##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



---



FORM 10-K



| |  | [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| |  | ----------------------------------------------------------------------------------------

For the fiscal year ended December 31, 1999



| |  | [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
| |  | ------------------------------------------------------------------------------------------

Commission File No. 0-23928

NetRadio Corporation
(Name of Small Business Issuer in its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Minnesota                                                      |  | 41-1819471                          
|                                                               |  |                                     
|(State or other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

43 Main Street, South East, Suite 149 Minneapolis, Minnesota 55414
(Address of Principal Executive Offices)

(612) 378-2211
(Issuers Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.01 Par Value
(Title of Class)

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past twelve months (or
for such shorter period that the Registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes
X      No____

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K and no disclosure will be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
X

Issuers revenues for its most recent fiscal year were $1,448,856.

The aggregate market value of voting stock held by non-affiliates of the Issuer
as of March 1, 2000, was $16,009,400.

The number of shares outstanding of the Issuers only class of common stock on
March 1, 2000, was 10,008,900.

Documents Incorporated by Reference: Portions of the Registrants Proxy
Statement for its 1999 Annual Meeting of Shareholders (the Proxy Statement),
are incorporated by reference in Part III.





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##### Table of Contents



PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Overview

We are a leading broadcaster of originally programmed audio entertainment
over the Internet through our Web site, www.netradio.com. We use content to
attract a large, diverse audience and retain them on our site for extended
periods of time. In December 1999, over 1.3 million unique listeners accessed
our more than 100 channels of music and information on demand, available 24
hours a day, seven days a week, and spent an average of more than 1 1/2 hours
per daily visit.

The site connects music enthusiasts with 15 interactive music lifestyle
communities ranging from Jazz, Modern Rock and New Age to Vintage Rock and
Classical. With our on-screen player, listeners can see the title and artist of
every song as it plays. Users can simply click at any time to seamlessly
purchase what theyre hearing from an inventory of more than 250,000 music
titles and 1 million sound samples at our on-line music store,
CDPoint.

Through our music and information channels, we provide our advertising and
marketing partners the ability to reach focused segments of users defined by
specific demographic and lifestyle characteristics. In addition, our site
allows advertisers to utilize the combined strength of audio messaging with
banner advertising, thus closing the loop between message and action.

Our Market

The Internet has quickly evolved from a relatively simple mechanism for
the delivery of text-based Web pages and electronic mail to a multimedia
platform, providing an interactive world of information, entertainment and
commerce. The resulting convergence of every day computer applications with
communication, entertainment and commerce platforms permits the Internet to
deliver content in such areas as music, sports, games, hobbies and shopping
opportunities. The development of streaming audio media, a new technology that
permits the simultaneous transmission and playback of digitized audio and video
streams, allows the Internet to broadcast music, information, advertising and
other content to hundreds of thousands of simultaneous listeners worldwide.

Streaming audio combines the Internets interactivity with traditional,
more passive radio listening. Music broadcasts can serve as a unifying vehicle,
drawing Internet listeners into lifestyle communities of similar musical tastes
and allowing them to interact with one another. Communities segregated by
specific musical tastes or interests provide Internet businesses with a target
for direct marketing and advertising programs. According to a study performed
in January 2000 by Arbitron/Edison Media Research, Streamies, Internet users
who listen to Internet radio, are highly responsive to online advertising and
purchase more on the Web than Internet users who are not listening online.

Music and Programming

By focusing on our breadth of music and information content, we seek to
capture a wide audience across a variety of musical tastes. Our programming has
been developed by a team of ten full-time and four part-time experienced,
award-winning content and programming professionals. These music programmers
bring specific musical expertise and an average of more than 17 years of
experience to us. Their awards have included national awards and nominations
from Billboard Magazine (Major Market Country Programmer of the
Year-Nominee)

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##### Table of Contents



and Gavin Magazine (Programmer of the Year-multiple winner and nominee), as
well as Minnesota Music awards (Club DJ of the Year-Winner). As a result of
our programmers musical expertise, NetRadio was recently recognized in the
Forbes February 28, 2000 Best of the Web edition as a Best of the Web site.
NetRadio was the only music or internet radio-related site to win the Best of
the Web designation. In describing the NetRadio.com site, Forbes noted that
the site has the widest selection of music on the internet and that the music
is passionately and expertly programmed.

Our programming team has experience in traditional radio programming as
well as at club and concert venues. Members of our programming team have served
as music directors of leading top 40, classic rock, jazz, country and
alternative radio stations in large and small markets throughout the United
States. We believe that our expertise in music and radio programming
distinguishes us from many of our competitors.

Our music professionals use the same song rotation software used by
traditional broadcast radio stations to program songs into light, medium and
heavy rotation patterns. This software enables them to include the music genre
or channel identifiers and artist endorsements within the channel and to easily
insert advertising messages into the music programming.

Music Genres and Channels.The NetRadio.com site is a complete music
resource, providing listeners with more than 100 channels of music and
information 24 hours a day, seven days a week. NetRadio.com appeals to a wide
range of musical tastes, ages and demographics. Visitors to the site can
access music, news and information within NetRadio.coms 15 music genres.
Within a music genre, each music or information channel contains content that
can be targeted to specific audience lifestyle segments and linked to potential
advertising and e-commerce revenue opportunities.

The number of songs within each channel ranges from 150 to over 1,000. The
breadth of our selection is significant compared to traditional broadcast radio
station play lists which typically include only 40 to 80 songs. The order and
frequency of the music is designed by our programming staff to reflect current
trends in the music business and the tastes of our listeners. We update
information channels daily.

Except for Channel One, our broadband channel, all channels can be heard
using a 28.8kbps narrow bandwidth modem through a telephone line. Channel One
is a special higher quality 40kbps stereo audio streaming channel featuring
music from NetRadios most popular music channels, and requires a high-speed
connection.

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##### Table of Contents



NetRadios channels as of March 1, 2000, grouped by genre, are listed
below.

|                    |  |                     |  |                    
|------------------- |  | ------------------- |  | -------------------
|BLUES               |  | ELECTRONICA/DANCE   |  | JAZZ (Cont.)       
|                   
|                   
|                   
|                   
|                    |  | (Cont.)            
|                   
|                   
|                   
|                   
|Blues               |  | DJ Mix              |  | Divas              
|                   
|                   
|                   
|                   
|Blues Revival       |  | Drum n Bass       |  | Horns              
|                   
|                   
|                   
|                   
|Chicago Blues       |  | Dub Electric        |  | Jazz Rock          
|                   
|                   
|                   
|                   
|New Blues           |  | Electronica         |  | Kidz Hits          
|                   
|                   
|                   
|                   
|Rockin Blues       |  | Experimental        |  | Lounge             
|                   
|                   
|                   
|                   
|Solid Gold Soul     |  | Funk                |  | New Age            
|                   
|                   
|                   
|                   
|Zydeco              |  | Groovin 70s       |  | Quiet Storm        
|                   
|                   
|                   
|                   
|                    |  | Hardcore            |  | Smooth Jazz        
|                   
|                   
|                   
|                   
|BROADWAY/MOVIES     |  | Hearts Of Space     |  | Soundtracks        
|                   
|                   
|                   
|                   
|Big Band            |  | Hip Hop             |  | Swing              
|                   
|                   
|                   
|                   
|Classic Crooners    |  | House              
|                   
|                   
|                   
|                   
|DotComedy           |  | Industrial          |  | KIDS               
|                   
|                   
|                   
|                   
|Kidz Hits           |  | Kidz Hits           |  | Kidz Hits          
|                   
|                   
|                   
|                   
|Lounge              |  | Mix Masters        
|                   
|                   
|                   
|                   
|Showtunes           |  | New Wave           
|                   
|                   
|                   
|                   
|Soundtracks         |  | Party Hits          |  | NEW AGE            
|                   
|                   
|                   
|                   
|Swing               |  | Solid Gold Soul     |  | Acoustic           
|                   
|                   
|                   
|                   
|                    |  | Soundtracks         |  | Ambient            
|                   
|                   
|                   
|                   
|CHRISTIAN/GOSPEL    |  | Starstreams         |  | Celtic             
|                   
|                   
|                   
|                   
|Christian Hits      |  | Techno              |  | Hearts Of Space    
|                   
|                   
|                   
|                   
|                    |  | Teen Scene          |  | Native American    
|                   
|                   
|                   
|                   
|CLASSICAL           |  | Trance Acid         |  | New Age            
|                   
|                   
|                   
|                   
|Baroque And Before  |  | Trip Hop            |  | Soundtracks        
|                   
|                   
|                   
|                   
|Chamber             |  | Urban               |  | Starstreams        
|                   
|                   
|                   
|                   
|Chant               |  |                     |  |                    
|                   
|                   
|                   
|                   
|Classical Notes     |  | FOLK                |  | POP                
|                   
|                   
|                   
|                   
|Maestro             |  | Acoustic            |  | 80s Hits          
|                   
|                   
|                   
|                   
|Opera               |  | Alternative Country |  | Adult Alternative  
|                   
|                   
|                   
|                   
|Piano               |  | Celtic              |  | Big Band           
|                   
|                   
|                   
|                   
|Quiet Classics      |  | Folk                |  | British Invasion   
|                   
|                   
|                   
|                   
|Soundtracks         |  | Kidz Hits           |  | Christian Hits     
|                   
|                   
|                   
|                   
|Symphony            |  | Soundtracks         |  | Disco              
|                   
|                   
|                   
|                   
|                    |  | Woodstock 69        |  | Fab 60s           
|                   
|                   
|                   
|                   
|COUNTRY             |  | Zydeco              |  | Funk               
|                   
|                   
|                   
|                   
|60s Country        |  |                     |  | Groovin 70s      
|                   
|                   
|                   
|                   
|70s Country        |  | HOLIDAY             |  | Hits               
|                   
|                   
|                   
|                   
|Alternative Country |  | Country Holiday     |  | Lite Hits          
|                   
|                   
|                   
|                   
|Bluegrass           |  | Holiday Hits        |  | Lounge             
|                   
|                   
|                   
|                   
|Route 1 Country     |  | Jazz Holiday        |  | New Wave           
|                   
|                   
|                   
|                   
|                    |  | Manheim Steamroller |  | Party Hits         
|                   
|                   
|                   
|                   
|ELECTRONICA/DANCE   |  | New Age Holiday     |  | Power Hits         
|                   
|                   
|                   
|                   
|Acid Jazz           |  |                     |  | Pre-Fab 60s       
|                   
|                   
|                   
|                   
|Ambient             |  | JAZZ                |  | Quiet Storm        
|                   
|                   
|                   
|                   
|Big Beat/Breaks     |  | Acid Jazz           |  | Rockin Rhythm 50s
|                   
|                   
|                   
|                   
|Club Mix            |  | Big Band            |  | Showtunes          
|                   
|                   
|                   
|                   
|Disco               |  | Café Jazz           |  | Smooth Jazz        
|                   
|                   
|                   
|                   
|                    |  | Classic Crooners    |  |                    

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##### Table of Contents



|                    |  |                     |  |                    
|------------------- |  | ------------------- |  | -------------------
|                   
|                   
|                   
|                   
|POP (Cont.)         |  | RAP/HIP HOP         |  | ROCK (Cont.)       
|                   
|                   
|                   
|                   
|Smooth Urban Hits   |  | Acid Jazz           |  | The X              
|                   
|                   
|                   
|                   
|Solid Gold Soul     |  | Hip Hop             |  | Vintage Rock       
|                   
|                   
|                   
|                   
|Soundtracks         |  | Power Hits          |  | Woodstock 69       
|                   
|                   
|                   
|                   
|Surf                |  | Rap                 |  | Woodstock 99       
|                   
|                   
|                   
|                   
|Swing               |  | Teen Scene         
|                   
|                   
|                   
|                   
|Teen Scene          |  | Trip Hop            |  | WORLD              
|                   
|                   
|                   
|                   
|The X               |  | Urban               |  | Acoustic           
|                   
|                   
|                   
|                   
|Trip Hop            |  |                     |  | Ambient            
|                   
|                   
|                   
|                   
|Urban               |  | ROCK                |  | Celtic             
|                   
|                   
|                   
|                   
|Vintage Rock        |  | 80s Hits           |  | Dub Electric       
|                   
|                   
|                   
|                   
|Woodstock 69        |  | Adult Alternative   |  | Earthbeat          
|                   
|                   
|                   
|                   
|Woodstock 99        |  | Alternative Country |  | Hawaiian           
|                   
|                   
|                   
|                   
|                    |  | British Invasion    |  | Hearts Of Space    
|                   
|                   
|                   
|                   
|R&B                 |  | Dub Electric        |  | Kidz Hits          
|                   
|                   
|                   
|                   
|80s Hits           |  | Fab 60s            |  | Latin              
|                   
|                   
|                   
|                   
|Disco               |  | Groovin 70s       |  | Native American    
|                   
|                   
|                   
|                   
|Fab 60s            |  | Guitar Heroes       |  | New Age            
|                   
|                   
|                   
|                   
|Folk                |  | Hard Rock           |  | Reggae             
|                   
|                   
|                   
|                   
|Funk                |  | Hits                |  | Ska                
|                   
|                   
|                   
|                   
|Groovin 70s       |  | Industrial          |  | Soundtracks        
|                   
|                   
|                   
|                   
|Hip Hop             |  | Lite Hits           |  | Starstreams        
|                   
|                   
|                   
|                   
|Hits                |  | Mix Master          |  | Zydeco             
|                   
|                   
|                   
|                   
|Kidz Hits           |  | New Wave           
|                   
|                   
|                   
|                   
|Lite Hits           |  | Party Hits          |  | NEWS AND INFO      
|                   
|                   
|                   
|                   
|Party Hits          |  | Power Hits          |  | Classical Notes    
|                   
|                   
|                   
|                   
|Power Hits          |  | Pre-Fab 60s        |  | Country Music News 
|                   
|                   
|                   
|                   
|Pre-Fab 60s        |  | Progressive Rock    |  | Hits Music News    
|                   
|                   
|                   
|                   
|Quiet Storm         |  | Psychedelic         |  | Jazz Notes         
|                   
|                   
|                   
|                   
|Rap                 |  | Punk                |  | Kidz News          
|                   
|                   
|                   
|                   
|Rockin Rhythm 50s |  | Reggae              |  | Music Industry News
|                   
|                   
|                   
|                   
|Solid Gold Soul     |  | Rockin Blues       |  | NetRadio Today     
|                   
|                   
|                   
|                   
|Soundtracks         |  | Rockin Rhythm 50s |  | Today in Rock      
|                   
|                   
|                   
|                   
|Teen Scene          |  | Ska                
|                   
|                   
|                   
|                   
|Trip Hop            |  | Soundtracks        
|                   
|                   
|                   
|                   
|Urban               |  | Surf               
|                   
|                   
|                   
|                   
|Woodstock 69        |  | Teen Scene         

C-Commerce, Product Sales and Fulfillment

We believe that our c-commerce (content enabled commerce) strategy is
effective because of the linkage between playing a song, or viewing or
listening to an advertising message, and providing the listener the opportunity
to immediately purchase the music, product or service being promoted. Listeners
do not need to be visually connected to NetRadios Web pages in order to
receive audio content and promotional messages. Listeners stay connected to
audio content for extended periods of time while NetRadio exposes them to
commerce, advertising and promotional messages.

