price in effect at the time of such consummation for all
Common Stock issuable upon such exercise immediately prior to such
consummation), in lieu of the Common Stock or other securities issuable upon
such exercise prior to such consummation, the highest amount of securities, cash
or other property to which such Holders would actually have been entitled as
stockholders upon such consummation if such Holders had exercised the rights
represented by the Warrants immediately prior thereto, subject to adjustments
(subsequent to such consummation) as nearly equivalent as possible to the
adjustments provided for in Section 8; provided that if a
--------

10
<PAGE>

purchase, tender or exchange offer shall have been made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock, and if a
Holder of Warrants so designates in a notice given to the Company on or before
the date immediately preceding the date of the consummation of such transaction,
such Holder of such Warrants shall be entitled to receive the highest amount of
securities, cash or other property to which such Holder would actually have been
entitled as a stockholder if such Holder of such Warrants had exercised such
Warrants prior to the expiration of such purchase, tender or exchange offer and
accepted such offer, subject to adjustments (from and after the consummation of
such purchase, tender or exchange offer) as nearly equivalent as possible to the
adjustments provided for in Section 8.

8.5 Assumption of Obligations. Notwithstanding anything contained in
-------------------------
the Warrants to the contrary, the Company will not effect any of the
transactions described in clauses (i) through (iv) of Section 8.4 unless, prior
to the consummation thereof, each person (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the exercise of
the Warrants as provided herein shall assume, by written instrument delivered
to, and reasonably satisfactory to, the Holders of the Warrants, (a) the
obligations of the Company under this Agreement and the Warrants (and if the
Company shall survive the consummation of such transaction, such assumption
shall be in addition to, and shall not release the Company from, any continuing
obligations of the Company under this Agreement and the Warrants) and (b) the
obligation to deliver to such Holders such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this Section 8, such
Holders may be entitled to receive, and such person shall have similarly
delivered to such Holders an opinion of counsel for such person, which counsel
shall be reasonably satisfactory to such Holders, stating that this Agreement
and the Warrants shall thereafter continue in full force and effect and the
terms hereof (including, without limitation, all of the provisions of this
Section 8) shall be applicable to the stock, securities, cash or property which
such person may be required to deliver upon any exercise of the Warrants or the
exercise of any rights pursuant hereto.

8.6 Stock Dividends. In the event that the Company shall at any time
---------------
prior to the exercise of all Warrants declare a stock dividend, the Holders of
the unexercised Warrants shall thereafter be entitled, in addition to the shares
of Common Stock or other securities receivable upon the exercise thereof, to
receive, upon the exercise of such Warrants, such stock dividend that they would
have been entitled to receive at the time such stock dividend was declared as
if the Warrants had been exercised immediately prior to such stock dividend. At
the time of any such stock dividend, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this Section 8.6.

8.7 [Reserved].
----------

8.8 Notice of Adjustment Events. Whenever the Company contemplates
---------------------------
the occurrence of an event which would give rise to adjustments under this
Section 8, the Company shall mail to each Holder, at least thirty (30) days
prior to the record date with respect to such event or, if no record date shall
be established, at least thirty (30) days prior to such event, a

11
<PAGE>

notice specifying (i) the nature of the contemplated event, (ii) the date of
which any such record is to be taken for the purpose of such event, (iii) the
date on which such event is expected to become effective and (iv) the time, if
any is to be fixed, when the holders of record of Common Stock shall be entitled
to exchange their shares of Common Stock for securities deliverable in
connection with such event.

8.9 Notice of Adjustments. Whenever the Exercise Price or the kind
---------------------
of securities or property issuable upon exercise of the warrants, or both, shall
be adjusted pursuant to this Section 8, the Company shall make a certificate
signed by its President or a Vice President and by its Chief Financial officer,
Secretary or Assistant Secretary, setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method of which such
adjustment was calculated (including a description of the basis on which the
Company made any determination hereunder), and the Exercise Price and the kind
of securities issuable upon exercise of the Warrants after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail postage prepaid) to each Holder promptly after each adjustment.

8.10 Preservation of Rights. The Company will not, by amendment of
----------------------
its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement or the Warrants or the rights represented
thereby, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders of the Warrants
against dilution.

9. Exchange and Replacement of Warrant Certificates. Each Warrant
------------------------------------------------
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.

Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity, bond or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.

10. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated as the Company's Board of
Directors shall determine subject to compliance with Delaware General Corporate
Law.

12
<PAGE>

11. Reservation and Listing of Securities. The Company shall at all times
-------------------------------------
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, nonassessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants approved for automated quotation system of the
Nasdaq National Market System (subject to official notice of issuance) with
respect to which the Common Stock issued to the public in connection herewith
may then be so listed and/or quoted.

12. Notices to Warrant Holders. Nothing contained in this Agreement shall
--------------------------
be construed as conferring upon the Holders the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of stockholders
for the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:

(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution payable; or

(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or

(c) a voluntary or involuntary dissolution, liquidation or winding-up
of the Company (other than in connection with a consolidation or merger) or any
capital reorganization, recapitalization or reclassification or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed;

then, in any one or more of said events, the Company will mail to each Holder of
a Warrant a notice specifying (i) the date or expected date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right, and (ii)
the date or expected date on which any such reorganization, reclassification,
recapitalization, consolidation, merger, sale, dissolution, liquidation or
winding-up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for the securities or other property deliverable upon
such reorganization, reclassification, recapitalization, consolidation, merger,
sale, dissolution, liquidation or winding-up. Such notice shall be mailed

13
<PAGE>

at least thirty (30) days prior to the date therein specified. Failure to give
such notice or any defect therein shall not affect the validity of any action
taken in connection with the declaration or payment of any such dividend,
distribution or rights, or any proposed dissolution, liquidation, winding up or
sale of the Company

13. Notices.
-------

All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly given or made at the time
delivered by hand if personally delivered; five calendar days after mailing if
sent by registered or certified mail; when answered back, if telexed; when
receipt is acknowledged, if telecopied; and the next business day after timely
delivery to the courier, if sent by overnight air courier guaranteeing next day
delivery (except that a notice of change of address shall not be deemed to have
been given until actually received by the addressee):

(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or

(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.

14. Supplements and Amendments. The Company and the Representatives may
--------------------------
from time to time supplement or amend this Agreement without the approval of any
holders of warrant Certificates (other than the Representative) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representatives may deem necessary or desirable and which the Company
and the Representatives deem shall not adversely affect the interests of the
Holders of Warrant Certificates. This Agreement may be amended with the mutual
agreement of the Company and the holders of a Majority of the Warrants or
Warrant Shares

15. Successors. All the covenants and provisions of this Agreement shall
----------
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.

16. Termination. This Agreement shall terminate at the close of business
-----------
on May __, 2004, provided, however, that the indemnification provisions in
Section 7 hereof shall survive such termination until such time for filing an
action for which indemnification is provided under Section 7 has expired under
the applicable statute of limitation.

17. Governing Law; Submission to Jurisdiction. This Agreement and each
-----------------------------------------
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the state of

14
<PAGE>

New York and for all purposes shall be construed in accordance with the laws of
said State without giving effect to the rules of said State governing the
conflicts of laws.

Any process or summons to be served upon any of the Company, the
Representatives and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim.

18. Entire Agreement; Modification. This Agreement (including the
------------------------------
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.

19. Severability. If any provision of this Agreement shall be held to be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.

20. Captions. The caption headings of the Sections of this Agreement are
--------
for convenience of reference only and are not intended to be, nor should they be
construed as, part of this agreement and shall be given no substantive effect.

21. Benefits of This Agreement. Nothing in this Agreement shall be
--------------------------
construed to give any person or corporation other than the Company and each of
the Representatives and any other registered Holder(s) of the Warrant
Certificates or Warrant Shares any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company, each of the Representatives and any other registered
Holder(s) of the Warrant Certificates or Warrant Shares.

22. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.

[SEAL] MUSICMAKER.COM, INC.

By: __________________________

15
<PAGE>

Attest:

______________________________
Secretary

FERRIS, BAKER WATTS, INCORPORATED

By: _______________________________
Name:
Title:

FAHNESTOCK & CO. INC.

By: _______________________________
Name:
Title:

16
<PAGE>

EXHIBIT A

[FORM OF WARRANT CERTIFICATE]

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("ACT") AND REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES) AND ANY SIMILAR EXEMPTION UNDER STATE
SECURITIES LAWS, OR (iii) ANOTHER EXEMPTION FROM REGISTRATION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS.

THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.

EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____________, 2004

No. W- _____ Warrants

WARRANT CERTIFICATE

This Warrant Certificate certifies that ______, or registered assigns, is
the registered holder of ___ Warrants to purchase initially, at any time from
_____________, 1999 [one year from the effective date of the Registration
Statement] until 5:30 p.m., New York time, on ______________, 2004 [five years
from the effective date of the Registration Statement] ("Expiration Date"], up
to ______ fully paid and nonassessable shares of common stock, $.01 par value
("Common Stock") of musicmaker.com, Inc., a Delaware corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $____ [110% of the initial public offering
price] per share of Common Stock upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the Warrant Agreement dated as of
_____________, 1999, between the Company and Ferris, Baker Watts, Incorporated
and Fahnestock & Co. Inc. (the "Warrant Agreement"). Payment of the Exercise
Price shall be made

1
<PAGE>

EXHIBIT A

by certified or official bank check in New York Clearing House funds payable to
the order of the Company.

No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.

The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.

The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
--------
however, that the failure of the Company to issue such new Warrant Certificates
- -------
shall not in any way change, alter, or otherwise impair the rights of the holder
as set forth in the Warrant Agreement.

Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.

Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.

The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.

All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.

2
<PAGE>

EXHIBIT A

IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.

Dated as of ____________, 1999

MUSICMAKER.COM, INC.

By: ____________________________________
Name:
Title:
[SEAL]

Attest:

______________________________
Secretary

3
<PAGE>

EXHIBIT A

[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.1]

The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York clearing House funds to the order of
_________________________ in the amount of $____, all in accordance with the
terms hereof. The undersigned requests that a certificate for such securities
be registered in the name of ______________ whose address is __________________
and that such Certificate be delivered to _________________ whose address is
__________________________.

Dated:

Signature____________________________
(Signature must conform in all respects to
name and holder as specified on the face of
the Warrant Certificate)

____________________________________
(Insert Social Security or Other Identifying
Number of Holder)

4
<PAGE>

EXHIBIT A

[FORM OF ELECTION TO PURCHASE
PURSUANT TO SECTION 3.2]

The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____ shares of Common
Stock all in accordance with the terms of Section 3.2 of the Representative's
Warrant Agreement, dated as of __________, 1999, between musicmaker.com, Inc.
and Ferris, Baker Watts, Incorporated and Fahnestock & Co. Inc. The undersigned
requests that a certificate for such securities be registered in the name of
____________________ whose address is _______________________________ and that
such Certificate be delivered to ___________________ whose address is
______________________.

Dated:

Signature____________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)

____________________________________
(Insert Social Security or Other Identifying
Number of Holder)

5
<PAGE>

EXHIBIT A

[FORM OF ASSIGNMENT]

(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate)

FOR VALUE RECEIVED _______________________________ hereby sells, assigns and
transfers unto

______________________________________________________________________________

(Please print name and address of transferee)

this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.

Dated: _________________ Signature: ___________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)

____________________________________
(Insert Social Security or Other
Identifying Number of Assignee)

<PAGE>

EXHIBIT 5.1

Venable, Baetjer & Howard, LLP
2010 Corporate Ridge
Suite 400
McLean, VA 22102

July 2, 1999

musicmaker.com, Inc.
1831 Wiehle Avenue
Reston, Virginia 20190

Ladies and Gentlemen:

We have acted as counsel for musicmaker.com, Inc. a Delaware corporation,
(the "Company") in connection with that certain registration statement on Form
S-1 of the Company (No. 333-72685) as may be amended from time to time (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), on June 28, 1999, pertaining to the registration of 8,400,000
shares of common stock, par value $0.01 per share, of the Company (the "Shares")
of which 5,000,000 Shares are to be issued and sold by the Company and 3,400,000
Shares are to be sold by that certain selling stockholder of the Company, Virgin
Holdings, Inc. (the "Selling Stockholder"), as described in the Registration
Statement.

In connection with the opinions set forth herein, we have considered such
questions of law as we have deemed necessary as a basis for the opinions set
forth below, and we have examined or otherwise are familiar with originals or
copies, certified or otherwise identified to our satisfaction, of the following:
(i) the Registration Statement; (ii) the Amended and Restated Certificate of
Incorporation and Bylaws, as amended, of the Company, as currently in effect;
(iii) certain resolutions of the Board of Directors of the Company relating to
the issuance of the Shares to be sold by the Company and the other transactions
contemplated by the Registration Statement; and (iv) such other documents as we
have deemed necessary or appropriate as a basis for such opinions. In our
examination, we have assumed without independent verification the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
copies. As to any facts
<PAGE>

material to this opinion that we did not independently establish or verify, we
have relied upon statements and representations of officers and other
representatives of the Company and others.

Based upon the foregoing, we are of the opinion that:

1. The Shares to be sold by the Company have been duly authorized for
issuance and that when sold, issued, paid for and delivered in the
manner contemplated by the Registration Statement, the Shares will be
validly issued, fully paid and nonassessable.

2. The Shares to be sold by the Selling Stockholder have been duly
authorized and validly issued and are fully paid and nonassessable.

The law covered by the opinion is limited to the general corporation
law of the State of Delaware (without regard to the principles of conflicts of
laws thereof) and based upon and limited to the laws and regulations in effect
as of the date hereof. We assume no obligation to update the opinions set forth
herein.

We hereby consent to the filing of this opinion with the Commission as
Exhibit 5 to the Registration Statement and we consent to the use of our name
under the caption "Legal Matters" in the prospectus forming a part of the
Registration Statement.

Very truly yours,

/s/ VENABLE, BAETJER & HOWARD, LLP

<PAGE>

EXHIBIT 10.13

Agreement (this "Agreement") made this 8th day of June, 1999 between
---------
MusicMaker.com, Inc., 1831 Weihle Avenue, Suite 128, Reston, Virginia, 20190
(hereinafter "Licensee") and Virgin Holdings, Inc., 338 North Foothill Road,
Beverly Hills, California 90210 (hereinafter "Virgin").

Concurrently with the execution of this Agreement, the parties hereto are
entering into an agreement, pursuant to which the Licensee, in exchange for this
License, is issuing to Virgin a number of shares of common stock, par value $.01
per share, of Licensee, upon the terms and subject to the conditions set forth
in such agreement.

1. Definitions
-----------

1.01. "Affiliate" shall mean any of the entities included on, but not
limited to, the list on Schedule J, attached hereto, and as Virgin may amend
from time to time during the Term of the Agreement in its sole discretion.

1.02. "Designated Master Recording(s)" shall mean such original
recording(s) or duplicate of original recording(s) owned by Virgin or an
Affiliate of Virgin designated by Virgin from time to time in the manner
described in Section 2.03, for use by Licensee solely upon the terms and subject
to the conditions of this Agreement.

1.03. "Floor Fee" shall mean *.

1.04. "Gross Price" shall mean the price charged to a customer for a
single copy of their custom compilation Record, such price being set before any
quantity discounts or other concessions, if any, for each such Record and
excluding actual shipping charges paid and sales tax, if any.

1.05. "Internet Sales" shall mean the sale of Records ordered directly
through Licensee's internet website and excludes, among other things, the use of
a computer network to deliver computer files embodying sound recordings to a
customer's personal computer, player or other equivalent device.

1.06. "Non-Exclusivity Trigger Event" shall mean the occurrence at any
time during the Term of the Agreement of any of the following events: (i) if,
either on the third anniversary or fourth anniversary of the date hereof,
Licensee's monthly sales averaged over the previous 12-month period is less than
* Records; (ii) Raju Puthukarai shall either cease to be the President of
Licensee (unless his successor is acceptable to Virgin and appointed in a timely
manner) or cease to be actively involved in the day-to-day operations of
Licensee, in each case as determined by Virgin in its sole reasonable
discretion; (iii) the agreement between Licensee and Columbia House dated June
12, 1998 expires and fails to be renewed on the same terms, is terminated, or is
modified in a manner not approved by Virgin; (iv) any person (other than Virgin
or any of its Affiliates) shall acquire more than 50% of the outstanding Voting
Power of Licensee; or (v) Virgin's equity interest in Licensee shall fall
- -------
*Material redacted pursuant to confidential treatment request.

<PAGE>

below 25% of the issued and outstanding capital stock of Licensee on a fully
diluted basis (other than as a result of Virgin's voluntary sale or other
voluntary transfer of shares).

1.07. "Premiums" shall mean Records which are not intended for
distribution through Licensee's web-site, are intended by an advertiser or
sponsor to promote the business of the advertiser or sponsor (which is not the
business of distributing records) and which are given free of charge or
advertised and sold on special terms in conjunction with a product or service
which emanates from the advertiser or sponsor.

