<PAGE>

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

                                   FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act
                                    Of 1934

                 For the quarterly period ended December 31, 1999

                          Commission File No. 0-24671

                                EMUSIC.COM INC.
       (Exact Name of small business issuer as specified in its charter)

          Delaware                                 65-0207877
(State or other jurisdiction of                  (I.R.S. Employer
incorporation or organization)                 Identification Number)

1991 Broadway, 2nd Floor                             94063
Redwood City,  California                          (Zip Code)
(Address of principal executive offices

      Registrant's telephone number, including area code:  (650) 216-0200

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 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
                             --------------           -----------------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:

Common Stock, $0.001 Par Value                   36,835,998
         (Class)                         (Outstanding at January 31, 1999)
<PAGE>

<TABLE>
<CAPTION>
                                EMUSIC.COM INC.
                                   FORM 10-Q
                                     INDEX

                                                                                                Page
                                                                                                ----
PART I - FINANCIAL INFORMATION
<S>      <C>                                                                                     <C>
Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1999 ........     3

         Condensed Consolidated Statements of Operations - three and six months ended
          December 31, 1998 and 1999.........................................................     4

         Condensed Consolidated Statements of Cash Flows - three and six months ended
          December 31, 1998 and 1999.........................................................     5

         Notes to Financial Statements.......................................................     6

Item 2. Management's Discussion and Analysis or Plan of Operation............................    10

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................   27

PART II - OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds............................................   28

Item 4.  Aquisitions..........................................................................   28

Item 6.  Exhibits and Reports on Form 8-K.....................................................   29

Signatures....................................................................................   30
 </TABLE>
<PAGE>

PART I:  FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                EMusic.com Inc.
                        (a development stage enterprise)
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                           December 31, 1999             June 30, 1999
                                                                           -----------------             --------------
Assets
<S>                                                                        <C>                           <C>
Current Assets:
  Cash.........................................................                   $ 63,232                    $ 19,002
  Accounts receivable..........................................                        661                          51
  Prepaid expenses and other assets............................                     12,465                         224
                                                                                  --------                    --------
     Total current assets......................................                     76,358                      19,227

Property and equipment, net....................................                      2,949                       1,076
Music content, net.............................................                     19,462                       8,758
Goodwill and intangible assets, net............................                     56,669                      24,680
Other assets...................................................                        489                         430
                                                                                  --------                    --------
        Total assets...........................................                   $155,927                    $ 54,221
                                                                                  ========                    ========

Liabilities, Redeemable Convertible Preferred Stock and
 Stockholders' Equity
Current Liabilities:
  Accounts payable.............................................                   $    807                    $    637
  Accrued liabilities..........................................                      1,414                       1,679
  Accrued compensation and related benefits....................                        566                           -
  Deferred revenue.............................................                        221                         368
                                                                                  --------                    --------
     Total current liabilities.................................                      3,008                       2,684
                                                                                  --------                    --------

Redeemable Convertible Preferred Series B Stock                                          -                      32,550

Stockholders' Equity:
  Capital stock and additional paid-in capital.................                    230,267                      67,844
  Deficit accumulated during the development stage.............                    (77,348)                    (48,857)
                                                                                  --------                    --------
    Total stockholders' equity.................................                    152,919                      18,987
                                                                                  --------                    --------
       Total liabilities, redeemable convertible Preferred
        Stock and stockholders' equity.........................                   $155,927                    $ 54,221
                                                                                  ========                    ========
</TABLE>

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

                                EMUSIC.COM INC.
                        (a development stage enterprise)
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                      January 8,
                                             Three months        Three months     Six months      Six months             1998
                                                ended               ended           ended           ended           (Inception) to
                                             December 31,       December 31,      December 31,    December 31,       December 31,
                                                1999                1998            1999            1998                1999
                                                ----                ----            ----            ----                ----
<S>                                          <C>             <C>                <C>                 <C>               <C>
Revenues..................................  $    423         $      8           $     603            $     20           $     695
Cost of revenues..........................       147                4                 172                   4                 199
                                            --------          -------            --------             -------            --------
Gross profit..............................       276                4                 431                  16                 496
                                            --------          -------            --------             -------            --------

Operating expenses:
  Product development.....................     5,890              925              11,901               1,592              24,552
  Selling and marketing...................     5,637                               10,408                                  10,964
  General and administrative..............     1,078              205               1,890                 402               3,708
  Amortization of goodwill and intangible
  assets..................................     2,877                                5,160                                   6,842
                                            --------          -------            --------             -------            --------
      Total operating expenses............    15,482            1,130              29,359               1,994              46,066

Operating loss............................   (15,206)          (1,126)            (28,928)             (1,978)            (45,570)
Interest and other income, net............       948                1               1,154                   3               1,476
                                            --------          -------            --------             -------            --------

Net loss..................................  $(14,258)         $(1,125)           $(27,774)            $(1,975)           $(44,094)
                                            --------          -------            --------             -------            --------