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CDPoint.With NetRadio.coms On-Screen Player, listeners can see the title
and artist of every song as it plays Users can simply click at any time to
seamlessly purchase what theyre hearing from an inventory of more than 250,000
music titles and 1 million sound samples at our on-line music store,
CDPoint.

Shipping, Distribution and Fulfillment.We maintain no product inventory.
Rather, the products we sell are owned and held by outside vendors who ship
directly to purchasers. When a customers purchases are completed, the order is
electronically communicated to one of our fulfillment partners. Music orders
are electronically sent first to Navarre Corporation and then, if not
completely available in Navarres inventory, to Valley Media. The fulfillment
partner ships products for delivery to the purchaser within two to 10 business
days. United Parcel Service, the United States Postal Service or a comparable
ground service handles delivery. Title and risk of loss for all
products shipped by Navarre and/or Valley Media shall pass
to NetRadio upon delivery of the products to the
carrier at the point of shipment. NetRadio establishes pricing for
all product sales and assumes all credit risk and risk of returned
product.

Database Development and Maintenance.To more efficiently generate
commerce opportunities, we are building revenues by developing a database
reflecting our customer preferences. We intend to use customer information for
internal purposes only, such as targeted marketing campaigns and other
advertising programs. We disclose to all visitors and consumers that we are
collecting this information.

Our servers record where visitors to our Web site originate, where they
go, what they listen to and what advertising they click on. From CDPoint, we
accumulate product, order size, shipping destination and customer demographic
information. We use information about visitors and listeners to enhance our
content offerings, advertising strategies, marketing campaigns and Web site
design and navigation elements. Product and demographic information helps us
conduct one-to-one marketing campaigns with customers. In addition, we use this
information to project purchase patterns and to ensure maximum product
availability, selection and shipping efficiencies.

Advertising and Promotion

NetRadio.com is an internet marketing platform that uses content to
attract a growing, lifestyle segmented audience retaining them on site for
extended periods of time. Our marketing platform provides our advertisers and
marketing partners with the ability to reach focused segments of users defined
by specific demographic and lifestyle characteristics. NetRadio.com allows
advertisers to utilize the combined strength of audio messaging with banner
advertising, closing the loop between message and action.

Banner Advertising.Visitors to our Web site are exposed to banner
advertising messages placed on our Web pages. Banner advertising allows a user
to travel immediately to the Web site displayed in the banner. These banners
are sold to advertisers primarily by our sales staff and through a third party
contractor, 24/7 Media, a nationally recognized advertising placement firm.

Audio Advertising.We incorporate audio advertisements into our
programming. We believe that audio advertising is well suited to advertisers
since it reaches listeners who are running multiple applications. Unlike banner
advertising, which requires the viewer to be visually connected to the Web
site, audio advertising allows the listener to hear streamed audio advertising
while he or she is working on other applications. Our innovative advertising
format combines audio advertisements with links to our advertisers Web sites,
encouraging an immediate consumer response.

Targeted Promotional Advertising.We have developed targeted promotions
as another means to generate revenues. In a targeted promotion, a record label
pays for space and audience exposure within our Web site. For example, NetRadio
might prominently feature a compact disc, artist or song on a Web page. We
believe that these special promotions are attractive to record labels which are
promoting particular artists or compact discs.

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Strategic Alliances

We have entered into several strategic alliances in the areas of content
and programming, Internet traffic and technology, and product fulfillment and
distribution.

Content and Programming Alliances.We have alliances with major record
labels and other content providers that help us continue to develop our
programming. Some of the record labels that have participated in featured
promotions include: A&M, American Gramaphone, Arista, Atlantic, AWA, Beacon,
Blue Note, Brentwood, Capitol, Caroline, CDM, CMC, DA Music, Damian, Decca,
Dreamworks, Durkin Hayes, Elektra, EMD Distribution, EMI/Angel, Forbidden, GRP,
Interscope, J Bird, Jellybean, Leviathan, Macola, MCA, MED, Mercury, Mission,
Moonshine, Motown, Nettwork, Nonesuch, Public Music, RCA, Relativity, Rhino,
RLM, Solid Disc, Un-D-Nyable, Unison, V-Wax, Van Richter, Vesper Alley, Virgin,
Warner Brothers and Windham Hill.

Internet Alliances.We have entered into internet alliances to attract
listeners and customers, build brand loyalty, and improve the quality of our
broadcasts, The Companys Internet alliances include:



| |  |  | Microsoft. We have a broad technology and marketing
agreement with Microsoft Corp. that allows us to offer our channels
in the Windows Media format and to be prominently featured on , the
MSN network guide to online media content. In addition,
our content will be promoted by Microsoft through a preset button in
the Radio Tuner feature of the Radio Station Guide for the IE5
version of the WindowsMedia.com site. As a result of this
relationship, 50 million Windows Media Player users will be able to
enjoy the wide range of music offered by NetRadio.com.                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | RealNetworks. RealNetworks licenses software that allows our
listeners to hear our audio streams. In addition to providing
technology, we believe that RealNetworks is an important source of
traffic to our Web site. We have 14 channel pre-sets on RealPlayer
7, a recent version of RealNetworks audio player.                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | AT&T. We have an agreement with AT&T under which AT&T
provides scalable bandwidth, round-the-clock technical support and
redundant back-up servers to meet our increasing listener demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | @Home Network. We offer two 80kbps channels to @Home Network,
a division of @Home Corporation. @Home provides high-speed,
fully-integrated multimedia Internet and online services using cable
television technology. @Home subscribers have the opportunity to
listen to our programming through a higher quality connection than
is normally available through a standard telephone line.                                                                                                                                                                                                                                                           
|
| |  |  | Sonicbox, Inc. In September 1999, we entered into a
memorandum of understanding with Sonicbox, under which we agreed to
commence negotiations toward the execution of a definitive agreement
with Sonicbox whereby we would allow Sonicbox to retransmit our
content. If a definitive agreement is executed, the parties also
have agreed to negotiate the development of a business model
focusing on music sales, direct marketing and targeted advertising.
Sonicbox is engaged in the development of a personal computer
accessory that would enable computer listeners to connect audio
streams from a computer to the tuner on nearby FM radios.

7



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| |  |  | INTERVU Inc. In January 2000, we entered a streaming media
distribution agreement with INTERVU Inc. to stream our audio content
through their distributed network. This agreement provides us
additional bandwidth capacity and redundancy in our streaming
technology network.                                                                                                                                                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IBeam Broadcasting Corporation. In February 2000, we entered
a streaming media distribution agreement with iBeam Broadcasting
Corporation to stream our audio content through their streaming
media network. IBeams sophisticated distribution model utilizes a
hybrid satellite and fiber network to stream media to the edges of
the Internet in the most efficient manner possible. This agreement
provides us additional bandwidth capacity and redundancy in our
streaming technology network.
|
| |  |  | Kerbango, Inc. In February, 2000, we entered a strategic
relationship with Kerbango, Inc., creator of the worlds first
standalone Internet radio. Under this relationship, the Kerbango
standalone Internet radio device will prominently feature all of
NetRadios 120 channels of music. The Kerbango radio can be plugged
in anywhere in the home or office  only a power outlet and standard
Internet connection  dial-up, cable modem, DSL, home network, or
other connection.  is needed. 

Fulfillment Alliances.We have entered into fulfillment alliances to sell
products and provide customer service. By integrating multiple fulfillment
sources, we increase product fill rates and enhance customer service.



| |  |  | Navarre. In December 1998, we entered into a five-year
product fulfillment agreement with Navarre, our majority
shareholder, for fulfillment of music purchases. We look to Navarre
first for order fulfillment and delivery. We currently buy
approximately 5 to 10% of our music products through Navarre.
Purchases through Navarre improve our margins because we pay lower
shipping and handling fees to Navarre than we pay to Valley Media.
We also pay a lower acquisition cost for purchases of titles
available exclusively through Navarre. Finally, through Navarre we
gain access to artists and independent and national record labels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Valley Media. In 1998, we entered into a distribution
agreement with Valley Media to provide an alternative fulfillment
source for products that are not available through Navarre. Valley
Media is the leading online fulfillment source for music and other
entertainment software products. Valley Media has approximately
250,000 stock keeping units in inventory, and a wide selection of
music, videos, DVDs, and music-related merchandise.                                                                                                                                                                                                  
|
| |  |  | Liquid Audio. We have an agreement with Liquid Audio under
which our visitors are able to link to the Liquid Audio Web site and
download over 20,000 authorized music tracks using Liquid Audios
Liquid Player.                                                                                                                                                                                                                                                                                                                                                                                                                                     

Technology and Network Infrastructure

Audio streaming is the one-way transmission of digitized audio data over
the Internet. The audio data begins in digitized form at the source or Internet
server. Upon transmission, the audio is divided into groups of data delivery
packets that are transmitted over the Internet to the receiving computer of the
listener. The receiving computer buffers the initial portion of the transmitted
audio data before sending it to the speakers. This buffering compensates for
momentary delays in packet delivery. Audio streaming technology permits the
simultaneous transmission and playback of continuous streams over the Internet.

8



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##### Table of Contents



Most transmissions over telephone lines occur at a rate of 28.8kbps.
Transmissions also occur at higher speeds using digital subscriber line, or
DSL, cable modem and broadband technologies. Audio clarity varies with speed of
transmission. Audio streaming differs from traditional radio broadcasting in
its ability to be transmitted to a worldwide audience. RealNetworks pioneered
the development of audio streaming technology in 1995. This technology has
transformed the Internet from a graphic and text-based information platform
into a multimedia audio/visual platform.

Our Web site is currently running on a Microsoft NT platform. E-commerce
data stores are hosted in a secure Oracle environment.

We have developed proprietary software, together with commercially
available music scheduling products to produce a traditional style broadcast
with real-time streaming information. Our audio content is programmed and
housed on Microsoft NT workstations connected to an internal network. Audio
streams are encoded in Microsoft and Real Networks streaming formats and are
distributed to either our self hosted farms or to one of our third party
streaming partners.

We have one-year contracts in place with Ibeam Broadcasting Corporation
and INTERVU Inc. to provide additional streaming capabilities to supplement our
own streaming farms. These partnerships allow NetRadio to take advantage of
aggressive scalability and pricing plans without the need for up-front capital
expenditures. Both Ibeam and Intervu provide 24-hour network and streaming
services support to NetRadio.com.

We currently contract with AT&T to provide remote hosting and ISP
services.

NetRadio.com staffs a fulltime Network Operations Center (NOC) to ensure
availability of our broadcast streams. All mission critical services are
monitored 24 / 7.

To listen to NetRadio, a listener must have a computer with a minimum
486-66 processor (Pentium preferred), or 68040 or PowerPC-based Macintosh or
Macintosh clone, an operating system of either Windows 95, 98 or NT or 0/S
7.5.3 or better, a modem having 28.8kbps or better connection speed, and a
soundcard.

Intellectual Property and Proprietary Rights

Copyrights and Trademarks.The trademarks N NET.RADIO NETWORK and design
and NET.RADIO have been registered with the United States Patent and Trademark
Office. We have filed applications for registration of the trademarks
NetRadio.com and design, CDPOINT, NETCOMPANION and NetRadio.com the net
generation of radio.. We have also applied for a European Community Trademark
registration for N NET.RADIO NETWORK and design. Our success depends in part
upon developing, building and protecting our trademarks, trade secrets and
similar intellectual property. We rely upon trademark and copyright law, trade
secret protection and confidentiality and license agreements with employees,
strategic partners and others to protect our proprietary rights.
Notwithstanding these precautions, there can be no assurance that the steps
that we have taken or will take will be adequate to prevent misappropriation,
infringement or other violations of our intellectual property. A third party
could, without authorization, copy or otherwise use our intellectual property.
There also can be no assurance that the United States intellectual property
laws and our agreements with employees, consultants and others who participate
in developing our proprietary rights will adequately protect our rights, or
that our trade secrets will not otherwise become known or independently
developed by competitors. Moreover, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States, and effective copyright, trademark and trade secret protection may not
be available in those jurisdictions, and we have not sought protection for our
intellectual property in every country where our broadcasts may be heard.