1.08. "Record" shall mean one (1) redbook audio compact disc (CD)
manufactured from the Designated Master Recording(s) that may be coupled with
other master recordings, but not video or images, such recordings either owned,
licensed, or leased by Licensee and produced as customized compilations ordered
by individual customers using their personal computers from Licensee's Internet
website. Without limiting the foregoing, in no event shall this definition
include any other format including, but not limited to Digital Versatile Disk
(DVD), Read-Write CD, or MiniDisc.

1.09. "Royalty Rate" shall mean *.

1.10. "Stream" or "Streaming" shall mean the digital transmission of an
excerpt from a Designated Master Recording no longer than 30 seconds that is
substantially contemporaneous with its audible performance on a customer's
personal computer and does not produce a computer file embodying such
performance on such customer's computer that is usable without a simultaneous
active connection to the digital transmission source, other than as temporarily
required to render such cotemporaneous performance as in the form of a data
buffer.

1.11. "Term of the Agreement" shall be five (5) years.

1.12. "Territory" shall mean worldwide.

1.13. "Voting Power" shall mean the ability to vote any securities or to
control the vote of any securities, directly or indirectly, by proxy or
otherwise, of Licensee having the right to vote generally in any election of
directors of Licensee (without the effect of contingencies).

2. Grant of Rights
---------------

2.01. (a) Subject to the limitations set forth in Section 3, Virgin
grants to Licensee the exclusive right, privilege, and license, without the
right to sublicense or assign to any other person, during the Term of the
Agreement in the Territory, to use the Designated Master Recording(s) solely for
the manufacture and sale of the Records in the manner described in paragraph
2.01(b), and not otherwise.

(b) The rights granted under this Section 2 shall be strictly
limited to retail Internet Sales by Licensee of Records embodying compilations
ordered from individual end-customers from their personal computers through the
internet, manufactured by Licensee's custom manufacturing facilities, and
delivered to those customers by mail or similar systems of delivery such as
courier or Federal Express, solely in the form of a Record, and subject to any
- -------
*Material redacted pursuant to confidential treatment request.

2
<PAGE>

further use restrictions applicable to any Designated Master Recording(s) as
specified by Virgin in the manner described in Section 2.03 and Section 3.
Without limiting the foregoing, Records shall not be sold or distributed as
Premiums.

(c) Virgin warrants and represents to Licensee that it or an
Affiliate of Virgin has or will have all rights necessary to grant this license
for the purpose specified in this Section, without further payment by Licensee
for the use of the Designated Master Recording(s), except as expressly provided
herein.

(d) Virgin grants to Licensee during the Term of the Agreement, a
royalty-free non-exclusive right, privilege, and license, to Stream a single
excerpt from each of the Designated Master Recording(s) solely for the purpose
of promotion of the Internet Sale of Records as permitted in this Section 2.

(e) Notwithstanding the foregoing, Licensee acknowledges that an
Affiliate of Virgin has granted to CDNow, Inc. a non-exclusive license to
include in custom compilations certain sound recordings owned by Virgin or an
Affiliate of Virgin for the period commencing October 1, 1999 and ending on
December 31, 1999. Subject to Section 3.06, Virgin agrees that during the Term
of the Agreement, its Affiliate will not renew the license to CDNow, Inc.

(f) Subject to Section 3.06 neither Virgin nor any of its Affiliates
shall grant licenses for sound recordings owned or controlled by them to any
other party for use in the limited manner as set forth in Section 2.01(b),
provided, however that Virgin and its Affiliates may at any time, as indicated
in Section 3.01, exploit themselves the same rights granted to Licensee under
Section 2.

2.02. Upon and after the designation by Virgin of a Designated Master
Recording(s), at Licensee's request, Virgin agrees to ship to Licensee, at an
address designated by Licensee, a duplicate master tape of each Designated
Master Recording in the format of either DAT (Digital Audio Tape), CD (Compact
Disc) or analog tape or any similar format, which format will be selected by
Virgin in its sole discretion. Licensee shall pay Virgin promptly after being
billed for the actual cost of dubbing said duplicate master tapes and for
packaging and shipping charges to the designated destination.

2.03. During the Term of the Agreement Virgin may from time to time and
in its sole discretion, identify Designated Master Recordings that Licensee is
permitted to use pursuant to the rights granted in this Section 2 by maintaining
a computer and written list and providing a copy of such list to Licensee. Each
Designated Master Recording shall be identified in such list by title, artist,
originating record label, required copyright notice, any use restriction (as
described in Section 3.05), and an authorized signatory of Virgin. Any sound
recording appearing on any list without all of the foregoing items shall be
deemed not to
3
<PAGE>

be a Designated Master Recording. Notwithstanding the foregoing, (i) Virgin
shall not be required to grant a license to any master recording (including,
without limitation, master recordings within the first two years of their
commercial release) that Virgin decides to withhold in its sole discretion for
any reason, and (ii) Virgin shall have the right, in its sole discretion, to
revoke or terminate the rights granted in this Section 2 with respect to any
Designated Master Recording at any time by providing Licensee with notice in
writing that henceforth such sound recording is not or is no longer a Designated
Master Recording. Licensee shall have fifteen (15) days from the date of such
notice to fulfill all orders for Records embodying such sound recording(s)
already received and paid for at the time of such notice and shall thereafter no
longer be permitted to use such sound recording(s).

2.04. From time to time during the Term of the Agreement, Virgin may, or
in its sole discretion for any reason, decline to, grant to Licensee a non-
exclusive right to include certain Designated Master Recording(s) in custom
redbook audio compact disc compilations sold to customers through direct mail,
magazine, newspaper and other print promotions. Licensee may not sublicense or
assign to any person any rights that may be granted under this Section 2.04.

3. Limitations of Rights
---------------------

3.01. The rights granted by Virgin hereunder are limited to the uses of
the Designated Master Recording(s) on the Records in the manner described in
Section 2. Any and all other rights in connection with the Designated Master
Recording(s) are specifically reserved and may be exploited by Virgin and its
designees, subject to Section 2.01(f), including without limitation: (i) all
rights to exploit the Designated Master Recordings over or through the Internet
in any manner, including without limitation, in custom compilations ordered
through websites and in any and all media and manners, (ii) all rights to
deliver, using a computer network, computer files embodying custom compilations
containing Designated Master Recording(s) to a customer's personal computer,
player, kiosk or other equivalent device, and (iii) the exercise of the same
rights granted to Licensee under Section 2.

3.02. Licensee will not edit, change, or alter in any way any Designated
Master Recording(s) without Virgin's prior written consent. No Designated Master
Recording(s) shall be sold in any Record nor shall any excerpt of a Designated
Master Recording(s) be Streamed without the inclusion of the ISRC code number
corresponding to such Designated Master Recording(s) in the digital data
embodied in such Record or Streamed excerpt.

3.03. Without in any way limiting the foregoing, without Virgin's prior
written consent, Licensee may not sublicense, assign or convey to any person any
rights under this Agreement including, but not limited to, the right to
manufacture and/or distribute Records.

4
<PAGE>

3.04. As a condition precedent to the rights granted to Licensee
hereunder, Licensee shall obtain on its own behalf (i) valid and currently
effective mechanical copyright licenses, where applicable, for use of the
copyrighted musical composition(s) embodied in the Designated Master
Recording(s) on the Records and (ii) valid and currently effective performance
licenses, where applicable, for use in Streaming the copyrighted musical
composition(s) embodied in the Designated Master Recording(s). Licensee's
failure to so obtain any such licenses from the proper copyright owners or their
agents, or to account properly thereunder, shall result in this license being
void with respect to such Designated Master Recording(s) and Licensee
specifically agrees that it shall have no right to distribute Records embodying
such unlicensed Designated Master Recording(s). Virgin reserves the right, upon
written notice to Licensee, to request copies of said valid and current licenses
which Licensee promptly will furnish to Virgin upon said written request. On
the date hereof, Licensee shall provide Virgin copies of Licensee's relevant
inquiry letters to ASCAP, BMI, and SESAC.

3.05. Virgin, in its sole discretion, shall retain all rights to place
restrictions on Licensee's use of any Designated Master Recording(s), including
without limitation, (i) prohibiting the coupling of certain Designated Master
Recording(s) with other masters or sound recordings during the Term of the
Agreement, (ii) setting a time period shorter than the Term of the Agreement
after which any use by Licensee of any such Designated Master Recording(s) shall
immediately, automatically, and thereafter be prohibited, and (iii) restricting
the territory for distribution of any such Designated Master Recording(s).

3.06. Upon the occurrence of a Non-Exclusivity Trigger Event, the rights
granted to Licensee under Section 2 which are exclusive shall immediately and
automatically cease to be exclusive rights and thereafter shall be non-
exclusive. All other provisions in this Agreement shall otherwise apply.