Accretion on Preferred Stock.............         --              (25)               (225)                (25)               (472)
Beneficial conversion charge, Preferred
 Stock....................................        --             (144)                 --                (144)            (31,721)
Dividend on Series B Preferred Stock .....        --               --                (492)                ---              (1,061)
                                            --------          -------            --------             -------            --------

Net loss applicable to Common shares......  $(14,258)        $(1,294)           $(28,491)             $(2,144)           $(77,348)
                                            ========         ========           ========              =======            ========
Net loss per Common share-basic and
 diluted..................................  $  (0.47)        $  (0.09)          $  (1.31)             $ (0.15)           $  (5.03)
                                            ========         ========           ========              =======            ========
Weighted average Common shares
 outstanding - basic and diluted..........    30,586           14,581             21,822               14,504              14,661
                                            ========         ========           ========              =======            ========
</TABLE>

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

                                EMUSIC.COM INC.
                        (a development stage enterprise)
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                     (in thousands, except per share data)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                               Six months        Six months       January 8, 1998
                                                                                 ended              ended         (Inception) to
                                                                               December 31,       December 31,      December 31,
                                                                                  1999               1998              1999
                                                                                  ----               ----              ----
<S>                                                                            <C>                <C>                 <C>
Cash flows from operating activities:
   Net loss.................................................................     $(27,774)        $(1,975)          $(44,094)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation..............................................................          480              14                576
  Amortization of intangible assets and trade names.........................        5,160                              6,842
  Loan interest converted into Series B Preferred Stock.....................            -               -                 34
  Amortization of music content.............................................          100                                102
  Issuance of Common Stock in exchange for services.........................            -               -                 13
  Fair value of equity instruments issued to advisors.......................        6,915             630             15,728
  Changes in assets and liabilities, net of effects of acquisition:
     Accounts receivable....................................................         (610)             (4)              (661)
     Prepaid expenses and other assets......................................      (10,236)           (132)           (10,890)
     Accounts payable.......................................................          170              26                386
     Accrued liabilities....................................................       (1,346)              2               (644)
     Accrued compensation and related benefits..............................          197                                367
     Deferred revenue.......................................................          221                                221
                                                                                 ---------        --------          ---------
      Net cash used in operating activities.................................      (27,209)         (1,439)           (32,506)
                                                                                 ---------        --------          ---------

Cash flows from investing activities:
  Purchase of Cductive, net of cash acquired................................          505               -                505
  Purchase of goodwill and intangible assets................................            -               -               (468)
  Purchase of music content.................................................       (9,429)              -            (16,746)
  Purchase of property and equipment........................................       (2,131)            (36)            (3,259)
                                                                                 ---------        --------          ---------
      Net cash used in investing activities.................................      (11,055)            (36)           (19,968)
                                                                                 ---------        --------          ---------
Cash flows from financing activities:
  Proceeds from issuance of Common Stock through public offering............       84,220               -             84,220
  Issuance costs associated with secondary offering.........................       (1,137)              -             (1,137)
  Proceeds from issuance of Common Stock....................................            -             300                301
  Proceeds from issuance of Common Stock issued in connection with merger...            -               -                688
  Proceeds from repayment of employee notes receivable......................            -               -                 10
  Proceeds from issuance of convertible notes...............................            -             513              1,913
  Proceeds from issuance Series A Preferred Stock and warrants..............            -             500                500
  Proceeds from issuance Series B Preferred Stock...........................            -               -             29,800
  Payment of dividend on Series B Preferred Stock...........................       (1,061)              -             (1,061)
  Exercise of stock options.................................................          472               -                472
                                                                                 ---------        --------          ---------
      Net cash provided by financing activities.............................       82,494            1,313           115,706
                                                                                 ---------        --------          ---------

Net increase (decrease) in cash.............................................       44,230             (162)           63,232
Cash at beginning of period.................................................       19,002              510
                                                                                 ---------        --------          ---------
Cash at end of period.......................................................     $ 63,232          $   348          $ 63,232
                                                                                 ---------        --------          ---------
Supplemental disclosure of non-cash transactions:
 Conversion of notes payable into Common Stock..............................     $      -          $     -          $    170
 Issuance of Common Stock for notes receivable..............................     $      -          $     -          $     10
 Accretion of Preferred Stock to redemption value...........................     $    225          $    25          $    472
 Beneficial conversion charge, Preferred Stock..............................     $      -          $   144          $ 31,721
 Conversion of notes payable and interest to Series B Preferred Stock.......     $      -          $     -          $  1,777
 Conversion of Series A Preferred Stock into series B Preferred Stock.......     $      -          $     -          $    182
 Issuance of Common Stock options for assets................................     $      -          $    44          $     44
 Issuance of warrants for music content.....................................     $    985          $     -          $  2,312
 Issuance of Common Stock in conjunction with acquisitions..................     $ 36,849          $     -          $ 50,178
 Issuance of Common Stock to Nordic.........................................     $      -          $     -          $ 11,084
 Conversion of Series B Preferred Stock into Common Stock...................     $ 32,206          $     -          $ 32,206
 Accrual for amount due on content license..................................     $      -          $     -          $    116
</TABLE>
        The accompanying notes are an integral part of these statements.
<PAGE>

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company

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

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


Basis of Presentation

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

All significant intercompany balances and transactions have been eliminated.