9



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We have licensed in the past, and expect to continue to license certain
proprietary rights, such as trademarks or copyrighted material, to third
parties. We expect that the quality of our brand will be maintained and
protected by our licensees. There can be no assurance that such licensees will
not take actions that might materially adversely affect the value of our
proprietary rights or reputation.

Licenses to Broadcast Pre-recorded Music On the Internet.We believe our
broadcasts of pre-recorded music over the Internet are permitted under the
copyright laws of the United States as long as we have permission from
appropriate authorities and pay appropriate royalties. We have entered into
license agreements with the major performing rights organizations, including
the American Society of Composers, Authors and Publishers, Broadcast Music,
Inc. and the Society of European Stage, Authors and Composers, Inc. These
agreements license us to broadcast music and other copyrighted materials over
the Internet and obligate us to pay royalties in connection with our
broadcasts. The amount of royalties that we must pay, or the terms and
conditions of the license agreements, may change, and such changes may be
detrimental to us. In addition, our license agreements with performing rights
organizations may not comply with the copyright laws of jurisdictions outside
the United States, and our broadcasts may violate the copyright laws of those
jurisdictions where our broadcasts may be heard.

We believe our use of third-party material on our Web site is permitted
under current provisions of United States copyright law. However, legal rights
to certain aspects of Internet content and commerce are not clearly settled,
and our ability to rely upon one or more exemptions or defenses under copyright
law is uncertain. We may be unable to continue to provide rights to
information, including downloadable music samples and artist, title and other
information.

The law regarding linking to and framing of third party Web sites without
permission is uncertain. NetRadio believes that its linking and limited framing
activities are lawful, but there is a possibility that we may be required to
pay a license fee or cease linking or framing. If we are required to pay fees,
or cease linking or framing, it could have a material adverse effect on us.

Competition

The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify and the number of competitors
to increase in the future. Barriers to entry on the Internet are minimal, and
current and new competitors can launch Web sites at a relatively low cost. In
addition, the broader retail compact disc industry is intensely competitive.
NetRadio currently or potentially competes with a variety of other companies.
These competitors include:



| |  |  | streaming media sites such as Broadcast.com, Real.com, Spinner, Launch, Sonicnet, Rolling Stone Radio and Imagine Radio,                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | online retail vendors of music including CDNow, audio
highway, E-music, Musicmaker, MP3, Amazon.com, Barnes & Noble.com,
and GetMusic,                                            
|
| |  |  | traditional radio broadcasters,                                                                                                                                                   
|
| |  |  | other small online vendors, and                                                                                                                                                   
|
| |  |  | publishers and traditional retail vendors of music and
software, including large specialty music stores such as MusicLand,
Tower Records and Best Buy, that have significant brand

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##### Table of Contents





| |  |  | awareness, sales volume and customer bases. Many of these
traditional retailers also support dedicated Web sites that compete
directly with NetRadio.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

We believe that the principal competitive factors in our online market are
brand name recognition, product quality, variety of value-added services, ease
of use, price, quality of customer service, availability of customer support,
reliability, technical expertise, quality of search tools, quality of site
content and speed of order fulfillment. Many current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we have. In addition, online retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger, well
established and well financed companies as use of the Internet and other online
services increases. Our competitors may be able to secure merchandise from
vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web sites and systems
development than we can.

In selling music and other consumer entertainment media products, we
compete generally with other content providers for the time and attention of
users and for advertising revenues. We also compete for advertising with online
services, other Web site operators and advertising networks, as well as
traditional media such as television, radio and print, for a share of
advertisers budgets. We must license and provide high quality, sufficiently
compelling and popular audio content, along with technology and value-added
Internet services, to attract users, support advertising intended to reach
those users and attract businesses seeking Internet broadcasting and
distribution services.

We believe that the principal competitive factors for attracting
advertisers include the number of users accessing our Web site, the lifestyle
demographics of those users, our ability to deliver focused advertising and
interactivity through our Web site, and the overall cost-effectiveness and
value of the advertising offered. There is intense competition for the sale of
advertising on high-traffic Web sites. This has resulted in a wide range of
rates quoted by different vendors for a variety of advertising services and
makes it difficult to project levels of Internet advertising that will be
realized generally or by any specific company. Any competition for advertisers
among present and future Web sites, as well as competition with other
traditional media for advertising placements, could result in significant price
competition. We believe that the number of companies selling Internet-based
advertising and the available inventory of advertising space have recently
increased substantially. Accordingly, we may face increased pricing pressure
for the sale of advertisements.

We also compete for traditional media advertising sales with national
radio networks, as well as local radio stations. Local radio content providers
and national radio networks may have larger and more established sales
organizations than we have. These broadcasters may have greater name
recognition and more established relationships with advertisers and advertising
agencies than we have. They also may be able to undertake more extensive
marketing campaigns, obtain a more attractive inventory of advertising spots,
adopt more aggressive pricing policies and devote substantially more resources
to selling advertising inventory.

Employees

As of December 31, 1999, we had 50 full-time and 6 part-time employees. We
also employed 9 independent contractors and other temporary employees in
connection with our content, operations and administrative functions.

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Executive Officers of the Registrant

The following sets forth certain information regarding the executive
officers of the Company:

|                    |  |     |  |                                                 
|------------------- |  | --- |  | ------------------------------------------------
|Name                |  | Age |  | Position                                        
|                    |  |     |  |                                                 
|Edward A. Tomechko  |  | 51  |  | Chief Executive Officer, President and Director 
|                   
|                   
|                   
|                   
|Michael P. Wise     |  | 42  |  | Vice President and Chief Financial Officer      
|                   
|                   
|                   
|                   
|Donavan W. Pederson |  | 60  |  | Chief Operating Officer, Secretary and Director 
|                   
|                   
|                   
|                   
|Richard W. Hailey   |  | 43  |  | Chief Technology Officer                        
|                   
|                   
|                   
|                   
|David R. Witzig     |  | 42  |  | Senior Vice President of Content and
Programming
|                   
|                   
|                   
|                   
|Nancy Rae Kielty    |  | 42  |  | Vice President of Commerce                      

Edward A. Tomechko.Mr. Tomechko has served as our Chief Executive
Officer, President and a director of NetRadio since January 1999 and served as
Chief Financial Officer from August 1998 until March 15, 1999. From April 1997
to April 1998, Mr. Tomechko served as Senior Vice President and Chief Financial
Officer of Davids Bridal, Inc. From January 1996 to April 1997, Mr. Tomechko
was Senior Vice President and Chief Financial Officer of The County Seat
Stores, Inc., and from 1990 to 1996, Mr. Tomechko served as Vice President and
Treasurer of County Seat. In October 1996, County Seat filed a voluntary
petition for reorganization under Chapter 11 of Title 11 of the United States
Bankruptcy Code, in the United States Bankruptcy Court for the District of
Delaware. On October 29, 1997, the Plan of Reorganization was consummated.

Michael P. Wise.Mr. Wise has served as our Vice President and Chief
Financial Officer since March 15, 1999. From December 1997 through March 1999,
Mr. Wise served as Vice President and Corporate Controller for Health Fitness
Corporation, a publicly held, Minneapolis-based manager of fitness centers for
Fortune 500 and large hospital clients. From April 1994 through October 1997,
Mr. Wise served as a consultant to and Chief Financial Officer, Treasurer and
Secretary of The Sled Dogs Company, a publicly held, Minneapolis-based
manufacturer, marketer and distributor of snow skates. On November 5, 1997, The
Sled Dogs Company filed a voluntary petition under Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court for the District of Minnesota.
From April 1986 to March 1994, Mr. Wise was employed by National Computer
Systems, Inc., a publicly held, Minneapolis-based developer and marketer of
information systems and services for education, serving in various financial
and sales, marketing and management positions.

Donavan W. Pederson.Mr. Pederson has served as our Chief Operating
Officer since July 1999 and served as our Chief Technology Officer from
September 1997 to June 1999. Mr. Pederson has served as Secretary and a
director of NetRadio since September 1997. From April 1994 to April 1997, he
was President of ComNet Research Corporation, a marketer and integrator of
fiber channel networks. From 1986 to 1994, Mr. Pederson served as President of
Donavan International, Inc., an international trade services company.

Richard W. Hailey.Mr. Hailey has served as our Chief Technology Officer
since July 1999. From November 1998 to July 1999, he served as the Technology
Services Practice Manager at Pragmatek Consulting Group, a Minneapolis-based
consulting firm. From July 1995 to October 1998, he served in various
leadership positions including Director of Technology for the U.S. Region at
MCI-Systemhouse. From October 1993 to July 1995, he served as a Senior
Technical Architect at Computer Sciences Corporation.

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##### Table of Contents



David R. Witzig.Mr. Witzig has served as our Senior Vice President of
Content and Programming since May 1996. From June 1989 to May 1994, Mr. Witzig
was Branch Manager, Chicago, of EMI Music Distribution, the distribution arm of
EMI Music, Inc. From May 1994 to May 1996, he served as Regional Director,
Chicago, of EMI Music Distribution. Mr. Witzig has more than 17 years of
experience in promotion, special accounts and sales capacities with major
record labels including Regional Director for EMI Music Distribution and
National Sales Director of Capitol Records.

Nancy Rae Kielty.Ms. Kielty has served as our Vice President of Commerce
since February 1999. From December 1996 to August 1998, she served as
Divisional Merchandise Manager, Airport Store Division, for Wilsons The Leather
Experts, a Minneapolis-based retailer of leather outerwear. From January 1992
to January 1996, Ms. Kielty was a Buyer for Fingerhut Companies, a
Minneapolis-based direct sales catalog retailer.

ITEM 2. DESCRIPTION OF PROPERTY

Our offices are located in one facility in Minneapolis, Minnesota. We
lease approximately 10,500 square feet of office space under four separate
leases, which includes space for our executive offices, technical center, sales
and marketing, content and commerce areas. Our administrative office lease
expired on October 31, 1999, and our technical center lease expires on October
31, 2000. We have been leasing our administrative offices on a month-to-month
basis since November 1, 1999. Our sales and marketing and content and
commerce area leases are also month-to-month. Effective March 13, 2000, the
Company entered into an office lease with a five-year term for approximately
13,700 square feet of office space in Eden Prairie, Minnesota. The Company
plans to take occupancy in May 2000.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended December 31, 1999, no matter was submitted to a
vote of security holders.

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##### Table of Contents



PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is traded on the Nasdaq National market under the symbol
NETR since the initial public offering in October 1999. As of March 1, 2000,
the Companys common stock was held by approximately 23 holders of record and
an estimated 2,400 additional beneficial owners. The following table sets
forth the high and low sales price for the Common Stock as reported by Nasdaq
for the period indicated. These prices reflect inter-dealer prices, without
retail mark-up or mark-down or commissions. The Company has paid no dividends
and does not expect to in the foreseeable future.

|               |  |                             |       |     |  |   |      |  |  |  |  | 
|-------------- |  | --------------------------- | ----- | --- |  | - | ---- |  |  |  |  | 
|               |  | Price Range of Common Stock
|               |  |                            
|               |  | 1999                       
|               |  |                            
|               |  | High                        |       | Low
|               |  |                             |       |    
|Fourth Quarter |  | $                           | 14.00 |     |  | $ | 6.63 | 

Our registration statement, filed on Form S-1 under the Securities Act
(File No. 333-73261), for our initial public offering became effective on
October 14, 1999. The closing of the sale of shares pursuant to the initial
public offering occurred on October 19, 1999, at which time we issued 3,200,000
shares of our common stock for an aggregate offering price of $35,200,000.
The managing underwriters for the initial public offering were Gerard Klauer
Mattison & Co., Inc. and Advest, Inc.

We received net proceeds from the initial public offering of approximately
$31,436,000 after deducting total estimated expenses of approximately
$3,764,000, which included the underwriting discount of $2,464,000 and other
estimated offering expenses of approximately $1,300,000. We have used, and
will use, the net
offering proceeds for the following purposes in the approximate amounts set
forth below:

|                      |  |  |            | 
|--------------------- |  |  | ---------- | 
|Working Capital       |  |  | 28,884,000 | 
|                     
|                     
|                     
|                     
|Advertising           |  |  | 1,462,000  | 
|                     
|                     
|                     
|                     
|Capital Expenditures  |  |  | 910,000    | 
|                     
|                     
|                     
|                     
|Repayment of Interest |  |  | 180,000    | 

None of the net proceeds were paid, directly or indirectly to (i) officers
or directors of NetRadio or its affiliates, (ii) persons owning 10"% or more of
our equity securities or (iii) our affiliates.

In connection with the closing of our initial public officering, we sold
to ValueVision 550,000 shares of our common stock for a total purchase price of
$500,000 in a transaction exempt from registration under Section 4(2) of the
Securities Act.