3.07. In addition to any restrictions on Licensee's use of any Designated
Master Recording specified in accordance with Section 3.05, Licensee shall not
permit the customer to purchase and Licensee shall not manufacture or sell (i)
any Record embodying Designated Master Recordings that contains more than one-
half (1/2) of the sound recordings otherwise manufactured as a single product
unit or components of an album by Virgin and (ii) any Record embodying any
Designated Master Recording(s) that contains fewer than five (5) total sound
recordings. For purposes of this Section 3.07, in order to be counted, a sound
recording must have a playing time of at least one (1) minute.

4. Royalties
---------

4.01. In addition to the Payment, as consideration for the rights and
license granted hereunder, pursuant to which Licensee will cause Records to be
manufactured,

5
<PAGE>

Licensee agrees to pay Virgin the royalties described in Sections 4.02 and 4.03
in accordance with Section 7 of this Agreement.

4.02. For Records on which Designated Master Recording(s) are not coupled
with sound recordings owned or controlled by an entity other than Virgin or any
of its Affiliates, the royalties shall be the greater of the following: (i) a
sum equal to the Royalty Rate times the Gross Price per Record; or (ii) the
Floor Fee multiplied by the number of Designated Master Recording(s) included on
the Record.

4.03. For Records on which Designated Master Recording(s) are coupled,
subject to Virgin's rights under Section 3.05, with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the
royalties shall be the greater of the following: (i) the sum of the amounts
computed by multiplying the Royalty Rate by each portion of the Gross Price that
is charged for each Designated Master Recording(s) included on the Record; (ii)
the amount computed by multiplying (A) the Royalty Rate multiplied by a
fraction, the numerator of which is the number of Designated Master Recording(s)
included on the Record and the denominator of which is the total number of sound
recordings included on the Record, times (B) the Gross Price charged by Licensee
-----
for such Record; or (iii) the Floor Fee multiplied by the number of Designated
Master Recording(s) included on the Record. For purposes of this Section 4.03,
in order to be counted, a sound recording (other than a Designated Master
Recording) must have a playing time of at least one (1) minute.

4.04. In computing the royalties payable under Sections 4.02 and 4.03,
there shall be no packaging deductions, reserves, or other restrictions against
payment of any kind.

4.05. If at anytime the Gross Price charged a customer for a Record
having a particular number of sound recordings (the "New Price") is less than
the Gross Price charged a customer on the date hereof (as set forth in Schedule
I) for a Record having the same number of sound recordings, (the "Old Price"),
then *.

4.06. Other Licenses. If, after the date of this Agreement, Licensee
--------------
enters into or renews any similar license for the use of sound recordings in
custom compilations, the terms and conditions of which are more favorable to
such third party than the terms and conditions applicable to Virgin as set forth
in this Agreement, then such favorable terms and conditions shall, without any
further action by Virgin, automatically apply to all Designated Master
Recording(s) exploited by Licensee as of the date of entry into such license,
and Licensee shall promptly pay to Virgin all royalties due on sales of records
containing Designated Master Recording(s) made on or after such date at the
amended royalty rate and terms. Licensee hereby warrants and represents that it
shall provide Virgin notice in writing of any such license, including its terms,
no later than ten (10) days after the date of entry into such license.
- ------
*Material redacted pursuant to confidential treatment request.

6
<PAGE>

For purposes of this Section, any and all amendments after the date hereof of
any third party agreements existing as of the date hereof and disclosed on
Schedule 2.22(b) of the Agreement between the parties dated June 8, 1999
("Preexisting Agreements") shall be deemed to be an agreement entered into by
Licensee after date of the Agreement except for the case of those Preexisting
Agreements that are renewed using the same terms and conditions as existed on
the date hereof.

4.07. Throughout the Term of the Agreement, and subject to applicable law
and Licensee's previously existing contractual obligations as of the date
hereof, Licensee shall provide to Virgin any and all of the customer data and
information it collects from the use of its website or otherwise that may be
collected and retained by Licensee, including the customer database.

5. Artist, A.F. of M. and Copyright Payments
-----------------------------------------

5.01. Virgin shall be responsible for, and shall pay, all royalties due
to artists and producers in connection with Licensee's use as permitted herein
of the Designated Master Recording(s) pursuant to the recording contracts
between Virgin and any Affiliates of Virgin and such artists and producers party
to such recording contracts.

5.02. Licensee represents and warrants that it will pay, and be solely
responsible for, any and all other third party payment or clearances including,
but not limited to, (i) all payments which may be required to be made to the
Music Performance Trust Fund and the Phonograph Record Manufacturer's Special
Payments Fund (and to any similar fund based on sales which is established by
collective bargaining agreements) arising out of the manufacture and sale of
Records, (ii) all fees or royalties which may be required to be paid to the
copyright owners of the musical compositions in connection with Licensee's
exploitation of such compositions, including but not limited to, the
manufacture, distribution and sale of Records, or the Streaming of Designated
Master Recording(s), (iii) all excise taxes and other taxes (as fixed by law)
for Records manufactured and sold hereunder including, but not limited to, such
amounts, if any, which may be required to be paid under the applicable
provisions of any state and/or local, sales and/or use tax laws or regulations
which impose a tax based upon any sums paid by Licensee to Virgin, (iv) all
payments which may become due to the AFTRA Pension and Welfare Fund to the
extent that Virgin may be additionally liable therefor as a result of sales of
Records, (v) all re-use payments and fees required to be paid for the use of the
Designated Master Recording(s) and the names and likenesses of performers
associated therewith in a radio or television advertisement and (vi) all
performance royalties that may become due as a result of any of Licensee's
activities. At Virgin's request, Licensee shall supply Virgin with copies of
statements and checks relating to the items set forth in clauses (i) through
(vi) of this Section.

6. Trademarks, Trade Names, Names, Credits, Copyright Notice and Quality
---------------------------------------------------------------------

7
<PAGE>

6.01. Licensee may release the Records only under such trade names or
marks as are owned by Licensee. Licensee agrees that it will not identify the
Records with any trademarks or logotypes of Virgin or any Affiliate of Virgin,
or their names, directly or indirectly, except as provided in Section 6.03.

6.02. Unless otherwise prohibited by contract and subject to this Section
6, Virgin grants Licensee the right to use the names of the performers who
recorded the Designated Master Recording(s), solely for advertising and trade
purposes in connection with the sale and exploitation of the Records in the
manner described in Section 2.01(b). In no event shall Licensee have the right
to use the name of any artists represented by Virgin and/or its Affiliates other
than to indicate the product Licensee has available for sale and further
Licensee shall not use the names and likenesses of any artists represented by
Virgin and or its Affiliates in any broadcast, cable or other television
advertising.

6.03. Subject to the prior written consent of Virgin (as determined in
its sole discretion) for each use, and subject to Virgin's rights, Licensee may
use the name and logo of Virgin and any of its Affiliates to promote its custom
compact disc compilation service and its website; provided however, that at the
request of Virgin, Licensee shall reasonably cooperate with Virgin to take
necessary steps to protect its trademarks and further, Licensee shall pay any
costs incurred by Virgin or otherwise associated with such use.

6.04. Prior to the actual use thereof, Licensee shall submit to Virgin
for approval sample copies of all artwork, packaging, containers, labels,
advertising copy and promotional material (the "Materials") in connection with
the manufacture, promotion, sale, and delivery of Records. Licensee warrants and
agrees that the credits for Virgins' or its Affiliates' artists in connection
with the Records and in any advertising thereof shall appear in substantially
similar size, prominence and type style to the size, prominence and type style
used in connection with the other artists whose performances are embodied on the
Records and that the presentation of each artist's name shall be in the same
order as the Artist's appearance on the Record. Licensee warrants and agrees
that any changes to approved artwork, packaging, containers, labels, advertising
copy and promotional material shall be subject to Virgin's prior approval, such
approval not being unreasonably withheld.

6.05. Licensee shall comply with all copyright notice requirements
provided by Virgin pursuant to Section 2.03(a) in the manner described herein.
Licensee will place prominently on each web-site screen presentation that
provides access to any Streamed excerpt of any Designated Master Recording(s)
the required copyright notice in the following format: "(P)[Year of first
publication] [Virgin designated name]. All rights reserved." Licensee will also
cause any Streaming software to display the required copyright notices on the
listener's computer monitor screen whenever a Streamed excerpt of a Designated
Master Recording(s) is performed thereon. With respect to all other types of
Materials, Licensee will place

8
<PAGE>

prominently on each type of Material or screen presentation on which any of the
Designated Master Recording(s) appear in name the required copyright notice in
the following format: "(C) [Year of first publication] [Virgin designated name].
All rights reserved." Licensee shall not delete or authorize deletion of any
such notice from the Materials. Licensee shall use its best efforts to
prospectively cure any failure to comply with any copyright notice of which
Licensee receives written notice from Virgin.