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

The financial information as of June 30, 1999 is derived from the Company's
Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1999 as filed with
the Securities Exchange Commission. The interim financial statements presented
herein should be read in conjunction with the financial statements and the notes
thereto included in the Form 10-K.

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

Net Loss per Common Share

The weighted average shares used to compute basic net loss per share include
outstanding shares of Common Stock from the date of issuance, and exclude shares
of Common Stock subject to repurchase by the Company. The calculation of diluted
net loss per share for all periods presented excludes shares of Common Stock
issuable upon exercise of employee stock options and for the six months ended
December 31, 1999 and for the period from January 8, 1998 (Inception) to
December 31, 1999 excludes Common Stock issuable upon the conversion of Series B
Preferred Stock, as their effect would be antidilutive. Therefore, the weighted
average number of shares used in the calculation of basic and dilutive net loss
per Common share is the same. The following table summarizes the computation of
basic and diluted net loss per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                                                       January 8,
                                               Three months       Three months      Six months       Six months          1998
                                                  ended              ended            ended        (Inception) to         to
                                               December 31,       December 31,      December 31,    December 31,      December 31,
                                                  1999               1998               1999            1998              1999
                                                  ----               ----               ----            ----              ----
<S>                                               <C>              <C>              <C>                 <C>           <C>
Net loss......................................... $(14,258)         $(1,125)        $(27,774)            $(1,975)        $(44,094)
                                                  ---------         --------        ---------            --------        --------
Accretion on Preferred Stock.....................        -              (25)            (225)                (25)            (472)
Beneficial conversion charge, Preferred
 Stock...........................................        -             (144)               -                (144)         (31,721)

Dividend on Series B Preferred Stock.............        -                -             (492)                  -           (1,061)
                                                  ---------         --------        ---------            --------        --------

Net loss applicable to Common shares............. $(14,258)         $(1,294)        $(28,491)            $(2,144)        $(77,348)
                                                  ---------         --------        ---------            --------        --------
Net loss per Common share-basic and
 diluted......................................... $  (0.47)         $ (0.09)        $  (1.31)            $ (0.15)          $(5.03)
                                                  =========         ========        =========            ========        ========
Weighted average Common shares
 outstanding - basic and diluted.................   30,586           14,581           21,822              14,504           14,661
                                                  =========         ========        =========            ========        ========
</TABLE>


Warrants of 4,543,000 and 100,000 outstanding as of December 31, 1999 and 1998,
respectively, were excluded from the above calculation as their effect would be
antidilutive for the purposes of the calculation of diluted earnings per share.

In addition, options of 7,877,000 and 3,142,000 outstanding as of December 31,
1999 and 1998, respectively were also excluded from the above calculation as
their effect would be antidilutive for the purposes of the calculation of
diluted earnings per share.

Comprehensive Net Loss

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

Segment information

The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. During all periods presented, the Company operated in a
single business segment, marketing a repertoire of musical recordings offered
for sale to consumers by direct file transfer, or "downloading," over the
Internet. Through December 31, 1999, foreign operations have not been
significant.
<PAGE>

Recent Accounting Pronouncements

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

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Managment
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of the Company.

Note 2 - Mandatorily Redeemable Convertible Preferred Stock

On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of 117,570 shares of Series B Convertible Preferred Stock ("Series B"), which
included the conversion of outstanding convertible notes and shares of Series A
Preferred Stock into Series B Shares. Total proceeds, including proceeds from
the convertible notes were $31,577,000 net of issuance costs of $2,724,000. Each
share of Series B was convertible into 100 shares of the Company's Common Stock.

On September 24, 1999, the Company completed an underwritten public offering,
and consequently the 117,570 shares of Series B were converted to 11,757,000
shares of Common Stock. In conjunction with this conversion, the Company
recorded an addition to Common Stock of $12,000 and an increase to additional
paid in capital of $32,194,000.  During the three months ended December 31,
1999, dividends on the Series B shares of $1,061,000 were paid.