On November 5, 1999 we issued
176,000 shares of common stock in connection with option exercises by
directors and officers at an exercise price of $1.64 per share.  On November
15, 1999, we issued 3,000 shares of common stock in connection with
an option exercise by a former employee at an exercise price of $3.00 per share.  On December 17, 1999 we
issued 1,000 shares of common stock in connection with an option
exercise by a former employee at an exercise price of $5.00 per share. All of
these issuances were made in transactions exempt from registration
under Rule 701 of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read together with the
financial statements and related notes and Management Discussion and Analysis
of Financial Condition and Results of Operations, appearing elsewhere in this
document. The selected statement of operations data shown below for the period
from January 1, 1997 through March 20, 1997, the period from March 21, 1997
through December 31, 1997 and the years ended December 31, 1998 and 1999 and
the balance sheet data as of December 31, 1998 and 1999 are derived

14



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##### Table of Contents



from our audited statements included elsewhere in this document. The selected
statement of operations data shown below for the year ended December 31, 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived
from our audited financial statements not included elsewhere in this document.

|                                        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        |             |     |   |           |     |     |   |           |     |       | 
|--------------------------------------- | -------------------- | ------------------ | --- | --------------------------------------------- | -- | ------------ | ------ | --------------- | --- | ------------ | ---- | -------------- | --- | ------------ | ------ | ----------- | --- | - | --------- | --- | --- | - | --------- | --- | ----- | 
|                                        |                      |                    |     | Net Radio Nevada                              |    | NetRadio    
|                                        |                      |                    |     |                                               |    |             
|                                        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        | Period from
|                                        |                      |                    |     | Period
from                                   |    |              |        |                 |     | Period from  |      | March 21, 1997
|                                        |                      |                    |     | Inception                                     |    | Year ended   |        | January 1, 1997 |     | through      |      | Year Ended     |     | Year Ended  
|                                        |                      |                    |     | (November 1, 1995 to                          |    | December 31, |        | through         |     | December 31, |      | December 31,   |     | December 31,
|                                        |                      |                    |     | December 31,
1995)                            |    | 1996         |        | March 20, 1997  |     | 1997         |      | 1998           |     | 1999        
|                                        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |             
|                                        |                      |                    |     | (dollars in thousands, except per share data)
|Statement of Operations Data:           |                      |                    |     |                                               |    |              |        |                 |     |             
|                                       
|                                       
|                                       
|                                       
|Net Revenues:                           |                      |                    |     |                                               |    |              |        |                 |     |             
|                                       
|                                       
|                                       
|                                       
|                                        | Product sales        |                    | $   |                                              |    |              | $      |                |     |              | $    |               |     |              | $      |            |     |   | $         | 50  |     |   | $         | 684 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Internet advertising |                    |     |                                              |    |              |        |                |     |              |      |               |     |              |        |            |     |   |           | 205 |     |   |           | 765 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Miscellaneous        |                    |     | 22                                            |    |              |        | 321             |     |              |      | 168            |     |              |        | 163         |     |   |           |    |     |   |           |    |      
|                                        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        |             |     |   |           |     |     |   |           |    
|                                        |                      | Total net revenues |     |                                               | 22 |              |        |                 | 321 |              |      |                | 168 |              |        |             | 163 |   |           |     | 255 |   |           |     | 1,449 | 
|                                       
|                                       
|                                       
|                                       
|Gross profit                            |                      |                    | 22  |                                               |    |              | 321    |                 |     |              | 168  |                |     |              | 146    |             |     |   | 190       |     |     |   | 803       |    
|Loss from operations                    |                      |                    | (72 | )                                             |    |              | (2,260 | )               |     |              | (737 | )              |     |              | (1,955 | )           |     |   | (3,952    | )   |     |   | (14,249   | )  
|                                       
|                                       
|                                       
|                                       
|Net loss                                |                      | $                  | (74 | )                                             |    | $            | (2,254 | )               |     | $            | (754 | )              |     | $            | (1,987 | )           |     | $ | (3,977    | )   |     | $ | (14,998   | )  
|                                        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        |             |     |   |           |     |     |   |           |    
|Loss per sharebasic and diluted        |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        |             |     | $ | (.67      | )   |     | $ | (2.21     | )  
|                                       
|                                       
|                                       
|                                       
|Weighted average shares outstanding (1) |                      |                    |     |                                               |    |              |        |                 |     |              |      |                |     |              |        |             |     |   | 5,899,167 |     |     |   | 6,787,995 |    



---

|(1) |  | Please see Note 1 of our financial statements for an explanation of the
determination of the number of shares of our common stock outstanding.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|                                                  |  |                                               |     |      |  |      |      |      |  |      |       |   |  |   |        |   |  |   |        | 
|------------------------------------------------- |  | --------------------------------------------- | --- | ---- |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ------ | - |  | - | ------ | 
|                                                  |  | December 31,                                 
|                                                  |  |                                              
|                                                  |  | 1995                                          |     | 1996 |  | 1997 |      | 1998 |  | 1999
|                                                  |  |                                               |     |      |  |      |      |      |  |     
|                                                  |  | (dollars in thousands, except per share data)
|Balance Sheet Data:                              
|                                                 
|                                                 
|                                                 
|                                                 
|Cash, cash equivalents and short term investments |  | $                                             | 66  |      |  | $    | 91   |      |  | $    | 4     |   |  | $ | 51     |   |  | $ | 29,567 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Working capital (deficit)                         |  |                                               | 57  |      |  |      | (828 | )    |  |      | (930  | ) |  |   | (176   | ) |  |   | 26,860 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total assets                                      |  |                                               | 206 |      |  |      | 223  |      |  |      | 2,395 |   |  |   | 2,740  |   |  |   | 33,781 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Long term obligations, less current
portion       |  |                                               | 111 |      |  |      | 486  |      |  |      | 1,389 |   |  |   | 5,363  |   |  |   | 9,686  | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total shareholders equity (deficit)              |  |                                               | 37  |      |  |      | (537 | )    |  |      | 13    |   |  |   | (3,830 | ) |  |   | 19,968 | 

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

We are a leading broadcaster of originally programmed audio entertainment
over the Internet through our Web site, www.netradio.com. During the period
from our inception through June 30, 1999, we had insignificant revenues and
were engaged primarily in developing infrastructure, assembling our management
team, and establishing our audio channels. Our initial business model consisted
of distributing coupons and other promotional material on behalf of third
parties. Substantially all of our revenues prior to 1998 were derived from
these activities. In January 1998, we decided to add e-commerce to our
operations and to discontinue distribution activities.

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##### Table of Contents



Our current revenues are generated from sales of audio merchandise through
our online store, CDPoint, and from Internet advertising. Our Internet
advertising revenues consist of banner advertisements placed on our Web site,
barter advertising, special promotional advertisements and audio
advertisements.

We recognize banner advertising revenues over the period in which the
advertisement is displayed on our Web site. We recognize barter advertising by
multiplying the contracted impression rate by the amount of monthly impressions
served until the contracted amount of impressions is completely depleted. The
contracted impression rate is comparable to rates realized in sales of
advertising to other third parties. We derive promotional advertising revenues
from product or artist related promotions, and recognize these revenues over
the term of the promotion. We derive audio advertising revenues from the sale
of advertising spots, and recognize these revenues when the audio advertisement
is broadcast.

In May 1996, Navarre acquired 50% of the stock of our predecessor, Net
Radio Nevada. On March 21, 1997, Navarre acquired the remaining 50%. This
acquisition was accounted for as a purchase. As a result, the accumulated
deficit of Net Radio Nevada as of March 21, 1997 was eliminated and goodwill of
approximately $1.3 million was recognized by Navarre at the time of the
acquisition. The goodwill has been attributed to NetRadio for financial
reporting purposes. As a result, our financial statements for the periods prior
to March 21, 1997 are reflected as predecessor financial statements and the
accumulated deficit at December 31, 1999 reflects only losses incurred since
March 21, 1997. We have incurred significant losses since our inception. Our
accumulated deficit of approximately $21,000,000 reflects our operating results
during the period from March 21, 1997 to December 31, 1999. In addition, we had
incurred an accumulated deficit of approximately $3,100,000 prior to
that date.

In the following Results of Operations section, we have combined the two
separate periods in 1997 to make the year-to-year comparison more meaningful.

We believe that our success will depend largely on our ability to program
and broadcast original audio content to attract and retain listeners and to
generate e-commerce and advertising revenues. Accordingly, we intend to invest
heavily to develop and maintain content and network infrastructure and to
expand e-commerce. We expect to continue to incur substantial operating losses
for the foreseeable future.

In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results, including gross margin and operating margin, are not
necessarily meaningful and should not be relied upon as indicators of our
future performance.

Results of Operations for Fiscal Years Ended December 31, 1999 and 1998.

Net Revenues

Net revenues increased to $1,449,000 in 1999, from $255,000 in 1998, a
468% increase and consisted primarily of product sales and Internet advertising
revenues.

Product Sales.Product sales increased to $684,000 in 1999, from $50,000
in 1998. Product sales in 1999 consisted of sales of audio merchandise,
including shipping and handling costs. We began selling audio merchandise in
the third quarter of 1998 when we opened our online store, CDPoint, which
became fully operational in November 1998.

Internet Advertising.Internet advertising revenues in 1999 were $765,000
compared to $205,000 in Internet advertising revenues in 1998. Internet
advertising revenues reflect audio and banner advertising sales as well as
promotional advertising revenues.

16



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##### Table of Contents



Cost of Revenues

Cost of revenues include the cost of audio merchandise that we sell,
including fulfillment costs through third party vendors that ship directly to
our customers, and include costs incurred in connection with the development of
specific advertising or promotional campaigns.

Cost of revenues increased to $646,000 in 1999, from $65,000 in 1998.
The increase in cost of revenues was due primarily to the increase in our
product sales.

Operating Expenses

Operations and Technical Support.Operations and technical support
expenses consist primarily of data communications expenses, personnel expenses
associated with broadcasting, e-commerce and technical support, software and
content license fees, operating supplies and overhead. Operations and technical
support expenses were $7,368,000 in 1999 compared to $1,635,000 in 1998. The
increase in operations and technical support expenses was due primarily to
bandwidth costs and the building of technical and personnel infrastructure
necessary to meet listener demand and provide e-commerce opportunities to
listeners.

Sales and Marketing.Sales and marketing expenses consist primarily of
personnel expenses associated with Internet advertising and the marketing of
our Web site. Sales and marketing expenses were $4,430,000 in 1999 compared to
$273,000 in 1998. The increase in sales and marketing expenses was a result
of our efforts to grow our unique visitor base and create brand awareness
through advertising and public relations expenditures.

General and Administrative.General and administrative expenses consist
primarily of administrative personnel expenses, professional fees, goodwill
amortization and expenditures for facility costs. General and administrative
expenses were $3,254,000 in 1999 compared to $2,234,000 in 1998. Goodwill
amortization recognized from Navarres acquisition of Net Radio Nevada amounted
to $421,000 in 1999 and 1998. The increase in general and administrative
expenses was due primarily to a recognition of $1,138,625 in non-cash
compensation expense associated with the issuance of stock options to employees
and directors with exercise prices below the estimated fair market value of our
common stock on the date of grant, and the acceleration of vesting of stock
options as part of an executive officers severance agreement.

Net Interest Expense.Net interest expense in 1999 was $750,000 compared
to $24,000 in 1998. The increase was due to interest expense associated with advances from Navarre. In connection with our initial public offering, our
borrowings, including accrued interest from Navarre, were restructured. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources for a description of this
restructuring.

Results of Operations for Fiscal Years Ended December 31, 1998 and 1997.

Net Revenues

Net revenues decreased to $255,000 in 1998, from $331,000 in 1997 due
primarily to our change in business model. Net revenues in 1998 consisted
primarily of product sales and Internet advertising revenues.

Product Sales.Product sales in 1998 consisted of $50,000 of sales of
audio merchandise, including shipping and handling costs, compared with no
product sales in 1997.

17



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##### Table of Contents



Internet Advertising.Internet advertising revenues in 1998 were
$205,000, compared to no Internet advertising revenues in 1997. The 1998
Internet advertising revenues reflect audio and banner advertising sales as
well as promotional advertising revenues.

Miscellaneous Revenues.We had no miscellaneous revenues in 1998,
compared to $331,000 in 1997. Miscellaneous revenues consisted primarily of
payments from third parties for distribution of coupons and other promotional
material. We do not expect future miscellaneous revenues to be significant.

Cost of Revenues

Cost of revenues increased to $65,000 in 1998, from $17,000 in 1997. The
increase in cost of revenues from 1997 to 1998 was due primarily to the cost
associated with the opening of our online music store.

Operating Expenses

Operations and Technical Support.Operations and technical support
expenses were $1,635,000 in 1998, and consisted primarily of data
communications expenses, personnel expenses associated with broadcasting,
software and content license fees, operating supplies and overhead. We incurred
operations and technical support expenses of $672,000 in 1997, reflecting the
cost of outside consulting services for Web site development.

Sales and Marketing.Sales and marketing expenses increased to $273,000
in 1998 from $214,000 in 1997. The increase in sales and marketing expenses
in 1998 compared to 1997 was due primarily to growth in our sales force and
marketing staff and to increased advertising expenses.

General and Administrative.General and administrative expenses were
$2,234,000 in 1998 compared to $2,120,000 in 1997. Goodwill amortization
recognized from Navarres acquisition of Net Radio Nevada amounted to $421,000
in 1998 and $316,000 in 1997. The increase in general and administrative
expenses in 1998 compared to 1997 reflects the costs associated with developing
our business strategy, acquiring personnel and building infrastructure.