6.06. Licensee hereby represents, warrants, and agrees that all Records
sold embodying Designated Master Recording(s) shall meet Virgin's normal
manufacturing standards for its own products. Virgin shall have the right to
evaluate the quality of the Records, and if the Records are below Virgin's
manufacturing standards, Virgin shall notify Licensee in writing. Upon receipt
of such notice of quality deficiency, Licensee shall take immediate steps to
improve the quality of the Records so that the Records meet Virgin's normal
manufacturing standards.

7. Statements and Payments
-----------------------

7.01. Licensee shall maintain full, true and accurate accounts with
respect to all Records manufactured and within forty-five (45) days after the
last day of each semi-annual accounting period ending June 30th and December
31st during which Records are manufactured will furnish Virgin with complete and
accurate royalty statements of: (i) the number of Records manufactured on which
Designated Master Recording(s) are not coupled with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the Gross
Price of each such Record, the number and title of each Designated Master
Recording(s) embodied on each such Record, the applicable Royalty Rate or Floor
Fee for each such Record; and (ii) the number of Records manufactured on which
Designated Master Recording(s) are coupled with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the number,
identity, and order of all sound recordings on each such Record, the applicable
Royalty Rate or Floor Fee for each Designated Master Recording(s) embodied on
each such Record, the Gross Price of each such Record, and the titles of the
Designated Master Recording(s) embodied on each such Record. Each statement
shall be delivered in a computer readable format as specified by Virgin in its
sole reasonable discretion.

7.02. The statements delivered pursuant to this Section 7 shall be
accompanied by payment of any royalties due to Virgin under this Agreement as a
result of such manufacturing. If Licensee shall fail to pay any sum due to
Virgin on the date for payment specified in this Agreement, in addition to the
royalties payable to Virgin, Licensee shall pay to Virgin (without limiting any
other rights Virgin may have) an amount equal to interest of ten percent (10%)
per annum on such unpaid sum or on a sum equal to the amount of any deficiency
in payments from Licensee to Virgin computed for the period commencing on the
last date such unpaid sum or a sum equal to such deficient amount was payable
hereunder and continuing until the date

9
<PAGE>

such sum or a sum equal to such deficient amount is remitted to Virgin. Any late
payment of royalties plus the required interest due pursuant to this Section
7.02 shall not preclude or act as waiver of any other remedies permitted under
this Agreement.

7.03. Licensee will permit Virgin and/or its designated agent or agents,
upon reasonable notice to Licensee, to audit all of Licensee's applicable books
and records and to make copies of portions thereof at Licensee's principal place
of business, for the purpose of verifying Licensee's royalty payments, at
reasonable times during regular business hours. In the event that the
calculation of royalty payments is determined by a computer based system, Virgin
shall be permitted to examine the machine sensible date utilized by such system
and the related documentation describing such system and Licensee agrees to
retain such data for at least two (2) years after the Term of the Agreement. If
any audit reveals any statement hereunder to be in error by more than five
percent (5%), the reasonable costs and expenses of such inspection shall be
borne by Licensee. Licensee's accounting for any particular use of a Designated
Master Recording(s) shall become binding to Virgin on the third anniversary
after the corresponding accounting by Virgin or its Affiliates to the artist or
licensor becomes binding to such artist or licensor, as the case may be.
Licensee's accounting shall not become binding if an objection to such
accounting has been made in writing before the occurance of such corresponding
third anniversary.

8. Representations, Warranties and Agreements
------------------------------------------

8.01. Licensee represents, warrants and agrees that it has the right and
power to enter into and fully perform this agreement, to make the commitments it
makes herein and has obtained all necessary licenses, permissions and consents
required hereunder or in connection with any of the transactions contemplated
hereby. Licensee will at all times indemnify and hold harmless Virgin, its
Affiliates and any licensor of Virgin or any of its Affiliates from and against
any and all claims, damages, liabilities, costs and expenses (including legal
expenses and reasonable counsel fees) arising out of (a) the use of the
Designated Master Recording(s) or (b) any breach or claim of a breach by
Licensee of any representation, warranty or agreement made by Licensee herein.
Licensee will reimburse Virgin, its Affiliates and/or their respective licensors
on demand for any payment made at any time after the date hereof in respect of
any liability or claim in respect of which Virgin, its Affiliates and/or their
respective licensors are entitled to be indemnified. Virgin shall notify
Licensee of any such claim and Licensee shall have the right, at its expense, to
participate in the defense thereof.

8.02. Licensee represents, warrants, and agrees (i) that it shall only
produce, sell and distribute product it is duly licensed to produce, sell and
distribute and (ii) that, upon the establishment and availability of industry
standards under the Secure Digital Music Initiative (SDMI) or any other similar
standardized digital copy protection scheme, Licensee shall only deliver to
customers Records or Streamed excerpts that fully comply with such standards.

10
<PAGE>

8.03. Licensee shall not, directly or indirectly, license, transfer,
assign, sell or otherwise dispose of, pledge, mortgage or in any way encumber
the rights granted hereunder.

8.04. During the Term of the Agreement, Licensee shall comply with any
applicable law governing the promotion, marketing, sale, and delivery of
Records, including, but not limited to any law requiring that vendor's true name
and address appear on all packaging and any Optical Disk Identification Law
(ODIL) or any similar law that may become effective.

8.05. Licensee represents and warrants that it shall not engage in any
pricing conduct in violation of federal or state law or any law prohibiting
selling below cost or any loss leader law.

8.06. Licensee shall make reasonable best efforts to provide telephone
and internet customer support during normal business hours.

8.07. Virgin will at all times indemnify and hold harmless Licensee from
and against any and all claims, damages, liabilities, costs and expenses
(including legal expenses and reasonable counsel fees) arising out of any breach
by Virgin of any representation, warranty or agreement made by Virgin herein.
Licensee shall notify Virgin of any such claim and Virgin shall have the right,
at its expense, to participate in the defense thereof.

9. Ownership
---------

9.01. Licensee hereby acknowledges that all Designated Master
Recording(s) licensed hereunder, all performances embodied thereon and all
copyrights and other rights in and to the Designated Master Recording(s) (the
"Owned Property") are as between Virgin and Licensee the sole property of
- ---------------
Virgin or an Affiliate of Virgin. Virgin represents that it and/or its
Affiliates own or control, for relevant purposes, the sound recording copyright
or equivalent rights in all of the Designated Master Recording(s) licensed to
Licensee. Licensee shall not contest, or assist others in contesting, Virgin's
and/or its Affiliates' rights or interests in the Owned Property or the validity
of such ownership. Licensee shall include on its website, its products and all
other material produced and distributed publicly by Licensee, such copyright,
trademark and other notices and credits as Virgin may from time to time require.

9.02. Upon the earlier of: (i) termination or expiration of this
Agreement, (ii) when Licensee has no further legitimate use for any Designated
Master Recording(s), or (iii) upon removal of a master recording from the list
of Designated Master Recording(s), all duplicate master tapes and other
reproducing devices furnished to Licensee embodying the relevant master
recordings shall, at Virgin's election, be returned to Virgin at Licensee's
expense, and in any case Licensee shall delete any computer files embodying such
recordings, and certify to their deletion. Licensee represents, warrants and
agrees that Licensee will not, directly or

11
<PAGE>

indirectly, license, transfer, assign, sell or otherwise dispose of, pledge,
mortgage or in any way encumber the duplicate master tapes and Licensee shall
similarly bind all parties dealing with such property.

9.03. Licensee shall provide Virgin exact digital copies of the digital
masters created by Licensee embodying the Designated Master Recording(s). The
digital copies shall be delivered on computer readable format, as specified by
Virgin, within 5 days of the date on which such digital masters were created.

10. Union Signatory
---------------

10.01. Licensee represents, warrants and agrees that at all times when
Records are sold, is and will continue to be, a signatory to the American
Federation of Musicians (AFM) Phonograph Record Labor Agreement, the Special
Payments Fund Agreement and Phonograph Record Trust Agreement, all of December,
1981, and the American Federation of Television and Radio Artists (AFTRA)
National Code of Fair Practice for Phonograph Recordings and that it will fully
comply with the terms and conditions of all such agreements during the Term of
the Agreement. Those provisions of any such agreements which are required by
the terms of such agreement to be included in this Agreement shall be deemed
incorporated herein. Licensee further represents and warrants that as of the
date hereof, it has applied to the AFM, and shall provide Virgin with a copy of
its application and certify that such application has been duly submitted, and
any required application fee duly paid.