Note 3 - Acquisitions

On December 13, 1999, the Company completed the acquisition of Group K, Inc.
(dba "Cductive") for stock, at which time Cductive became a wholly owned
subsidiary of the Company. The results of Cductive have been included in the
Consolidated Statement of Operations since the date of acquisition. The total
purchase price of $36,849,000 consisted of 2,136,000 shares of the Company's
Common Stock valued at $32,311,000, assumption of outstanding warrants and
options valued at $4,966,000, professional fees of $200,000, assumption of
termination contracts of $115,000, and assumption of net assets of $743,000. The
acquisition has been accounted for using the purchase method of accounting and,
based on a preliminary review, the Company has allocated substantially all of
the purchase price to the acquired goodwill and intangible assets. The Company
has engaged an independent valuations consultant to perform a review of the
Company's preliminary allocation of the purchase price. Any adjustments arising
as a result of their review will be recorded upon its completion. The Company is
amortizing the goodwill and intangible assets over its estimated life of three
years using the straight-line method.

Summarized below are the unaudited pro-forma results of the Company as though
Cductive had been acquired at the beginning of the periods presented.
Adjustments have been made for the estimated increases in amortization relating
to the goodwill and intangible assets acquired and other immaterial pro forma
adjustments (in thousands except per share data).

<TABLE>
<CAPTION>
                                                                     Six months ended          Six months ended
                                                                     December 31, 1999         December 31, 1998
                                                                  -----------------------   -----------------------

<S>                                                               <C>                       <C>
Revenue........................................................                 $    637                   $    50
Net loss.......................................................                  (29,404)                   (8,439)
Net loss per Common share, basic and diluted...................                 $  (0.94)                  $ (0.52)
</TABLE>

The above amounts are based upon certain assumptions and estimates, which the
Company believes are reasonable. The pro forma financial information presented
above is not necessarily indicative of either the results of operations that
<PAGE>

would have occurred had the acquisition taken place at the beginning of the
periods presented or of future results of operations of the combined companies.

During the quarter, the Company announced the acquisition of Tunes.com Inc., of
which the completion of the merger is subject to shareholder approval.
<PAGE>

--------------------------------------------------------------------------------
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
--------------------------------------------------------------------------------

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

In addition to historical statements, this Quarterly Report on Form 10-Q
contains certain forward-looking statements that are subject to certain risks
and uncertainties, which could cause actual results to differ materially from
those stated or implied. Forward-looking statements are those that use the words
"expects," "estimates," "will," "may," "anticipates," "believes" or similar
expressions. These forward-looking statements reflect management's opinions only
as of the date hereof, and the Company assumes no obligation to update this
information. Risks and uncertainties include, but are not limited to, those
discussed below and in the section entitled "Factors That May Affect Our
Results." Other risks and uncertainties are disclosed in the Company's prior SEC
filings.

The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto, included
elsewhere in this report.


RESULTS OF OPERATIONS

The Company was incorporated on January 8, 1998 and is a development stage
enterprise that has incurred costs to organize and develop an Internet website
through which it will conduct its business. The Company began selling musical
recordings over the Internet in July 1998. The Company may experience
significant fluctuations in operating results in future periods due to a variety
of factors, including, but not limited to, market acceptance of the Internet as
a medium for consumers to obtain downloadable sound recordings, the Company's
ability to create, license, and deliver compelling music-related content, the
Company's ability to obtain additional financing in a timely manner and on terms
favorable to the Company, the Company's ability to successfully integrate
prospective asset acquisitions into its existing business operations, the level
of traffic on the Company's website, intense competition from other providers of
music-related content over the Internet, the entrance of established music
and/or software companies into the on-line music industry, delays or errors in
the Company's ability to effect electronic commerce transactions, the Company's
ability to upgrade and develop its systems and infrastructure in a timely and
effective manner, technical difficulties, system downtime or Internet brownouts,
the Company's ability to attract customers at a steady rate and maintain
customer satisfaction, seasonality of the recorded music industry, seasonality
of advertising sales, Company promotions and sales programs, the amount and
timing of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure and the implementation of
marketing programs, key agreements and strategic alliances, the number of
recorded music releases introduced during the period, the level of returns
experienced by the Company and general economic conditions and economic
conditions specific to the Internet, on-line commerce and the recorded music
industry.

We have experienced significant growth since inception and in comparison to the
three months ended December 31, 1998. The following table (in thousands, except
per share data) and analysis sets forth a comparison of the three months and six
months ended December 31, 1999 and December 31, 1998.
<PAGE>

<TABLE>
<CAPTION>
                                                        Three months        Three months           Six months          Six months
                                                            ended               ended                 ended              ended
                                                         December 31,        December 31,         December 31,        December 31,
                                                            1999                1998                  1999                1998
                                                            ----                ----                  ----                ----
<S>                                                   <C>                 <C>                    <C>                   <C>