Liquidity and Capital Resources

Since inception, we have incurred significant net losses primarily due to
the costs of developing our infrastructure, and hiring management and personnel
to establish our audio channels and programming. We have funded our capital
requirements primarily through the sales of equity securities and prior to our
initial public offering, borrowings from Navarre.

The Company had working capital of $26,860,000 at December 31, 1999, and a
working capital deficit of $176,000 and $930,000 at December 31, 1998 and 1997,
respectively. Net cash used in operating activities was $10,076,000 for the
year ended December 31, 1999, $2,772,000 for the year ended December 31, 1998
and $2,126,000 for the year ended December 31, 1997. Net cash used in operating
activities for the year ended December 31, 1999 was primarily composed of our
net losses offset in part by depreciation and amortization, an increase in
accounts payable and accrued expenses and non-cash compensation expense
associated with the issuance of stock options.

Accounts receivable grew to $147,000 at December 31, 1999 from $26,000 at
December 31, 1998 and $9,000 at December 31, 1997, and consisted primarily of
agency-placed advertising revenue accounts. Advertising

18



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##### Table of Contents



revenues placed by an agency typically are collected in 60 to 90 days. We
expect advertising revenue accounts generally to be collected within 60 to 90
days in the future.

The increase in prepaid expenses, other current assets, deferred revenue
and accrued expenses from December 31, 1998 and 1997 to 1999 was primarily due
to the execution of two contracts with RealNetworks in May 1999.

Accounts payable increased to $3,153,000 at December 31, 1999 from
$1,023,000 at December 31, 1998 and $737,000 at December 31, 1997. The
increase was due primarily to higher operating expenses as we developed the
infrastructure necessary to manage the growth of our business.

Net cash used in investing
activities was $20,435,000 for the year ended
December 31, 1999, $906,000 for the year ended December 31, 1998 and $11,000
for the year ended December 31, 1997. Net cash used in investing activities in
these periods was related primarily to purchases of short-term
investments and property and equipment.

We generated net cash from financing activities of $42,182,000 for the
year ended December 31, 1999, $3,725,000 for the year ended December 31, 1998
and $2,101,000 for the year ended December 31, 1997. Net cash from financing
activities for the year ended December 31, 1999 was generated primarily from
$9,597,000 in advances from Navarre, and $33,236,000 from our initial public
offering. We believe that the net proceeds from our initial public offering,
together with our current cash and cash equivalents, will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. In connection with the offering, ValueVision
International, Inc. purchased 550,000 shares of our common stock for $500,000
at the closing of our initial public offering.

In connection with our initial public offering, we entered into a
separation agreement with Navarre in March 1999 under which Navarre agreed to
contribute to the capital of NetRadio $5,234,840 of principal indebtedness owed
by NetRadio to Navarre as of December 31, 1998. In addition, in
connection with our initial public offering, we restructured our
indebtedness with Navarre into a term note. Under the term note NetRadio agreed
to repay to Navarre all amounts advanced to NetRadio beginning January 1, 1999,
plus accrued interest on $5,234,840 of principal indebtedness incurred through
December 31, 1998. The Term Note bears interest at Midwest prime plus one
half-percentage point (9.0% as of March 1, 2000) and is payable monthly.
The principal balance of the Term Note, approximately $9.6 million, is due on
November 14, 2001.

We may need to raise additional funds, in the future, through public or
private financings, or other arrangements. There can be no assurance that
these additional financings, if needed, will be available on terms attractive
to us, if at all. Our failure to raise capital when needed could have a
material adverse effect on our business, results of operations and financial
condition. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our then-current shareholders will be
reduced. Furthermore, these equity securities might have rights, preferences
or privileges senior to those of our common stock.

Net Operating Loss Carryforwards

As of December 31, 1999, we had available net operating loss carryforwards
totaling approximately $18,800,000, which expire beginning in 2011. Please see
Note 6 of Notes to the Financial Statements included elsewhere herein. The Tax
Reform Act of 1986 imposes limitations on the use of net operating loss
carryforwards if specified stock ownership changes have occurred or could occur
in the future.

19



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##### Table of Contents



Cautionary Statement

This Form 10-K contains forward-looking statements within the meaning of
federal securities laws. These statements include statements regarding intent,
belief, or current expectations of the Company and its management. These
forward-looking statements are not guarantees of the future performance and
involve a number of risk and uncertainties that may cause the Companys actual
results to differ materially from the results discussed in these statements.
Please refer to the Risk Factor section of the Companys prospectus dated
October 14, 1999 for cautionary statements on important factors to consider in
evaluating the forward-looking statements included in this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no derivative financial instruments or derivative commodity
instruments. We
invest our cash and cash equivalents and marketable securities in investment
grade, highly liquid investments, consisting of money market instruments, bank
certificates of deposit, overnight investments in commercial paper, and short
term government and corporate bonds.

We are exposed to market risk from changes in the interest rate on
borrowings under our term note that bears interest from time to time at prime
plus 0.5%. We do not believe that changes in interest rates on the maximum
borrowings outstanding under this term note would have a material effect on our
results of operations or liquidity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Companys Consolidated Financial statements, including notes thereto,
are included after the signature page beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information contained under the heading Election of Directors in the
Proxy Statement is incorporated by reference. Information with respect to the
Companys executive officers is provided under the heading Executive Officers
of the Registrant in Part I, Item 1.

ITEM 11. EXECUTIVE COMPENSATION.

The information contained under the headings Compensation of Directors
and Executive Compensation in the Proxy Statement is incorporated by
reference, except that the information set forth under the caption Report of
Compensation Committee on Executive Compensation and the Comparative Stock
Performance graph are not incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained under the heading Principal Shareholders in
the Proxy Statement is incorporated
by reference.

20



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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under the heading Certain Transactions in the
Proxy Statement is incorporated by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REP
ORTS ON FORM 8-K.

(a) Exhibits, Financial Statements and Financial Statement Schedules



| |  |  | 1. Financial Statements
| |  |  | -----------------------

The Companys financial statements are attached hereto beginning at page
F-1. See Index to Financial Statements at page F-1.



| |  |  | 2. Financial Statement Schedules
| |  |  | --------------------------------

All financial statement schedules are omitted since the required
information is not represented or is not present in amounts sufficient to
require submission of such schedules, or because the information required is
included in the financial statements and notes thereto.



| |  |  | 3. Exhibits
| |  |  | -----------

The following exhibits are included with this Annual Report on Form 10-K
(or incorporated by reference) as required by Item 601 of Regulation S-K.

|        |  |                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|No.     |  | Description                                                                                                                         
|        |  |                                                                                                                                     
|3.1     |  | Articles of Incorporation, as amended (1)                                                                                           
|       
|       
|       
|       
|3.2     |  | Bylaws of the Registrant (1)                                                                                                        
|       
|       
|       
|       
|4.1     |  | Specimen of Common Stock Certificate (1)                                                                                            
|       
|       
|       
|       
|4.3     |  | Form of Warrant to Purchase 125,000 Shares of Common
Stock, dated October 19, 1999, issued to Gerard Klauer Mattison &
Co., Inc. (1)
|       
|       
|       
|       
|4.4     |  | Form of Warrant to Purchase 75,000 Shares of Common
Stock, dated October 19, 1999 to First Union Securities, Inc. (1)               
|        |  |                                                                                                                                     

21



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##### Table of Contents



|        |  |                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|No.     |  | Description                                                                                                                                                                         
|        |  |                                                                                                                                                                                     
|       
|       
|       
|       
|10.1    |  | Employment Agreement, dated as of August 1, 1998 between
NetRadio Corporation and Edward A. Tomechko (1)                                                                            
|       
|       
|       
|       
|10.2    |  | Promissory Note, dated December 1, 1998 between NetRadio
Corporation and Edward Tomechko (1)                                                                                        
|       
|       
|       
|       
|10.3    |  | Employment Agreement, dated as of August 1, 1998 between
Net Radio Corporation and Donavan W. Pederson (1)                                                                          
|       
|       
|       
|       
|10.4    |  | Employment Agreement, dated as of August 1, 1998 between
NetRadio Corporation and David R. Witzig (1)                                                                               
|       
|       
|       
|       
|10.5    |  | Termination Agreement, dated February 25, 1999 between
NetRadio Corporation and Nancy R. Kielty (1)                                                                                 
|       
|       
|       
|       
|10.6    |  | Agreement and Plan of Reorganization, dated March 7, 1997,
by and among NetRadio Nevada, Navarre and NetRadio Corporation (2)                                                       
|       
|       
|       
|       
|10.7    |  | Stock Purchase Agreement, dated as of March 7, 1997, by and
among ValueVision, NetRadio, Navarre and Net Radio Nevada (2)                                                           
|       
|       
|       
|       
|10.8    |  | Conversion Agreement, dated March 20, 1997 between
ValueVision and Navarre (2)                                                                                                      
|       
|       
|       
|       
|10.9    |  | Waiver of Certain Provisions of the Stock Purchase
Agreement dated as of March 7, 1997, dated as of February 26, 1999
by and among ValueVision, Navarre and NetRadio Corporation (1)
|       
|       
|       
|       
|10.10   |  | Fulfillment Agreement, dated as of December 1, 1998
between Navarre and NetRadio Corporation (1)                                                                                    
|       
|       
|       
|       
|10.11   |  | License Agreement, dated as of September 3, 1998 between
NetRadio Corporation and Real Networks (1)                                                                                 
|       
|       
|       
|       
|10.12   |  | RealNetworks Presets Agreement, dated as of May 10, 1999
between RealNetworks, Inc., and NetRadio Corporation (1)                                                                   
|       
|       
|       
|       
|10.13   |  | License Agreement, dated June 7, 1999 between NetRadio and
RealNetworks (1)                                                                                                         
|       
|       
|       
|       
|10.14   |  | Office Lease Agreement, dated May 31, 1996 between
Riverplace, Inc. and NetRadio Corporation (1)                                                                                    
|       
|       
|       
|       
|10.15   |  | Storage Lease Agreement, dated April 5, 1996 between
Riverplace, Inc. and NetRadio Corporation (1)                                                                                  
|       
|       
|       
|       
|10.16   |  | Third Amendment to Lease dated March 27, 1999 between
Riverplace, Inc. and NetRadio Corporation (1)                                                                                 
|       
|       
|       
|       
|10.17   |  | Multiple Advance Term Note, dated March 1, 1999 of
NetRadio Corporation to Navarre (1)                                                                                              

22



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##### Table of Contents



|        |  |                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------
|Exhibit
|No.     |  | Description                                                                                                               
|        |  |                                                                                                                           
|       
|       
|       
|       
|10.18   |  | NetRadio Corporation 1998 Stock Option and Incentive Plan
(1)                                                             
|       
|       
|       
|       
|10.19   |  | Form of NetRadio Stock Option Agreement under the 1998
Stock Option and Incentive Plan (1)                                
|       
|       
|       
|       
|10.20   |  | Separation Agreement, dated as of March 2, 1999 between
Navarre and NetRadio Corporation (1)                              
|       
|       
|       
|       
|10.21   |  | Order Fulfillment Agreement dated as of March 2, 1999
between Valley Media and NetRadio Corporation (1)                   
|       
|       
|       
|       
|10.22   |  | Agreement between AT&T and NetRadio Corporation, dated
March 12, 1999 (1)                                                 
|       
|       
|       
|       
|10.23   |  | Termination Agreement, dated April 29, 1999 between
NetRadio Corporation and Michael P. Wise (1)                          
|       
|       
|       
|       
|10.24   |  | Termination Agreement, dated July 26, 1999 between
NetRadio Corporation and Richard W. Hailey (1)                         
|       
|       
|       
|       
|10.25   |  | Severance Agreement, dated August 24, 1999 between
NetRadio and Jan Andersen (1)                                          
|       
|       
|       
|       
|10.26   |  | Office Lease Agreement, dated as of March 13, 2000 between Duke-Weeks
Realty Limited Partnership and NetRadio Corporation.
|       
|       
|       
|       
|10.27   |  | Promotion and Support Agreement, dated November 23, 1999 between
Microsoft Corporation and NetRadio Corporation.          
|       
|       
|       
|       
|24.1    |  | Power of Attorney (included on signature page)                                                                            
|       
|       
|       
|       
|27.1    |  | Financial Data Schedule                                                                                                   



---

|(1) |  | Incorporated by reference to the Registrants previously filed Form S-1
Registration Statement No. 333-73261
|--- |  | ------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the Form 10-K of Navarre for the fiscal year
ended, March 31, 1997             
|   
|   
|   
|   
|(b) |  | Reports on Form 8-K.                                                                                        

The Registrant did not file any reports on Form 8-K for the quarter ended
December 31, 1999.