11. Notices
-------

11.01. Except as otherwise specifically provided herein, all notices
hereunder shall be in writing and shall be given by registered or certified mail
or Federal Express or similar carrier (prepaid), at the respective addresses
hereinabove set forth, or such other address or addresses as may be designated
by either party. Such notices shall be deemed given when mailed or delivered to
a Federal Express office, except that notice of change of address shall be
effective only from the date of its receipt. A copy of each notice sent to
Virgin shall be sent simultaneously to Jay Samit, EMI Recorded Music, N.A., New
Media Dpt., 1750 North Vine St., Hollywood, California, 90028; Alasdair
McMullan, Sr. Dir. Legal Affairs, EMI Recorded Music, N.A., 1290 Avenue of the
Americas, 38th Fl. New York, NY, 10104. All statements and payments from
Licensee to Virgin shall be addressed to Alasdair McMullan, Sr. Dir. Legal
Affairs, EMI Recorded Music, N.A., 1290 Avenue of the Americas, 38th Fl. New
York, NY, 10104.

12. Assignment
----------

12.01. Virgin may assign this Agreement or its rights hereunder in whole
or in part to any subsidiary, affiliated or controlling corporation or to any
person owning or acquiring a

12
<PAGE>

substantial portion of the stock or assets of Virgin, and the Agreement or such
rights may be assigned by any assignee thereof.

12.02. Licensee shall not assign its rights hereunder in whole or in part
to any person or entity, including without limitation, to any subsidiary,
affiliated or controlling corporation, or to any person or entity owning or
acquiring a substantial portion of the stock or assets of Licensee without the
prior written approval of Virgin. Any such purported assignment shall be null
and void.

13. Other
-----

In the event Virgin decides, in its sole discretion, to grant rights to the
Designated Master Recording(s) to deliver, using a computer network, computer
files embodying custom compilations containing Designated Master Recording(s) to
a customer's personal computer, player, or other equivalent device, Virgin, from
time to time during the Term of the Agreement, may in its sole discretion, (and
is not obligated to) grant to Licensee, a non-exclusive right to deliver, using
a computer network, computer files embodying custom compilations containing
Designated Master Recording(s) to a customer's personal computer, player, or
other equivalent device. Notwithstanding the foregoing, Virgin shall be
entitled to freely exploit such rights without any involvement by or notice to
Licensee. Licensee may not sublicense or assign to any person any rights that
may be granted under this Section 13.

14. Default by Licensee and Termination
-----------------------------------

14.01. The occurrence of the following events shall be deemed material
breaches and defaults by Licensee hereunder:

(a) If Licensee breaches in any material way any representation,
warranty or agreement or any other obligation in the Agreement between Virgin
and Licensee dated June 8, 1999 unless such breach or failure is fully and
immediately cured no later than ten (10) days from date of notice to Licensee.

(b) If Licensee fails to timely render statements and/or make
royalty payments to Virgin unless such breach or failure is fully and
immediately cured no later than ten (10) days from date of notice to Licensee;
and/or

(c) If Licensee breaches in any material way any representation,
warranty, agreement or any other obligation in this Agreement unless such breach
or failure is fully and immediately cured no later than ten (10) days from date
of notice to Licensee, provided, however, that the events described in clauses
(d), (e) and (g), of this Section 14 are not subject to Licensee's right to
cure; and/or

13
<PAGE>

(d) In the event of Licensee's dissolution or the liquidation of
Licensee's assets, or the filing of a petition in bankruptcy or insolvency or
for an arrangement or reorganization, by, for or against Licensee, or in the
event of the appointment of a receiver or a trustee for all or a portion of its
property, or in the event that Licensee shall make an assignment for the benefit
of creditors or commit any act for, or in, bankruptcy or become insolvent;
and/or

(e) If Licensee sublicenses or assigns any rights licensed hereunder
without Virgin's written consent or distributes or sells Records through any
distribution channels or by promotional means other than in the manner described
in Section 2.01, or beyond the dates specified pursuant to Section 3.05 with
respect to particular Designated Master Recording(s) for which the rights herein
are licensed to Licensee or in violation of any restrictions set by Virgin
pursuant to Section 3.07; and/or

(f) If Licensee shall couple the Designated Master Recording(s)
with any master recording which is duplicated without the permission of the
owner of such master recording; and/or

(g) If Licensee does not fully comply with Articles 3, 5, 6 and 8.03
hereof;

then Licensee shall be deemed in material breach hereof and Virgin, in addition
to such other rights and remedies which Virgin may have at law or otherwise
under this Agreement, may terminate the Term of the Agreement without prejudice
to any rights or claims Virgin may have and all rights granted hereunder shall
forthwith revert to Virgin or its Affiliates, and Licensee may not thereafter
manufacture Records from the Designated Master Recording(s), nor sell and
distribute such Records.

15. Miscellaneous
-------------

15.01. This Agreement contains the entire understanding of the parties
hereto relating to the subject matter hereof and cannot be changed or terminated
except by an instrument signed by an officer of Virgin and an officer of
Licensee. A waiver by either party of any term or condition of this Agreement in
any instance shall not be deemed or construed as a waiver of such term or
condition for the future, or of any subsequent breach thereof. All remedies,
rights, undertakings, obligations and agreements contained in this Agreement
shall be cumulative and none of them shall be in limitation of any other remedy,
right, undertaking, obligation or agreement of either party.

15.02. This Agreement shall be deemed entered into in the State of New
York, and the validity, interpretation and legal effect of this agreement shall
be governed by the laws of the State of New York applicable to contracts entered
into and performed entirely within the State of New York, with respect to the
determination of any claim, dispute or disagreement which may arise out of the
interpretation, performance, or breach of this agreement. Any process in any
action or proceeding commenced in the courts of the State of New York or
elsewhere arising out of any such claim, dispute or disagreement,

14
<PAGE>

may, among other methods, be served in the manner set forth in Section 11.01 or
such other address the parties may designate pursuant to Section 11 hereof. Any
such delivery or mail service shall be deemed to have the same force and effect
as personal service within the State of New York or the jurisdiction in which
such action or proceeding may be commenced.

15.03. The parties hereto are sophisticated and have had the opportunity
to be represented by lawyers throughout the negotiation of this Agreement. As a
consequence, the parties do not believe that the presumptions of any laws or
rules relating to the interpretation of contracts against the drafter of any
particular clause should be applied in this case and therefore waive their
effects.

15.04. This Agreement shall not become effective until executed by all
proposed parties hereto.

15
<PAGE>

15.05. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which, when taken together, shall
constitute one and the same instrument.

ACCEPTED AND AGREED:

MUSICMAKER.COM, INC. VIRGIN HOLDINGS, INC.

By: /s/ Robert Bernardi By: /s/ Susan Feingold
----------------------------- -----------------------------
Title: Chairman and Co-CEO Title: Secretary
-------------------------- --------------------------

By: /s/ Devarajan S. Puthukarai
-----------------------------
Title: President and Co-CEO
--------------------------

16
<PAGE>

Schedule I

[Description of Schedule I to the License Agreement, dated June 8, 1999, between
musicmaker.com, Inc. and Virgin Holdings, Inc.]

The Schedule is a page view of the "How Much Does It Cost" screen found on
www.musicmaker.com. In particular, at the top of the page is the musicmaker.com
logo underneath which are the words "#1 Custom CD and Digital Download Internet
Shop." Next to the logo, four buttons/icons appear in the shapes of CDs, in the
following order: custom cd, MP3-Secure, Liquid Audio, and Microsoft Media. The
first button is for custom cds, while the last three are for digital downloads.

The tool bar below the CD icons reads from left to right as follows:
Browse Genre, Top 100 Artists, Top 100 Tracks, Gift Ideas, Suggested
Compilations, Customer Compilations, Help, and Ready to Buy.

Below the tool bar is a description of the custom CD which the customer is
currently ordering, including the title, content, number of tracks and time
left. Below this description, there are three choices of search tools for use to
search the website. On the right three buttons appear: View/Edit, Personalize,
and Advisor.

On the left side of the screen are the boxes used to enter member login
names and passwords. Below these boxes appear the following links: Join
Insider's Club for Free Music, First Time Here, Custom CD, Download,
Search/Browse, Payment/Shipping, Order Status, Account, About Us, Contact, Real
Audio, Liquid Audio, MP3, and Media Player. Below the links, the credit cards
accepted by the Company are listed and "Copyright(c) 1999 musicmaker.com" is
printed.

In the middle of the page, the following links appear: How to create your
own custom music CD, How to search by artist or genre, How many songs on a CD,
How much does it cost, How is it shipped, and How can I pay.