Revenues..............................................        $    423             $     8             $    603        $      20
Cost of revenues......................................             147                   4                  172                4
                                                              --------             -------             --------         --------
Gross margin..........................................              65%                 50%                  71%             80%
Product development...................................           5,890                 925               11,901            1,592
Selling and marketing.................................           5,637                  --               10,408
General and administrative............................           1,078                 205                1,890              402
Amortization of trade names...........................           2,877                  --                5,160
                                                              --------             -------             --------         --------
Total operating expenses..............................          15,482               1,130               29,359           1 ,994
Operating loss........................................         (15,206)             (1,126)             (28,928)          (1,978)
Interest and other income, net........................             948                   1                1,154                3
                                                              --------             -------             --------         --------
Net loss..............................................        $(14,258)            $(1,125)            $(27,774)         $(1,975)
                                                              --------             -------             --------         --------
Accretion on Preferred Stock..........................            --                 (25)                (225)             (25)
Beneficial conversion charge, Preferred Stock.........            --                (144)                  --             (144)
Dividend on Series B Preferred Stock (Note 3).........            --                  --                 (492)              --
                                                              --------             -------             --------         --------
Net loss applicable to Common shares..................        $(14,258)            $(1,294)            $(28,491)         $(2,144)
                                                              ========             =======             =========        =========
Net loss per Common share-basic and diluted...........          $(0.47)             $(0.09)              $(1.31)         $ (0.15)
                                                              ========             =======             ========         =========
Weighted average Common shares outstanding - basic and          30,586              14,581               21,822           14,504
                                                              ========             =======             ========         ========
</TABLE>


Net Revenues

EMusic.com is a development stage enterprise that introduced its Internet retail
website, www.emusic.com, in April 1998 and began selling digital, downloadable
musical recordings and physical merchandise in July 1998. Net revenues are
comprised of advertising and downloadable music recordings and for the period
ended December 31, 1998 also included sales of physical merchandise. Revenues
for the quarters ended December 31, 1999 and 1998 were $423,000 and $8,000,
respectively. Revenues for the six months ended December 31, 1999 and 1998 were
$603,000 and $20,000, respectively. Revenues increased during periods primarily
as a result of increased downloadable music sales generated from the greater
amount of content available on the Company's website as well as increased
advertising resulting from increased page views.

Cost of Revenues

Cost of revenues include the cost of merchandise sold, if any, credit card
processing fees, and royalties on downloadable music. Cost of revenues for the
quarters ended December 31, 1999 and 1998 were $147,000 and $4,000,
respectively. Cost of revenues for the six months ended December 31, 1999 and
1998 were $172,000 and $4,000, respectively. Gross margins as a percentage of
sales for the quarters ended December 31, 1999 and 1998 were 65% and 50%,
respectively. Gross margins as a percentage of sales for the six months ended
December 31, 1999 and 1998 were 71% and 80%, respectively. Gross margins as a
percentage of sales increased significantly when comparing the quarters ended
December 31, 1999 and 1998 due to increased sales of higher margin advertising.
Gross margins as a percentage of sales decreased when comparing the six months
ended December 31, 1999 and 1998 due to the quarter ended September 30, 1998
consisting of only higher margin advertising.

Product Development Expenses

Product development expenses consist principally of website development,
software engineering, audio production, graphic design, certain non-recoverable
advances to artists, artist development, telecommunications charges, and the
cost of development activities which support the Company's music distribution
business, including related salaries, rent and depreciation. Product development
expenses for the quarters ended December 31, 1999 and 1998 were $5,890,000 and
$925,000, respectively. Product development expenses for the six months ended
December 31, 1999 and 1998 were
<PAGE>

$11,901,000 and $1,592,000, respectively. The increases for the three and six
month periods reflected an increase in stock compensation and an increase in the
Company's product development efforts, particularly in software engineering,
graphic design, and development of the infrastructure and "e-commerce" required
to deliver downloadable music from the Company's Internet website. Product
development expenses included charges associated with stock warrants and stock
options, granted to advisors of $2,955,000 and $534,000 during the quarters
ended December 31, 1999 and 1998, respectively, and $6,915,000 and $630,000
during the six months ended December 31, 1999 and 1998, respectively. The
Company currently plans to continue aggregating a compelling repertoire of
musical recordings available for customer downloads, and therefore expects
product development expenses will continue to increase in future periods.

Selling and Marketing Expenses

Selling and marketing expenses for the quarter and six months ended December 31,
1999 were $5,637,000 and $10,408,000, respectively. There were no similar
expenses during the quarter and six months ended December 31, 1998. The increase
in selling and marketing expenses from year to year reflects the launch of an
extensive marketing campaign to establish the brand name "EMusic." In addition
the Company implemented certain sales and marketing programs designed to promote
its website storefront through strategic alliances, targeted advertising, direct
promotion, trade shows and other such activities designed specifically to
attract new customers.

General and Administrative Expenses

General and administrative expenses consist primarily of executive management,
finance, legal and administrative costs. General and administrative expenses for
the quarters ended December 31, 1999 and 1998 were $1,078,000 and $205,000,
respectively. General and administrative expenses for the six months ended
December 31, 1999 and 1998 were $1,890,000 and $402,000, respectively. General
and administrative expenses increased principally as a result of additional
headcount required to manage the Company's growing operations. The Company
expects general and administrative expenses to increase as the Company expands
its staff and incurs additional costs related to the growth of its business.