23



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##### Table of Contents



SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|      |  |                |  |                     
|----- |  | -------------- |  | --------------------
|Date: |  | March 30, 2000 |  | NetRadio Corporation



| | By /s/ Edward A. Tomechko
| | -------------------------

| | Edward A. Tomechko, Chief
Executive Officer
| | -------------------------------------------

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Edward A. Tomechko and Michael P. Wise, with
full power to each to act without the other, his or her true and lawful
attorney-in-fact and agent with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of NetRadio Corporation (the Company) for the
Companys year ended December 31, 1999, and any or all amendments to said
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and to file the same with such other authorities as necessary, granting unto
each such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that each such
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has also been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

|                                               |  |                                                                               |  |                |  | 
|---------------------------------------------- |  | ----------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                           |  | Title                                                                         |  | Date          
|                                               |  |                                                                               |  |               
|By /s/ Edward A. Tomechko
Edward A. Tomechko   |  | Chief Executive Officer,
President and Director
(Principal Executive Officer) |  | March 30, 2000
|                                              
|By /s/ Michael P. Wise
Michael P. Wise         |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)          |  | March 30, 2000
|                                              
|By /s/ Eric H. Paulson
Eric H. Paulson         |  | Chairman of the Board                                                         |  | March 30, 2000
|                                              
|By /s/ Donavan W. Pederson
Donavan W. Pederson |  | Director                                                                      |  | March 30, 2000
|                                              
|By /s/ James Caparro
James Caparro             |  | Director                                                                      |  | March 30, 2000
|                                              
|By /s/ Charles E. Cheney
Charles E. Cheney     |  | Director                                                                      |  | March 30, 2000
|                                              
|By /s/ Marc H. Kalman
Marc H. Kalman           |  | Director                                                                      |  | March 30, 2000
|                                              
|By /s/ Gene McCaffery
Gene McCaffery           |  | Director                                                                      |  | March 30, 2000

24



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TABLE OF CONTENTS



|                                  |  |  |  |  |  |  |  | 
|--------------------------------- |  |  |  |  |  |  |  | 
|Report of Independent Auditors   
|Balance Sheets                   
|Statements of Operations         
|Statement of Shareholders Equity
|Statements of Cash Flows         
|Notes to Financial Statements    



---



NetRadio Corporation and Predecessor

Financial Statements

Years ended December 31, 1999 and 1998
and the Periods January 1, 1997 through
March 20, 1997 and March 21, 1997
through December 31, 1997

Contents

|                                  |  |    
|--------------------------------- |  | ---
|Report of Independent Auditors    |  | F-2
|                                 
|                                 
|                                 
|                                 
|Audited Financial Statements     
|                                 
|                                 
|                                 
|                                 
|Balance Sheets                    |  | F-3
|                                 
|                                 
|                                 
|                                 
|Statements of Operations          |  | F-4
|                                 
|                                 
|                                 
|                                 
|Statement of Shareholders Equity |  | F-5
|                                 
|                                 
|                                 
|                                 
|Statements of Cash Flows          |  | F-6
|                                 
|                                 
|                                 
|                                 
|Notes to Financial Statements     |  | F-7

F-1



---



##### Table of Contents









Report of Independent Auditors

Board of Directors and Shareholders
NetRadio Corporation

We have audited the accompanying balance sheets of NetRadio Corporation as of
December 31, 1999 and 1998, and the related statements of operations,
shareholders equity (deficit) and cash flows for the years then ended and for
the period from
March 21, 1997 through December 31, 1997 and the statements of operations,
shareholders equity (deficit) and cash flows of the Predecessor for the period
from January 1, 1997 through March 20, 1997. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NetRadio Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended and for the period from March 21, 1997 to
December 31, 1997 and of the Predecessor for the period from January 1, 1997
through March 20, 1997, in conformity with accounting principles generally
accepted in the United States.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
January 21, 2000

F-2



---



##### Table of Contents









NetRadio Corporation







Balance Sheets

|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |            |           | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---------- | ----------- | ---------- | ---- | ---------- | ---------- | --------- | 
|                                                     |                                                                                                                           |                                                                                                      |            | December 31
|                                                     |                                                                                                                           |                                                                                                      |            |            
|                                                     |                                                                                                                           |                                                                                                      |            | 1999        |            | 1998
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |     
|Assets                                              
|                                                    
|                                                    
|                                                    
|                                                    
|Current assets:                                     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash and cash equivalents                                                                                                 |                                                                                                      | $          | 11,721,536  |            |      | $          | 50,756     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Short-term investments                                                                                                    |                                                                                                      | $          | 17,845,905  |            |      | $          |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts receivable, less allowance for doubtful accounts of
$55,000 at December 31, 1999 and $5,000 at December 31, 1998 |                                                                                                      |            | 146,863     |            |      |            | 26,213     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Prepaid advertising                                                                                                       |                                                                                                      |            | 802,793     |            |      |            | 952,793    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Prepaid expenses                                                                                                          |                                                                                                      |            | 97,420      |            |      |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other current assets                                                                                                      |                                                                                                      |            | 372,220     |            |      |            |           |          
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|Total current assets                                 |                                                                                                                           |                                                                                                      | 30,986,737 |             |            |      | 1,029,762  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Property and equipment, net                          |                                                                                                                           |                                                                                                      | 2,626,227  |             |            |      | 881,478    |           
|                                                    
|                                                    
|                                                    
|                                                    
|Note receivable  officer                            |                                                                                                                           |                                                                                                      | 62,141     |             |            |      | 62,549     |           
|                                                    
|                                                    
|                                                    
|                                                    
|Deferred offering costs                              |                                                                                                                           |                                                                                                      |           |             |            |      | 239,643    |           
|                                                    
|                                                    
|                                                    
|                                                    
|Goodwill, net                                        |                                                                                                                           |                                                                                                      | 106,000    |             |            |      | 526,250    |           
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|Total assets                                         |                                                                                                                           | $                                                                                                    | 33,781,105 |             |            | $    | 2,739,682  |           
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|Liabilities and shareholders equity (deficit)      
|                                                    
|                                                    
|                                                    
|                                                    
|Current liabilities:                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts payable                                                                                                          |                                                                                                      | $          | 3,157,622   |            |      | $          | 1,022,639  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accrued expenses                                                                                                          |                                                                                                      |            | 853,436     |            |      |            | 86,649     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Current maturities of capital lease obligations                                                                           |                                                                                                      |            | 115,223     |            |      |            | 96,506    
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|Total current liabilities                            |                                                                                                                           |                                                                                                      | 4,126,281  |             |            |      | 1,205,794  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Note payable                                         |                                                                                                                           |                                                                                                      | 9,596,827  |             |            |      | 5,234,840  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Capital lease obligations, less current portion      |                                                                                                                           |                                                                                                      | 89,630     |             |            |      | 128,564    |           
|                                                    
|                                                    
|                                                    
|                                                    
|Shareholders equity (deficit):                     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common stock, no par value:                                                                                              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                           | Authorized shares  50,000,000                                                                      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                           | Issued and outstanding shares  10,007,900 and 5,922,500
at December 31, 1999 and 1998, respectively |            |             | 40,930,243 |      |            |            | 2,072,643 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accumulated deficit                                                                                                       |                                                                                                      |            | (20,961,876 | )          |      |            | (5,902,159 | )        
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|Total shareholders equity (deficit)                 |                                                                                                                           |                                                                                                      | 19,968,367 |             |            |      | (3,829,516 | )         
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           
|Total liabilities and shareholders equity (deficit) |                                                                                                                           | $                                                                                                    | 33,781,105 |             |            | $    | 2,739,682  |           
|                                                     |                                                                                                                           |                                                                                                      |            |             |            |      |            |           

See accompanying notes.

F-3



---



##### Table of Contents



NetRadio Corporation







Statements of Operations

|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |         | 
|----------------------------------- | -------------------------------- | - | ---------------------- | --------- | ------------ | - | ---------- | --------- | ---- | - | ----------------- | --------- | ------------ | - | ----------- | ------- | 
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   | Predecessor
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |            
|                                    |                                  |   |                        |           |              |   |            |           |      |   | Period from March |           | Period from 
|                                    |                                  |   |                        |           |              |   |            |           |      |   | 21,               |           | January 1,  
|                                    |                                  |   |                        |           |              |   |            |           |      |   | 1997 through      |           | 1997 through
|                                    |                                  |   | Year ended December 31 |           | December 31, |   | March 20, 
|                                    |                                  |   | 1999                   |           | 1998         |   | 1997       |           | 1997
|                                    |                                  |   |                        |           |              |   |            |           |     
|Net revenues:                      
|                                   
|                                   
|                                   
|                                   
|                                    | Product sales                    |   | $                      | 684,144   |              |   | $          | 49,639    |      |   | $                 |          |              |   | $           |        | 
|                                   
|                                   
|                                   
|                                   
|                                    | Internet advertising             |   |                        | 764,712   |              |   |            | 205,423   |      |   |                   |          |              |   |             |        | 
|                                   
|                                   
|                                   
|                                   
|                                    | Miscellaneous                    |   |                        |          |              |   |            |          |      |   |                   | 162,971   |              |   |             | 167,950 | 
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Total net revenues                  |                                  |   | 1,448,856              |           |              |   | 255,062    |           |      |   | 162,971           |           |              |   | 167,950     |        
|                                   
|                                   
|                                   
|                                   
|Cost of revenues                    |                                  |   | 645,625                |           |              |   | 64,825     |           |      |   | 16,989            |           |              |   |            |        
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Gross profit                        |                                  |   | 803,231                |           |              |   | 190,237    |           |      |   | 145,982           |           |              |   | 167,950     |        
|                                   
|                                   
|                                   
|                                   
|Operating expenses:                
|                                   
|                                   
|                                   
|                                   
|                                    | Operations and technical support |   |                        | 7,368,185 |              |   |            | 1,635,160 |      |   |                   | 672,061   |              |   |             |        | 
|                                   
|                                   
|                                   
|                                   
|                                    | Sales and marketing              |   |                        | 4,430,063 |              |   |            | 273,426   |      |   |                   | 160,748   |              |   |             | 53,036  | 
|                                   
|                                   
|                                   
|                                   
|                                    | General and administrative       |   |                        | 3,253,668 |              |   |            | 2,234,451 |      |   |                   | 1,267,879 |              |   |             | 851,688 | 
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Total operating expenses            |                                  |   | 15,051,916             |           |              |   | 4,143,037  |           |      |   | 2,100,688         |           |              |   | 904,724     |        
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Loss from operations                |                                  |   | (14,248,685            | )         |              |   | (3,952,800 | )         |      |   | (1,954,706        | )         |              |   | (736,774    | )      
|                                   
|                                   
|                                   
|                                   
|Other (income) expense:            
|                                   
|                                   
|                                   
|                                   
|                                    | Interest (income)                |   |                        | (107,941  | )            |   |            |          |      |   |                   |          |              |   |             |        | 
|                                   
|                                   
|                                   
|                                   
|                                    | Interest expense                 |   |                        | 857,466   |              |   |            | 23,883    |      |   |                   | 32,277    |              |   |             | 17,694  | 
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Net loss                            |                                  | $ | (14,998,210            | )         |              | $ | (3,976,683 | )         |      | $ | (1,986,983        | )         |              | $ | (754,468    | )      
|                                    |                                  |   |                        |           |              |   |            |           |      |   |                   |           |              |   |             |        
|Loss per share  basic and diluted  |                                  | $ | (2.21                  | )         |              | $ | (.67       | )        
|                                    |                                  |   |                        |           |              |   |            |          
|Weighted average shares outstanding |                                  |   | 6,787,995              |           |              |   | 5,899,167  |          
|                                    |                                  |   |                        |           |              |   |            |          

See accompanying notes.

F-4



---



##### Table of Contents



NetRadio Corporation







Statement of Shareholders Equity

|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |             |  
|-------------------------- | ---------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- | - | ---------- | ---------- | ------------ | - | ---------- | ---------- | ----- | - | ----------- | ----------- | - | - | -------- | ------- |  | - | ---------- | ----------- | -
|                           |                                                                              |  | Common Stock |            | Additional
|                           |                                                                              |  |              |            | Paid-In    |   | Retained   |            | Subscription
|                           |                                                                              |  | Shares       |            | Amount     |   | Capital    |            | Earnings     |   | Receivable |            | Total
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |      
|Predecessor               
|                          
|                          
|                          
|                          
|Balance, December 31, 1996 |                                                                              |  | 5,254,060    |            |            | $ | 52,541     |            |              | $ | 2,397,278  |            |       | $ | (2,327,734  | )           |   | $ | (658,765 | )       |  | $ | (536,680   | )          
|                          
|                          
|                          
|                          
|                           | Net loss                                                                     |  |              |           |            |   |            |           |              |   |            |           |       |   |             | (754,468    | ) |   |          |        |  |   |            | (754,468    | )
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            
|Balance, March 20, 1997    |                                                                              |  | 5,254,060    |            |            |   | 52,541     |            |              |   | 2,397,278  |            |       |   | (3,082,202  | )           |   |   | (658,765 | )       |  |   | (1,291,148 | )          
|                          
|                          
|                          
|                          
|The Company               
|                          
|                          
|                          
|                          
|                           | Record effect of acquisition
by Navarre                                      |  |              | (5,244,060 | )          |   |            | (52,541    | )            |   |            | (2,397,278 | )     |   |             | 3,082,202   |   |   |          | 658,765 |  |   |            | 1,291,148   |  
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            
|Balance, March 21, 1997    |                                                                              |  | 10,000       |            |            |   |           |            |              |   |           |            |       |   |            |             |   |   |         |         |  |   |           |            
|                          
|                          
|                          
|                          
|                           | Stock issued for cash and
advertising rights                                 |  |              | 1,765      |            |   |            | 2,000,000  |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 2,000,000   |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                                     |  |              |           |            |   |            |           |              |   |            |           |       |   |             | (1,986,983  | ) |   |          |        |  |   |            | (1,986,983  | )
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            
|Balance, December 31, 1997 |                                                                              |  | 11,765       |            |            |   | 2,000,000  |            |              |   |           |            |       |   | (1,986,983  | )           |   |   |         |         |  |   | 13,017     |            
|                          
|                          
|                          
|                          
|                           | Stock split                                                                  |  |              | 5,870,735  |            |   |            |           |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            |            |  
|                          
|                          
|                          
|                          
|                           | Stock issued                                                                 |  |              | 40,000     |            |   |            | 65,600     |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 65,600      |  
|                          
|                          
|                          
|                          
|                           | Stock option compensation                                                    |  |              |           |            |   |            | 20,500     |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 20,500      |  
|                          
|                          
|                          
|                          
|                           | Notes forgiven by shareholders                                               |  |              |           |            |   |            | 48,050     |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 48,050      |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                                     |  |              |           |            |   |            |           |              |   |            |           |       |   |             | (3,976,683  | ) |   |          |        |  |   |            | (3,976,683  | )
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            
|Balance, December 31, 1998 |                                                                              |  | 5,922,500    |            |            |   | 2,134,150  |            |              |   |           |            |       |   | (5,963,666  | )           |   |   |         |         |  |   | (3,829,516 | )          
|                          
|                          
|                          
|                          
|                           | Stock issued in initial
public offering, net of
offering costs of $1,353,432 |  |              | 3,750,000  |            |   |            | 31,882,788 |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 31,882,788  |  
|                          
|                          
|                          
|                          
|                           | Conversion of debt to common
stock                                           |  |              |           |            |   |            | 5,234,840  |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 5,234,840   |  
|                          
|                          
|                          
|                          
|                           | Stock option compensation                                                    |  |              |           |            |   |            | 1,113,625  |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 1,113,625   |  
|                          
|                          
|                          
|                          
|                           | Stock options exercised                                                      |  |              | 335,400    |            |   |            | 564,840    |              |   |            |           |       |   |             |            |   |   |          |        |  |   |            | 564,840     |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                                     |  |              |           |            |   |            |           |              |   |            |           |       |   |             | (14,998,210 | ) |   |          |        |  |   |            | (14,998,210 | )
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            
|Balance, December 31, 1999 |                                                                              |  | 10,007,900   |            |            | $ | 40,930,243 |            |              | $ |           |            |       | $ | (20,961,876 | )           |   | $ |         |         |  | $ | 19,968,367 |            
|                           |                                                                              |  |              |            |            |   |            |            |              |   |            |            |       |   |             |             |   |   |          |         |  |   |            |            