Finally, below the links in the middle of the page, information is written
regarding how much the custom CDs cost. The breakdown appears of the prices for
mix and match CDs sold in the United States, Canada, and all other countries.
The costs are listed for shipping and handling in the United States, Canada and
all other countries, and the statement that orders will include sales tax and
that foreign customers (outside the United States) are responsible for VAT,
duties and similar taxes, if any, appears.

<PAGE>

Specifically, the following language appears below the heading Mix and Match
CDs, subheading USA & Canada:

"The minimum price is $9.95 per CD which allows you to choose 5 songs of your
choice, each not exceeding five minutes in length. Thereafter you can add
additional songs, each not exceeding five minutes in length, for just $1.00
each. You can choose as many songs as you like up to 20 songs or a maximum of 70
minutes per CD. For any song you choose that exceed the five minutes length,
either as part of your first five songs or thereafter, there will be an
additional charge of $0.20 a minute over the five-minute limit."

Below the heading Mix & Match CDs, subheading All Other Countries appears:

"The minimum price is $12.95 per CD which allows you to choose 5 songs of your
choice, each not exceeding five minutes in length. Thereafter you can add
additional songs, each not exceeding five minutes in length, for just $1.00
each. You can choose as many songs as you like up to 20 songs or a maximum of 70
minutes per CD. For any song you choose that exceed the five minutes length,
either as part of your first five songs or thereafter, there will be an
additional charge of $0.20 a minute over the five-minute limit."

Below the heading Shipping & Handling, subheading USA & Canada appears:

"All CDs are shipped by U.S. Postal Service within 3 business days and will take
1-2 weeks for delivery. Standard shipping and handling fee is $2.95 (USD) per
CD. Rush delivery is available for the U.S.A. only and guarantees receipt within
5 business days. The cost for this service is an additional $2.00 (USD) per CD
(U.S.A. only)."

Below the heading Shipping & Handling, subheading All Other Countries appears:

"All CDs are shipped by U.S. Postal Service within 3 business days and will take
3-4 weeks for delivery. Standard shipping and handling fee is $5.95 (USD) per
CD. Rush delivery will be available soon for an additional price to be
determined."

Below the heading Sales Tax appears:

"Your order total will include sales tax, when applicable.
For foreign customers (outside the U.S.A.), you are responsible for payment of
VAT, duties, etc., if any. Please check with your local tax authority if you
have any questions."
<PAGE>

Schedule J

Affiliates

Affiliates as of the date hereof include, but are not limited to (and additions
and deletions may be made by Virgin in its sole discretion during the Term of
the Agreement):

Capitol Records
Virgin Records
Blue Note Records
Capitol Nashville
EMI Latin
EMI Christian Music Group
Metro Blue
Hemisphere
EMI Records
SBK Records
Liberty Records
The Right Stuff
Chrysalis Records

<PAGE>

EXHIBIT 10.18

NOTE PURCHASE AGREEMENT
-----------------------

AGREEMENT (this "Agreement"), dated as of June 23, 1999, between Rho
Management Trust I (the "Purchaser") and musicmaker.com, Inc., a Delaware
corporation (the "Company").

W I T N E S S E T H :

In order to provide bridge financing for the Company, the Company
desires to sell a Promissory Note in the principal amount of One Million Dollars
($1,000,000) in the form set forth on Exhibit A hereto (the "Note").

NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the Company and the Purchaser do hereby agree as
follows:

1. Purchase and Sale. Subject to the provisions of this Agreement,
-----------------
on the Closing Date (as hereinafter defined) the Company will sell to the
Purchaser, and Purchaser will purchase from the Company, a Note in the principal
amount of One Million Dollars ($1,000,000) (the "Purchase Price").

2. Closing of Purchase and Sale.
----------------------------

2.1 Closing; Closing Date. The purchase and sale of the Note to
---------------------
the Purchaser (the "Closing") will take place at the offices of Kelley Drye and
Warren LLP, 101 Park Avenue, New York, New York 10178 at 10:00 a.m. local time
on June 23, 1999, or at such other place or time as may be agreed upon by the
Company and the Purchaser (the "Closing Date").

2.2 Transactions at the Closing. At the Closing, subject to the
---------------------------
terms and conditions set forth herein, the Company will deliver to Purchaser a
Note in the principal amount of One Million Dollars ($1,000,000), in Purchaser's
name, against payment in full by Purchaser of the Purchase Price, by delivery of
a check drawn or a wire transfer of funds made to the order of the Company in
the amount of the Purchase Price.

2.3 Conditions to Closing. The obligation of the Purchaser to
---------------------
disburse the funds in the amount of the Purchase Price (the "Loan") is subject
to the condition precedent that, on the Closing Date, the Purchaser shall have
received the Note required by Section 2.2.

3. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants that:

3.1 The Company is a corporation duly organized and existing
under the laws of the State of Delaware, and is properly qualified to do
business and in good standing
<PAGE>

in every jurisdiction in which the Company is doing business, except where
failure to so qualify will not have a material adverse effect on the Company.

3.2 The execution, delivery and performance of this Agreement
and any instrument or agreement required of the Company hereunder are within the
Company's powers, have been duly authorized and are not in conflict with the
terms of the Certificate of Incorporation or Bylaws of the Company, as each has
been amended, or any instrument or agreement to which the Company is a party or
by which the Company is bound or affected.

3.3 No approval, consent, exemption or other action by, or
notice to or filing with, any governmental authority or other third party is
necessary in connection with the execution, delivery, performance or enforcement
of this Agreement or any instrument or agreement required hereunder, except as
may have been obtained or contemplated hereby.

3.4 There is no law, rule or regulation, nor is there any
judgment, decree or order of any court or governmental authority binding on the
Company, that would be contravened by the execution, delivery, performance or
enforcement of this Agreement or any instrument or agreement required of the
Company hereunder.

3.5 This Agreement and the Note are each the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as enforcement may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights generally,
and subject to rules of law governing specific performance, injunctive relief
and other equitable remedies.

3.6 The Company shall use the proceeds from the sale of the Note
for general working capital in the ordinary course of the Company's business,
unless otherwise approved by the Board of Directors of the Company.

4. Covenants. The Company covenants and agrees that so long as the
---------
principal balance of the Loan plus such interest as may be due at the time in
question (the "Debt") is outstanding, the Company will promptly notify Purchaser
in writing of any event listed in Section 5 hereof ("Event of Default") or any
event that, upon a lapse of time or notice or both, would become an Event or
Default.

5. Events of Default. Regardless of the terms of the Note issued
-----------------
hereunder, the occurrence of any of the following events, at the option of the
Purchaser, shall make the entire amount of the Debt immediately due and payable:

5.1 The Company shall fail to pay, within five (5) days after
the date when due, any principal due under the Note.

5.2 Any representation or warranty herein shall prove to have
been false or misleading in any material respect when made or when deemed to
have been made.

5.3 The Company shall file any petition or action for relief
under the Bankruptcy Reform Act of 1978, Title 11 of the U.S. Code, in effect
from time to time, or under
<PAGE>

any other bankruptcy, reorganization, insolvency or moratorium law, or any
other law or laws for the relief of, or relating to, debtors.

5.4 An involuntary petition or action for relief shall be filed
under the Bankruptcy Reform Act of 1978, Title 11 of the U.S. Code against the
Company or a custodian, receiver, trustee, assignee for the benefit of creditors
(or any similar official) shall be appointed to take possession, custody or
control of the properties of the Company, and such proceeding or appointment
continues undismissed or unstayed for a period of thirty (30) days.

5.5 Any breach or default shall occur under this Agreement or
this Agreement shall become ineffective.

6. Subordination of Loan.
---------------------

6.1 The Loan shall be subordinated, junior and subject in right
of payment, to the extent and in the manner hereinafter provided, to the prior
payment of all Senior Indebtedness (as hereinafter defined) of the Company now
outstanding. For purposes of this Section 6, the term "Senior Indebtedness"
means (i) all indebtedness of the Company for borrowed money from banks; (ii)
obligations of the Company with respect to equipment financing; and (iii)
indebtedness of the Company evidenced by promissory notes issued in connection
with the private placement thereof by GunnAllen Financial, Inc.

6.2 No payment on account of principal of or interest on the
Loan shall be made if at the time of such payment or immediately after giving
effect thereto, (i) there shall exist a default in any payment with respect to
any Senior Indebtedness or (ii) there shall have occurred an event of default
(other than a payment default) with respect to any Senior Indebtedness, as
defined in the instrument(s) under which the same is outstanding, with respect
to which the holders thereof have given notice of an intent to accelerate the
maturity thereof, and such event of default shall not have been cured or waived
or shall not have ceased to exist.