Amortization of Goodwill and Intangible Assets

During 1999, we purchased the "EMusic," "IUMA" and certain other trade names for
a combined total of $26,362,000 in cash and stock. We began amortizing these
costs over three-year lives, resulting in an amortization expense of $2,283,000
per quarter through the year ending June 30, 2002.

On December 13, 1999, we purchased Group K, Inc. (dba "Cductive") for a total of
$36,849,000 in stock. We began amortizing this cost over a three-year life,
resulting in an amortization expense of $594,000 for the quarter and six months
ended December 31, 1999.

The combined amortization expenses for the quarter and six months ended December
31, 1999 were $2,877,000 and $5,160,000, respectively. There was no similar
expenses for the quarter and six months ended December 31, 1998.

Operating Expenses Exclusive of Cductive and Non-cash Charges

Total operating expenses exclusive of Cductive and non-cash charges for the
quarters ended December 31, 1999 and 1998 were $9,160,000 and $587,000,
respectively. Cductive and non-cash charges for the quarter ended December 31,
1999 included charges related to Cductive for the period from acquisition to
December 31, 1999 of $210,000, depreciation of $280,000, stock compensation
charges of $2,955,000 and amortization of trade names of $2,877,000. During the
quarter ending December 31, 1998 non-cash charges included depreciation of
$9,000 and stock compensation of $534,000.

Total operating expenses exclusive of Cductive and non-cash charges for the six
months ended December 31, 1999 and 1998 were $16,594,000 and $402,000,
respectively. Cductive and non-cash charges for the six months ended December
31, 1999 included charges related to Cductive for the period from acquisition to
December 31, 1999 of $210,000, depreciation of $480,000, stock compensation
charges of $6,915,000 and amortization of trade names of $5,160,000.
<PAGE>

During the six months ending December 31, 1998 non-cash charges included
depreciation of $14,000 and stock compensation of $630,000.
<PAGE>

Liquidity and Capital Resources

At December 31, 1999, the Company had a cash balance of $63,232,000. Net cash of
$27,209,000 was used for operating activities for the six months ended December
31, 1999, principally as a result of net losses of $27,774,000 generated during
the period and the increase of prepaid expenses and other assets of $10,236,000,
offset by non-cash expenses of $12,555,000 associated with stock options and
warrants granted to advisors, amortization of goodwill and intangible assets and
depreciation. Purchases of capital equipment for the six months ended December
31, 1999 totaled $2,131,000. The Company expects to incur negative cash flow
from operations for the foreseeable future, as it continues to develop its
market and operations.

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

On September 24, 1999 the Company completed a public offering of 5,270,000
shares of Common Stock for proceeds of $79,682,000, net of issuance costs of
$1,137,000.

On October 27, 1999, the Company issued an additional 300,000 shares of Common
Stock for net proceeds of $4,538,000 in connection with the exercise by the
underwriters of their over-allotment option.

The Company believes its balances of cash, cash equivalents, short-term
investments will be sufficient to meet its cash requirements over the next
twelve months. However, if the Company should need to obtain additional capital
or short-term borrowings, there can no assurance such capital or borrowings
could be obtained on favorable terms or at favorable rates, or at all.

YEAR 2000

Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates or have been programmed with default dates
ending in 99, the common two-digit reference for 1999. As a result, as EMusic
transitions from the 20th century to the 21st century, computer systems and
software used by many companies and organizations in a wide variety of
industries will produce erroneous results or fail unless they have been modified
or upgraded to process date information correctly. Significant uncertainty
exists concerning the scope and magnitude of problems associated with the year
2000 issue.

<PAGE>

Through January 2000. The Company experienced a limited number of minor
malfunctions in its information technology systems as the result of the Year
2000 date change.   None of these failures had an impact on the Company's
financial performance or operations.  The Company could experience additional
malfunctions not previously detected but the Company believes that these
additional malfunctions, if any, will not have a material impact on the
Company's results of operations or financial condition.

The Company is in part dependent on third party suppliers. Through January 2000,
the Company's key third party suppliers have not reported any significant Year
2000 compliance problems. However, because the Company's continued Year 2000
compliance is in part dependent on the continued compliance of third parties,
there can be no assurance that problems with third party suppliers will not have
an adverse affect on the Company's results of operations or financial condition.
<PAGE>

FACTORS THAT MAY AFFECT OUR RESULTS

Investing in our Common Stock involves a high degree of risk. You should
carefully consider the following factors and other information contained in this
Form 10-Q and in our Form 10-K and other filings with the SEC before deciding to
invest in our stock.

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

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

  .  online sales of downloadable music;

  .  website advertising fees from third parties;

  .  licensing of musical recordings for use by others; and

  .  online sales of music-related merchandise.