See accompanying notes.

F-5



---



##### Table of Contents



NetRadio Corporation







Statements of Cash Flows

|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |   |             |         |  
|--------------------------------------------------------------------------- | ------------------------------------------ | -------------------------------------------- | -------------------- | --------- | ---------------------- | --------- | ------------ | ------ | --------- | ------- | ---------- | --------- | ----------------- | -------- | ------------ | - | ----------- | ------- | -
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |   | Predecessor
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |   |            
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           | Period from March |          | Period from 
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           | 21,               |          | January 1,  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           | 1997 through      |          | 1997 through
|                                                                            |                                            |                                              |                      |           | Year ended December 31 |           | December 31, |        | March 20,
|                                                                            |                                            |                                              |                      |           | 1999                   |           | 1998         |        | 1997      |         | 1997      
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |           
|Operating activities                                                       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                            | $                                            | (14,998,210          | )         |                        | $         | (3,976,683   | )      |           | $       | (1,986,983 | )         |                   | $        | (754,468     | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net cash used
in operating activities:
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            | Depreciation and amortization                |                      |           | 1,347,067              |           |              |        | 843,103   |         |            |           | 648,280           |          |              |   | 98,474      |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            | Stock option compensation                    |                      |           | 1,113,625              |           |              |        | 20,500    |         |            |           |                  |          |              |   |            |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            | Changes in operating assets and liabilities:
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            |                                              | Accounts receivable  |           |                        | (120,650  | )            |        |           | (17,129 | )          |           |                   | 16,896   |              |   |             | (22,480 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            |                                              | Prepaid expenses     |           |                        | 52,580    |              |        |           | 47,207  |            |           |                   |         |              |   |             |        |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            |                                              | Accounts payable     |           |                        | 2,134,983 |              |        |           | 285,339 |            |           |                   | (780,100 | )            |   |             | 757,612 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            |                                              | Accrued expenses     |           |                        | 766,787   |              |        |           | 25,748  |            |           |                   | (5,243   | )            |   |             | (97,864 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                            |                                              | Other current assets |           |                        | (372,220  | )            |        |           |        |            |           |                   |         |              |   |             |        |  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Net cash used in operating activities                                       |                                            |                                              | (10,076,038          | )         |                        |           | (2,771,915   | )      |           |         | (2,107,150 | )         |                   |          | (18,726      | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Investing activities                                                       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Notes receivable  officer                                                  |                                            |                                              | 408                  |           |                        |           | (62,549      | )      |           |         |           |           |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Purchases of property and equipment                                         |                                            |                                              | (2,589,391           | )         |                        |           | (843,700     | )      |           |         | (12,703    | )         |                   |          | 1,300        |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Purchases of short-term
investments                                         |                                            |                                              | (19,803,078          | )         |                        |           |             |        |           |         |           |           |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Sale of short-term investments                                              |                                            |                                              | 1,957,173            |           |                        |           |             |        |           |         |           |           |                   |          |             |  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Net cash (used in) provided by investing activities                         |                                            |                                              | (20,434,888          | )         |                        |           | (906,249     | )      |           |         | (12,703    | )         |                   |          | 1,300        |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Financing activities                                                       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from notes payable                                                 |                                            |                                              |                     |           |                        |           |             |        |           |         |           |           |                   |          | 36,879       |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Payments on notes payable                                                   |                                            |                                              |                     |           |                        |           | (9,836       | )      |           |         | (68,994    | )         |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Payments on capital lease obligations                                       |                                            |                                              | (102,392             | )         |                        |           | (113,983     | )      |           |         | (41,977    | )         |                   |          | (42,848      | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Deferred offering costs                                                     |                                            |                                              |                     |           |                        |           | (239,643     | )      |           |         |           |           |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from stock issuances                                               |                                            |                                              | 564,840              |           |                        |           | 65,600       |        |           |         | 1,000,000  |           |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Mandatory convertible equity                                                |                                            |                                              |                     |           |                        |           |             |        |           |         |           |           |                   |          | (45,755      | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from initial public offering, net of
offering costs                |                                            |                                              | 32,122,431           |           |                        |           |             |        |           |         |           |           |                   |          |             |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Advances from Navarre                                                       |                                            |                                              | 9,596,827            |           |                        |           | 4,022,529    |        |           |         | 1,212,311  |           |                   |          |             |  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Net cash provided by (used in) financing activities                         |                                            |                                              | 42,181,706           |           |                        |           | 3,724,667    |        |           |         | 2,101,340  |           |                   |          | (51,724      | )
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Net increase (decrease) in cash and cash equivalents                        |                                            |                                              | 11,670,780           |           |                        |           | 46,503       |        |           |         | (18,513    | )         |                   |          | (69,150      | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents at beginning of period                            |                                            |                                              | 50,756               |           |                        |           | 4,253        |        |           |         | 22,766     |           |                   |          | 91,916       |  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Cash and cash equivalents at end of period                                  |                                            | $                                            | 11,721,536           |           |                        | $         | 50,756       |        |           | $       | 4,253      |           |                   | $        | 22,766       |  
|                                                                            |                                            |                                              |                      |           |                        |           |              |        |           |         |            |           |                   |          |              |  
|Supplemental cash flow information                                         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Significant noncash investing and financing
activity:                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Fixed assets acquired under capital lease  |                                              | $                    | 82,175    |                        |           | $            | 25,078 |           |         | $          |          |                   |          | $            |  |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Conversion of note payable to common stock |                                              |                      | 5,234,840 |                        |           |              |       |           |         |            |          |                   |          |              |  |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes forgiven by shareholders             |                                              |                      |          |                        |           |              | 48,050 |           |         |            |          |                   |          |              |  |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Stock issued for advertising rights        |                                              |                      |          |                        |           |              |       |           |         |            | 1,000,000 |                   |          |              |  |            

See accompanying notes.

F-6



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##### Table of Contents



NetRadio Corporation and Predecessor







Notes to Financial Statements

Years ended December 31, 1998 and 1999

1. Organization and Summary of Significant Accounting Policies

Description of Business

NetRadio Corporation (the Company) is a leading broadcaster of originally
programmed audio entertainment over the Internet through its Web site,
www.netradio.com. The Company uses content to attract a large, diverse audience
and retain them on site for extended periods of time. The Companys unique
listeners can access more than 100 channels of music and information on demand,
24 hours a day, seven days a week.

The Company currently generates revenue through e-commerce and advertising
opportunities. E-commerce revenue consists of sales of audio merchandise
through the Companys on-line store, CDPoint. With the Companys
on-screen player, listeners can see the title and artist of every song as it
plays. Users can click at any time to seamlessly purchase what they are hearing
from an inventory of more than 250,000 music titles and one million sound
samples. Advertising revenue consists of banner ads placed on the Companys Web
pages and audio spots incorporated into its audio programming. Through the
Companys music and information channels, it provides advertising and marketing
partners with the ability to reach focused segments of users defined by
specific demographic and lifestyle characteristics. In addition, the Companys
site allows advertisers to utilize the combined strength of audio messaging
with banner advertising, thus closing the loop between message and action.

The Companys business is characterized by rapid technology change, new product
development and evolving industry standards. Inherent in the Companys business
are various risks and uncertainties, including its limited operating history,
unproven business model and the limited history of commerce and advertising on
the Internet. The Companys success may depend in part upon the emergence of
the Internet as a communication medium, prospective product development efforts
and the acceptance of the Companys solutions by the marketplace.

F-7



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Basis of Presentation

Net Radio Corporation, Minnesota commenced operations on March 21, 1997 upon
acquiring the former Net Radio Corporation, Nevada (Predecessor). Net Radio
Corporation, Minnesota individually or collectively with the Predecessor is
hereafter referred to as the Company.

On March 21, 1997, Navarre Corporation, which already held a 50% interest of
the Predecessor, acquired the remaining outstanding shares of the Predecessor
by merging it into NetRadio. In connection with the merger, all outstanding
common stock of the Predecessor was canceled, leaving Navarre as the owner of
all of the 10,000 outstanding shares of NetRadio. In connection with the
acquisition, Navarre issued 125,000 shares of its common stock to shareholders
and affiliates of the Predecessor and agreed to issue an additional 2,075,000
shares contingent upon NetRadio achieving specified levels of sales and profits
in the two years following the transaction. NetRadio did not achieve the levels
of sales or profits targeted in the agreement with Navarre and no additional
shares were issued. The acquisition was accounted for as a purchase. Goodwill
of $1,263,000 recognized at the time of the acquisition by Navarre has been
pushed down to NetRadio for financial reporting purposes.

Financial information for the Predecessor at dates and for periods prior to
March 21, 1997 are included at the Predecessors historical cost basis.
Accordingly, the period from January 1, 1997 to March 20, 1997 is not
comparable to the periods after March 20, 1997.

Cash and Cash Equivalents

The Company considers all short-term investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.

Short-term Investments

Short-term investments consist of U.S. Government obligations and
corporate debt securities with maturities of less than one year.
Management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Management has classified
the debt securities as available for sale. Available for sale
securities are carried at face value with the unrealized gains and
losses, net of tax, reported as a separate component of shareholder's
equity. At December 31, 1999, the fair value of the Company's
investments approximates cost.

F-8



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Equipment under capital leases is
stated at the present value of minimum lease payments and is amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

Income Taxes

The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is

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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

recognized in results of operations in the period that the tax change occurs.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.

During the periods March 21, 1997 through March 31, 1998, Net Radio
Corporation, Minnesota was included in the consolidated federal and state
income tax returns of its parent company, Navarre. The tax benefit of net
operating losses of Net Radio Corporation, Minnesota during that period have
been retained by Navarre, and no benefit has been shown on NetRadio since it
would not have been able to recognize any benefit on a stand-alone basis.

Revenue Recognition

The Companys revenues are derived from the sale of audio merchandise at its
online store and Web site banner and audio advertisements. Product sales,
including shipping and handling, are recognized in the period that the
merchandise is shipped to the customer. Advertising revenues are recognized in
the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. Company obligations arising from prepayment of
advertising fees are recorded as deferred revenue. There were no
deferred prepaid
advertising fees at December 31, 1999 and 1998.

Promotional revenues consisted of payments from third parties for the
distribution of coupons and other promotional material. Promotional revenues
were recognized at the time the associated services were completed. Collection
of these revenues occurred through a chargeback, or credit, against the
advances from Navarre. Promotional revenue was included in miscellaneous
revenue in the statement of operations.

Internal Software Development Costs

Software development costs incurred through outside contractors, consisting of
costs to develop, test and upgrade the Companys Web site and systems, are
capitalized and amortized over the estimated useful life of the software,
typically three years, in accordance with AICPA Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.

F-10



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

1. Organization and Summary of Significant Accounting Policies (continued)

Advertising Expenses

Advertising expenses are capitalized during the production phase of specific
commercials or campaigns and charged to operations at the time the campaign is
initially presented to the audience. In addition, television advertising time
contributed by ValueVision International, Inc. (see Note 7) is charged to
operations as the advertising time is used. Advertising expenses, including
ValueVision charges, were $2,510,313, $262,820, $90,785 and $10,966 in the
years ended December 31, 1999 and 1998, in the period March 21, 1997 through
December 31, 1997 and in the period January 1, 1997 through March 20, 1997,
respectively.