6.3 Subject to the prior payment in full of all Senior
Indebtedness, Purchaser shall be subject to the rights of the holders of Senior
Indebtedness to receive payments or distributions of the assets of the Company
made on such Senior Indebtedness until all principal and interest on the Note
shall be paid in full; and for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness of any cash, property or
securities to which Purchaser would be entitled except for the subordination
provisions of Section 6.1 above shall, as between Purchaser and the Company
and/or its creditors other than the holders of Senior Indebtedness, be deemed to
be a payment on account of the Senior Indebtedness.

6.4 The provisions of this Section 6 are, and are intended
solely, for the purposes of defining the relative rights of Purchaser and the
holders of Senior Indebtedness. Nothing in this Section 6 shall impair, as
between the Company and the Purchaser, the unconditional and absolute obligation
of the Company to repay the Loan, together with all interest thereon, to
Purchaser, nor shall anything herein prevent the Purchaser from exercising all
remedies otherwise permitted by applicable law or hereunder upon default.
<PAGE>

7. Miscellaneous.
-------------

7.1 Any communications between or among the parties hereto or
notices or requests provided herein to be given may be given by mailing the
same, postage prepaid, or by facsimile to the other party as follows:

If to the Company:

musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
Attention: Mr. Robert P. Bernardi
Facsimile: (703) 904-4117

with a copy to:

Venable, Baetjer and Howard, LLP
2010 Corporate Ridge Road
McLean, Virginia 22102
Attention: John L. Sullivan, III, Esq.
Facsimile: (703) 904-4117

If to the Purchaser:

Rho Management Trust I
767 Fifth Avenue
43rd Floor
New York, New York 10153
Attention: Mr. Habib Kairouz
Facsimile: (212) 751-3613

with a copy to:

Kelley Drye & Warren LLP
101 Park Avenue
New York, New York 10178
Attention: Audrey M. Roth, Esq.
Facsimile: (212) 808-7897

7.2 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
-------- -------
that neither the Company nor the Purchaser may assign, amend, or waive this
Agreement, the Note, or any of the rights hereunder or thereunder without the
prior written consent of the other party, provided, further, however, that
-------- ------- -------
Purchaser may assign this Agreement, the Note, or any of the rights hereunder or
thereunder to a beneficiary of Purchaser without the prior written consent of
the Company.
<PAGE>

7.3 The Company will pay (a) reasonable legal fees and expenses
of counsel for the Purchaser incurred in connection with the preparation,
negotiation and execution of this Agreement and the Note; (b) all stamp,
documentary transfer and other similar transfer taxes (if any) payable with
respect to this Agreement and the issuance of the Note other than taxes based
upon the net income (including any federal and state income taxes) of Purchaser;
(c) all costs of complying with the securities or Blue Sky laws of any
jurisdiction with respect to the offering or sale of the Note; and (d) the cost
of delivering the Note to Purchaser. Adequate documentation of such expenses
will be provided to the Company.

7.4 No delay or omission by Purchaser to exercise any right
under this Agreement shall impair any such right, nor shall it be construed to
be a waiver thereof. No waiver of any single breach or default under this
Agreement shall be deemed a waiver of any other breach or default. Any waiver,
consent, or approval under this Agreement must be in writing to be effective.

7.5 This Agreement and the Note integrate all the terms and
conditions mentioned herein or incidental hereto, and supersede all oral
negotiations and prior writings in respect to the subject matter hereof. In the
event of any conflict between the terms, conditions and provisions of this
Agreement and the Note, the terms, conditions and provisions of this Agreement
shall prevail.

7.6 This Agreement, and any instrument or agreement required
hereunder, shall be governed by and construed in accordance with the internal
laws of the State of Delaware, without regard to principles of conflicts of law.
In the event any provision of this Agreement or the application of any such
provision to any party is held by a court of competent jurisdiction to be
contrary to law, the remaining provisions of this Agreement will remain in full
force and effect.

7.7 This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered will be deemed an
original, and such counterparts together will constitute one instrument.

7.8 The illegality or unenforceability of any provision of this
Agreement or any instrument or agreement required hereunder shall not in any way
affect or impair the legality or enforceability of the remaining provisions of
this Agreement or any instrument or agreement required hereunder.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the day and year first above written.

COMPANY:

musicmaker.com, Inc.

By: /s/ Mark A. Fowler
----------------------------------
Name: Mark A. Fowler
Title:Chief Financial Officer

PURCHASER:

RHO MANAGEMENT TRUST I

By: Rho Management Company, Inc., its
Investment Advisor

By:
----------------------------------
Name:
Title:

<PAGE>

EXHIBIT 10.19

DEMAND PROMISSORY NOTE
----------------------

$1,000,000.00 June 23, 1999
New York, New York

musicmaker.com, Inc., a Delaware corporation ("Borrower"), promises to
pay to the order of Rho Management Trust I, or its assigns ("Lender"), at
Lender's principal executive offices or at such other place as Lender may
designate in writing, in lawful money of the United States of America, the
principal sum of One Million Dollars ($1,000,000.00), plus interest thereon in
the amount set forth below, on the earliest to occur of (i) the closing date of
an underwritten initial public offering of securities of Borrower pursuant to a
registration statement filed by Borrower under the Securities Act of 1933, as
amended (an "IPO"); (ii) a private placement of securities of Borrower resulting
in proceeds to Borrower of not less than Ten Million Dollars ($10,000,000), and
(iii) January 1, 2000.

The Borrower agrees to pay interest on the principal amount hereof,
commencing on June 18, 1999, at a rate per annum equal to Twelve Percent (12%),
provided that the interest rate hereunder will increase to Fourteen Percent
(14%) in the event that the Company has not consummated an IPO by September 30,
1999. Interest payable hereunder shall be compounded monthly, and shall be
payable as set forth above.

This Note is the Note defined in that certain Note Purchase Agreement,
dated as of June 23, 1999, between Borrower and Lender, as the same may be
amended from time to time (the "Note Agreement"), and is governed by the terms
thereof. Each capitalized term not otherwise defined herein shall have the
meaning set forth in the Note Agreement.

In connection with the enforcement of Lender's rights hereunder,
Borrower waives (a) any right to require Lender to pursue any remedy, and (b)
presentment, protest and notice of protest, demand and notice of nonpayment,
demand of performance, notice of sale, and advertisements of sale.

This Note shall be subject to the subordination provisions set forth
in the Note Agreement.

The entire unpaid principal sum of this Note, together with accrued
and unpaid interest to date, shall be due and payable at any time without any
demand, immediately upon the occurrence of an "Event of Default" (as that term
is defined in the Note Agreement).

The Company may prepay this Note, in whole or in part, with accrued
interest to the date of such prepayment on the amount prepaid and such
prepayment shall not be subject to any premium or penalty for prepayment.

Borrower shall reimburse Lender for all costs and expenses, including
without limitation reasonable attorneys' fees and expenses expended or incurred
by Lender in any
<PAGE>

arbitration, judicial reference, legal action or otherwise in the enforcement
of the Note Agreement, this Note or any related instrument or agreement; in
collecting any sum that becomes due Lender under the Note Agreement; in
connection with any proceeding for declaratory relief, any counterclaim to any
proceeding, or any appeal; or in the protection, preservation or enforcement
of any rights of Lender.

This Note shall be governed by, and construed in accordance with, the
internal laws of the State of Delaware, without regard to principles of
conflicts of law.

This Note shall not be assignable except in accordance with the terms
of the Note Agreement.

IN WITNESS WHEREOF, Borrower has executed this Note by its duly
authorized officer.

musicmaker.com, Inc.

By: /s/ Mark A. Fowler
------------------------------
Name: Mark A. Fowler
Title: Chief Financial Officer

-2-

<PAGE>

EXHIBIT 23.1

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 February 5, 1999 (except for Note 12, as to which the
date is June 14, 1999) in Amendment No. 5 to the Registration Statement (Form
S-1 No. 333-72685) and the related Prospectus of musicmaker.com, Inc. (formerly
The Music Connection Corporation) for the registration of 5,000,000 shares of
its common stock.

/s/ Ernst & Young LLP

Vienna, Virginia
July 1, 1999

<PAGE>

EXHIBIT 23.3

Consent of Darby & Darby P.C.
-----------------------------

We consent to the reference to our firm under the caption "EXPERTS" concerning
the sections "Risk Factors--We depend upon intellectual property rights and
risk having our rights infringed" and "Business--Intellectual Property and
Trade Secrets" in the Registration Statement (Form S-1, No. 333-72685) and the
related Prospectus of musicmaker.com, Inc. (formerly the Music Connection
Corporation), dated February 19, 1999 and as amended April 12, 1999, June 15,
1999, June 22, 1999, June 25, 1999 and July 1, 1999.

New York, New York /s/ Darby & Darby P.C.

July 1, 1999 July 1, 1999