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

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

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

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

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

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

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

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

From inception through December 31, 1999, we had a deficit accumulated during
the development stage of $77.3 million. We expect substantial net losses and
negative cash flow for the foreseeable future. We believe it is critical to our
long-term success that we continue to develop "EMusic" brand awareness and
loyalty through marketing and promotion, expand our artist and consumer
networks, develop our online content and expand our other services. We expect
that our operating expenses will increase significantly during the next several
years, especially in sales and marketing. With increased expenses, we will need
to generate significant additional revenues to achieve profitability. As a
result, we may never achieve profitability and, if we do achieve profitability
in any period, we may not be able to sustain or increase profitability.


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

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

     .  the demand for downloadable music content and Internet advertising;

     .  the addition or loss of advertisers;

     .  the level of traffic on our Internet sites;

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

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

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

     .  price competition or pricing changes in the industry;

     .  technical difficulties or system downtime; and

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

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

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

As of December 31, 1999, there were approximately 34,000,000 shares of Common
Stock outstanding, of which approximately 32,000,000 were tradable without
restriction under the Securities Act, tradable under Rule 144 or covered by an
effective resale registration statement.


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

Our Common Stock is currently traded on the Nasdaq National Market under the
ticker symbol "EMUS." Our stock is held by a limited number of investors and
there can be no assurance that an active trading market will be sustained in the
future. In addition to fluctuations in our operating results, the following
factors could cause the price of our securities to be volatile:

     .  development of the downloadable music market;

     .  technological innovations;

     .  new products;

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

     .  failure to meet securities analysts' expectations;

     .  government regulatory action;

     .  patent or proprietary rights developments; and

     .  market conditions for internet and technology stocks in general.


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

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

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

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

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

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

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

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

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

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

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

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

Our business strategy includes entering into strategic alliances and acquiring
complementary businesses, technologies, content or products. In January 1999, we
completed the acquisition of Creative Fulfillment, Inc., in June 1999, we
completed the acquisition of Internet Underground Music Archive, and in December
1999, we completed the acquisition of Group K, Inc. (dba "Cductive"). In
November 1999, we announced our proposed acquisition of Tunes.com Inc.  We
expect this acquisition to be completed in the quarter ending March 31, 2000.
These and any other future acquisitions involve risks commonly encountered in
acquisitions of companies, including:

     .  exposure to unknown liabilities of acquired companies;

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

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

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

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

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

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

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

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

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

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

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

Certain companies have agreed to work together to offer music over the Internet,
and we may face increased competitive pressures as a result. In 1999, Time
Warner and Sony's Columbia House unit announced an agreement to merge with
CDNow. Also in 1999, Microsoft Corporation and Sony Corporation announced an
agreement to pursue a number of cooperative activities. Sony has announced that
it will make its music content downloadable from the Internet using Microsoft's
multimedia software. In addition, Universal Music Group and BMG Entertainment
have announced a joint venture to form an online music store.  The announced
acquisition of Time Warner by America Online could also result in increased
competition to the Company.  Finally, MusicMaker, Inc. announced in January 2000
that it was examining its strategic options.

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

     .  longer operating histories;

     .  significantly greater financial, technical and marketing resources;

     .  greater brand name recognition;

     .  larger existing customer bases; and

     .  more popular content or artists.

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

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

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

     .  finance unanticipated working capital requirements;

     .  develop or enhance existing services or products;

     .  fund distribution relationships;

     .  advertise to build global brand recognition;
<PAGE>

     .  respond to competitive pressures; or

     .  acquire complementary businesses, technologies, content or products.

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

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

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

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

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

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

In an attempt to increase our customer base and traffic on our website, build
brand recognition, attract paid advertising and enhance content, distribution
and commerce opportunities, we have entered into strategic alliances with
various media, hardware device and Internet-related companies such as: Yahoo,
America Online and RealNetworks. Our failure to maintain or renew our existing
strategic alliances or to establish and capitalize on new strategic alliances
could harm our business. Our future success depends to a significant extent upon
the success of such alliances. Moreover, we are substantially dependent on our
ability to advertise on other Internet sites and the willingness of the owners
of other sites to direct users to our Internet sites through hypertext links. We
may not achieve the strategic objectives of these alliances, and parties to
strategic alliance agreements with us may not perform their obligations as
agreed upon. Such agreements also may not be specifically enforceable by us. In
addition, some of our strategic alliances are short term in nature and may be
terminated by either party on short notice. The termination or impairment of
these strategic alliances could reduce our ability to attract new customers.
<PAGE>

Our success depends on our retention of key personnel.

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

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

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

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

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

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

Our business is dependent on maintaining a database of confidential user
information, including credit card numbers. If the security measures that we use
to protect personal information are ineffective, we may lose customers and our
business would be harmed. We rely on security and authentication technology
licensed from third parties. With this technology, we perform real-time credit
card authorization and verification. We cannot predict whether new technological
developments could allow these security measures to be circumvented.