Goodwill

Goodwill is being amortized on the straight-line method over the estimated
useful life of three years. Accumulated amortization at December 31, 1999 and
1998 was $1,157,250 and $737,000, respectively. The Company periodically
reviews goodwill for impairment in value.

Net Loss Per Common Share

Basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities, while diluted earnings per share gives effect to
dilutive potential common shares. Net loss per share data, for fiscal 1999 and
1998, has been presented on the face of the statements of operations. Prior
year amounts have not been presented on the statement of operations due to the
recapitalization of the Company in 1997. Diluted earnings per share is not
separately presented as the effect of outstanding options and warrants is
antidilutive.

Reclassifications

Certain prior period items have been reclassified to conform to the current
year presentation.

F-11



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

2. Related Party Transactions

Fulfillment Agreement

Navarre and NetRadio have entered into a five-year fulfillment agreement (the
Fulfillment Agreement) under which NetRadio will seek to fulfill its customer
purchase orders for certain products from Navarre before any other fulfillment
source. The Fulfillment Agreement governs and describes order procedures,
product returns, shipping procedures, payments and price lists. The Fulfillment
Agreement may be terminated by either party if, among other things, NetRadio
discontinues online sales of pre-recorded music or if Navarre discontinues
fulfillment services to online customers.

Administrative Services Agreement

From March 1997 through October 1999, Navarre supplied the Company with
executive services, certain administrative services such as human resources,
marketing, accounting, payroll, legal, and employee benefits for a fee of
$5,000 a month. The Company believes amounts charged are representative of the
level of expense that would have been incurred on a stand-alone basis.

Note Payable

Upon the closing of the Companys initial public offering in October 1999,
Navarre contributed $5,234,840 of outstanding advances, relating to 1998 and
prior, to NetRadio. The contribution was recorded as additional equity,
although no shares of NetRadio common stock were issued.

In addition, at the initial public offering closing, the Company and Navarre
entered into a $9,596,827 term note which represents the amount of advances
made in 1999 plus interest accrued on all advances made prior to the initial
public offering closing date. The term note is due on November 14, 2001 and
bears interest at the prime rate plus one-half percent. Accrued interest is
payable monthly.

F-12



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

2. Related Party Transactions (continued)

Other Current Assets

Other current assets consist of 14 pre-set channels on RealNetworks, Inc.s
(RealNetworks) RealPlayer and promotional space on RealNetworks home page
that the Company acquired in May 1999 in exchange for cash and advertising of
RealNetworks on the Companys Web site. The Company acquired the one-year right
to the pre-set channels for $560,000 payable in four quarterly payments.
RealNetworks is also obligated, for one year, to promote the Company twice per
month on RealNetworks home page in exchange for $250,000 in RealNetworks
advertising on the Companys
Web site. These assets are being amortized over one year.

3. Note Receivable  Officer

The note receivable consists of an advance to an officer which is payable on
demand. The note bears interest at 7.75% per year beginning December 1999.
Interest will accrue through December 2001, the duration of the note.

4. Property and Equipment

|                                |  |                        |            |      |  |   |           |  
|------------------------------- |  | ---------------------- | ---------- | ---- |  | - | --------- | -
|                                |  | Year ended December 31
|                                |  |                       
|                                |  | 1999                   |            | 1998
|                                |  |                        |            |     
|Furniture and fixtures          |  | $                      | 130,900    |      |  | $ | 129,534   |  
|                               
|                               
|                               
|                               
|Computer equipment and software |  |                        | 3,998,101  |      |  |   | 1,541,700 |  
|                               
|                               
|                               
|                               
|Office equipment                |  |                        | 22,682     |      |  |   | 11,503    |  
|                                |  |                        |            |      |  |   |           |  
|                                |  |                        | 4,151,683  |      |  |   | 1,682,737 |  
|                               
|                               
|                               
|                               
|Accumulated depreciation        |  |                        | (1,525,456 | )    |  |   | (801,259  | )
|                                |  |                        |            |      |  |   |           |  
|                                |  | $                      | 2,626,227  |      |  | $ | 881,478   |  
|                                |  |                        |            |      |  |   |           |  

F-13



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

5. Notes Payable

In 1998, a note payable with a remaining balance due of $48,050 was forgiven by
the shareholder.

Interest paid was $97,048, $23,442, $29,627 and $9,875 for the year ended
December 31, 1999, for the year ended December 31,
1998, in the period March 21, 1997 through December 31, 1997 and in the period
January 1, 1997 through March 20, 1997.

6. Income Taxes

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $18,800,000. These carryforwards are available to offset future
taxable income, expire beginning 2011, and are subject to the limitations of
Internal Revenue Code Section 382 resulting from changes in ownership.

Components of deferred income taxes are as follows:

|                          |                                  |   |             |           |      |   |            |           | 
|------------------------- | -------------------------------- | - | ----------- | --------- | ---- | - | ---------- | --------- | 
|                          |                                  |   | December 31
|                          |                                  |   |            
|                          |                                  |   | 1999        |           | 1998
|                          |                                  |   |             |           |     
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforwards |   | $           | 6,776,000 |      |   | $          | 1,400,000 | 
|                         
|                         
|                         
|                         
|                          | Stock option compensation        |   |             | 401,000   |      |   |            |          | 
|                         
|                         
|                         
|                         
|                          | Other                            |   |             | 20,000    |      |   |            |          | 
|                          |                                  |   |             |           |      |   |            |          
|Total deferred tax assets |                                  |   | 7,197,000   |           |      |   | 1,400,000  |          
|                         
|                         
|                         
|                         
|Valuation allowance       |                                  |   | (7,197,000  | )         |      |   | (1,400,000 | )        
|                          |                                  |   |             |           |      |   |            |          
|                          |                                  | $ |            |           |      | $ |           |          
|                          |                                  |   |             |           |      |   |            |          

F-14



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

7. Capital Stock

Concurrent with Navarres March 1997 acquisition of NetRadio, ValueVision
International, Inc. (ValueVision) agreed to an investment in NetRadio,
consisting of $1 million in cash and an agreement to provide $2 million worth
of advertising time on television in exchange for 882,500 shares of NetRadio
common stock. ValueVision International is an integrated electronic and print
media direct marketing company and operates a leading television home shopping
network. For financial reporting purposes, the advertising time was
valued at
$1 million at the time of the transaction. Before NetRadio can offer
merchandise not distributed by Navarre or NetRadio prior to March 1997 (music
and software), ValueVision has the right to distribute such merchandise
provided that ValueVision offers NetRadio similar terms as those of another
vendor.

ValueVision also had certain preemptive rights which entitled it to purchase
additional shares of NetRadio securities. If NetRadio achieved net revenues
(excluding revenues from product sales) equal to $3 million in any 12-month
period, NetRadio had the right to require ValueVision to purchase for $500,000,
additional shares of common stock equal to 4.95% of NetRadios outstanding
common stock, and ValueVision had a similar right to purchase 4.95% of the
outstanding common stock for $500,000. NetRadio and ValueVision agreed to
cancel these rights in connection with the issuance of 550,000 shares of
NetRadio for $500,000 concurrent with the closing of an initial public offering
by NetRadio.

8. Stock Options and Grants

All stock option plans prior to the 1998 plan were terminated at the time of
the final acquisition by Navarre Corporation in March 1997. No options were
granted during fiscal 1997.

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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

8. Stock Options and Grants (continued)

In June 1998, the Board of Directors adopted, and the shareholders approved the
NetRadio Corporation 1998 Stock Option and Incentive Plan (the 1998 Stock
Option Plan) pursuant to which officers, employees, consultants, independent
contractors and non-employee directors are eligible to receive options to
purchase shares of NetRadio common stock, stock appreciation rights and awards
of deferred or restricted stock. A total of 1,475,000 shares of common stock
may be issued under the 1998 Stock Option Plan with vesting periods of up to
five years and maximum option terms of ten years. In February 1999, the board
of directors approved an increase in the number of shares reserved under the
1998 Stock Option Plan from 1,475,000 to 2,000,000 shares.

Option activity for the years ended 1999 and 1998 is summarized as follows:

|                             |                 |  |              |           |              |                |         |          |          |   |      |      | 
|---------------------------- | --------------- |  | ------------ | --------- | ------------ | -------------- | ------- | -------- | -------- | - | ---- | ---- | 
|                             |                 |  | Plan Options |           |              |                |         |          | Weighted
|                             |                 |  | Available    |           | Plan Options |                | Average
|                             |                 |  | for Grant    |           | Outstanding  | Exercise Price
|                             |                 |  |              |           |              |               
|Balance on December 31, 1997 |                 |  |             |           |              |                |        |          |          |   |     |     
|                            
|                            
|                            
|                            
|                             | Shares reserved |  |              | 1,475,000 |              |                |         |         |          |   |      |     | 
|                            
|                            
|                            
|                            
|                             | Granted         |  |              | (939,500  | )            |                |         | 939,500  |          |   | $    | 2.27 | 
|                             |                 |  |              |           |              |                |         |         
|Balance on December 31, 1998 |                 |  | 535,500      |           |              |                | 939,500 |          |          | $ | 2.27 |     
|                            
|                            
|                            
|                            
|                             | Shares reserved |  |              | 525,000   |              |                |         |         |         
|                            
|                            
|                            
|                            
|                             | Granted         |  |              | (453,850  | )            |                |         | 453,850  |          |   |      | 7.06 | 
|                            
|                            
|                            
|                            
|                             | Forfeited       |  |              | 65,600    |              |                |         | (65,600  | )        |   |      | 3.87 | 
|                            
|                            
|                            
|                            
|                             | Exercised       |  |              |          |              |                |         | (335,400 | )        |   |      | 1.68 | 
|                             |                 |  |              |           |              |                |         |         
|Balance on December 31, 1999 |                 |  | 672,250      |           |              |                | 992,350 |          |          | $ | 4.52 |     
|                             |                 |  |              |           |              |                |         |         

F-16



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

8. Stock Options and Grants (continued)

The weighted average fair value of options granted in 1999 and 1998 was $3.95
and $1.37, respectively. The exercise price of options outstanding at December
31, 1999 ranged from $1.64 to $11.00 per share. The number of options
exercisable at
December 31, 1999 and 1998 was 78,717 and 117,333, respectively, with a
weighted average remaining contractual life of 6.0 and 6.5 years.

Pro forma information regarding net income (loss) and earnings (loss) per share
is required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for 1999 and 1998,
risk-free interest rate of 4.7%, volatility factor of the expected market price
of the Companys Common stock of .70 and a weighted average expected life of
the option of five years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Companys employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Companys pro
forma information is as follows:

|                                           |  |             |             |      |  |   |            |  
|------------------------------------------ |  | ----------- | ----------- | ---- |  | - | ---------- | -
|                                           |  | December 31
|                                           |  |            
|                                           |  | 1999        |             | 1998
|                                           |  |             |             |     
|Pro forma net loss                         |  | $           | (15,280,016 | )    |  | $ | (4,062,330 | )
|                                          
|                                          
|                                          
|                                          
|Pro forma basic and diluted loss per share |  | $           | (2.25       | )    |  | $ | (.69       | )

F-17



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##### Table of Contents



NetRadio Corporation and Predecessor

Notes to Financial Statements (continued)

8. Stock Options and Grants (continued)

In 1998, the Company granted an option to purchase 20,000 shares of common
stock to a non-employee. The fair value of the option, which was determined to
be $20,500, was expensed at the time of grant.

In March and September 1999, NetRadio recognized $879,625 and $234,000,
respectively, in compensation expense associated with the issuance of incentive
stock options to employees with exercise prices below the estimated fair market
value of the Companys common stock on the date of the grant.

9. Commitments

The Company is obligated under operating and capital leases for office space
and office equipment. Future annual minimum lease payments under leases in
effect at December 31, 1999 are as follows:

| |                                                     |  |           |         |         |  |   |         | 
| | --------------------------------------------------- |  | --------- | ------- | ------- |  | - | ------- | 
| |                                                     |  | Operating |         | Capital
| |                                                     |  |           |         |        
| | 2000                                                |  | $         | 255,731 |         |  | $ | 124,183 | 
|
|
|
|
| | 2001                                                |  |           |        |         |  |   | 96,600  | 
| |                                                     |  |           |         |         |  |   |         | 
| | Total minimum lease payments                        |  | $         | 255,731 |         |  |   | 220,783 | 
| |                                                     |  |           |        
| | Less amount representing interest                   |  |           |         |         |  |   | 15,930  | 
| |                                                     |  |           |         |         |  |   |        
| | Present value of minimum capitalized lease payments |  |           |         |         |  | $ | 204,853 | 
| |                                                     |  |           |         |         |  |   |        

Rent expense under operating leases was $239,954, $134,491, $78,852 and $32,605
for the years ended December 31, 1999 and 1998, in the period March 21, 1997
through December 31, 1997 and in the period January 1, 1997 through March 20,
1997, respectively.

F-18



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##### Table of Contents



Index to Exhibits

|            |  |                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Item                                                                                                               
|            |  |                                                                                                                    
|[10.26]     |  | Lease Agreement by and between Duke-Weeks Realty Limited
Partnership and NetRadio Corporation, dated March 13, 2000
|           
|           
|           
|           
|[10.27]     |  | Promotion and Support Agreement, dated November 23, 1999
between Microsoft Corporation and NetRadio Corporation    
|           
|           
|           
|           
|27.1        |  | Financial Data Schedule