In addition, our software, databases and servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. We may need
to spend significant resources to protect against security breaches or to
alleviate problems caused by any breaches and we may not be able to prevent all
security breaches.
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our executive officers and directors control approximately 19% of our Common
Stock and have power to influence significant corporate matters, which may
delay, deter or prevent transactions that could benefit our stockholders.

Executive officers and directors, in the aggregate, beneficially own
approximately 19% of our outstanding Common Stock. These stockholders are able
to significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of EMusic and may make
some transactions more difficult or impossible without the support of these
stockholders.

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

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

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

Since our data warehousing, web server and network facilities are all located in
California, an earthquake or other natural disaster could affect all of our
facilities simultaneously. An unexpected event such as a power or
telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at our Internet service providers' facilities could
cause the loss of critical data and prevent us from offering our services to
artists and consumers. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, we rely on third parties
to securely store our archived data, house our web server and network systems,
and
<PAGE>

connect us to the Internet. A failure by any of these third parties to provide
these services satisfactorily could harm our business.
<PAGE>

--------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

Interest Rate Risk

The Company does not hold derivative or speculative financial instruments and
substantially all cash and cash equivalent balances are invested in money market
accounts with floating interest rates, therefore the Company is not subject to
significant interest rate risk.

Currency Exchange Rate Risk

During the period from inception through December 31, 1999, all of the Company's
revenues and expenses have been denominated in U.S. dollars. As a result, the
Company has not incurred any realized or unrealized currency exchange rate gains
or losses. The Company does not expect to incur any significant gains and losses
during the next twelve months. The Company has not engaged in foreign currency
hedging activities to date.
<PAGE>

PART II - OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On September 24, 1999 the Company completed a public offering of 5,270,000
shares of Common Stock for proceeds of $79,682,000, net of issuance costs of
$1,137,000.  In conjunction with this offering the Series B shares converted
into 11,757,000 shares of Common Stock.

On October 27, 1999, the Company issued an additional 300,000 shares of Common
Stock for net proceeds of $4,538,000 in connection with the exercise by the
underwriters of their over-allotment option.

During the quarter ended December 31, 1999, the Company granted warrants for the
purchase of 419,000 shares to advisors and in conjunction with the acquisition
of musical content during quarter.  All of such warrants were granted to
accredited investors pursuant to Regulation D.

During the quarter, the Company also issued approximately 2,136,000 shares in
connection with the acquisition of Group K, Inc. pursuant to Regulation D, and
approximately 64,000 shares in connection with one isolated transaction pursuant
to Section 4(2) of the Securities Act of 1933.

Use of Proceeds

During the quarter ended December 31, 1999, proceeds from the above offering and
available cash have been used to pay $40,000 in offering related expenses, to
purchase $1,018,000 in fixed assets, and to pay operating expenses, primarily
payroll and facilities related, of $12,838,000. The remainder of the proceeds
has been invested in money market accounts as of December 31, 1999.

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

At the annual meeting of the Company's stockholders held November 19, 1999 the
following matters were voted upon:

1)  The following individuals were elected to Class 1 of the Company's Board of
    Directors:

    Nominee             Votes Cast For         Withheld or Against
    -------             --------------         -------------------
    Tor Braham          23,802,813             11,800
    Robert H. Kohn      23,803,113             11,500

The following additional proposals were considered at the Annual Meeting and
were approved by the vote of the stockholders, in accordance with the tabulation
shown below.

2)   Proposal to ratify the selection of PricewaterhouseCoopers LLP, as
     independent accountants for the Company for the fiscal year ended June 30,
     2000.

     Votes For          Votes Against          Abstain
     ---------          -------------          -------
     23,811,653         2,750                  210
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

    27.1  Financial Data Schedule (EDGAR only)


(b) Reports on Form 8-K filed during the three months ended December 31, 1999.

    On November 15, 1999, the Company filed a Form 8-K describing the
    acquisition of Group K, Inc. (dba "Cductive").

    On November 29, 1999, the Company filed a Form 8-K describing the
    acquisition of Tunes.com Inc.

    On December 22, 1999, the Company filed a Form 8-K/A which amends the
    following items, financial statements, exhibits or other portions of its
    Current Report on Form 8-K dated November 15, 1999, related to the
    Registrant's completion of the acquisition of Group K, Inc. (dba
    "Cductive").

    On December 22, 1999, the Company filed a Form 8-K/A which amends the
    following items, financial statements, exhibits or other portions of its
    Current Report on Form 8-K dated November 29, 1999, related to the
    Registrant's completion of the acquisition of Tunes.com Inc.
<PAGE>

--------------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Date: February 11, 1999           EMusic.com Inc.


                                  /s/  Joseph Howell
                                  ------------------
                                  Joseph Howell,
                                  Executive Vice President and
                                  Chief Financial Officer