U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]      Annual Report Under Section 13 or 15(d) of the Securities  Exchange Act
         of 1934

                   For the Fiscal Year Ended December 31, 2000

[ ]      Transition Report Under Section 13 or 15(d) of the Securities  Exchange
         Act of 1934

                          Commission File No. 333-9809

                                  MCY.COM, INC.
                 (Name of Small Business Issuer in its charter)

                Delaware                                  87-0561634
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
    incorporation or organization)

                     1133 Avenue of the Americas, 28th Floor
                            New York, New York 10036
              (Address of principal executive offices and zip code)


                                 (212) 944-6664
                (Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Act:

    Title of each class                        Name of each exchange on which
    to be so registered                        each class is to be registered
    None                                       None
<TABLE>
<CAPTION>

<S>                                 <C>                <C>
Securities registered under Section 12(g) of the Act:      $0.001 par value common stock
</TABLE>
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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

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

         The issuer's revenues for its most recent fiscal year:  $474,000.

         The  aggregate  market  value  of  the  voting  common  stock  held  by
non-affiliates  of the registrant  (38,456,879  shares) as of March 30, 2001 was
$21,151,283 (computed by reference to the average bid and asked price ($0.55) of
such common equity).

         The number of shares  outstanding  of the  issuer's  common stock as of
March 30, 2001: 62,199,507.


<PAGE>

                                TABLE OF CONTENTS
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<CAPTION>
Item Number                                                                                             Page Number

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PART I............................................................................................................3

   ITEM 1.       DESCRIPTION OF BUSINESS..........................................................................3
   ITEM 2.       DESCRIPTION OF PROPERTY.........................................................................18
   ITEM 3.       LEGAL PROCEEDINGS...............................................................................19
   ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................21

PART II..........................................................................................................22

   ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................22
   ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS......................................25
   ITEM 7.       FINANCIAL STATEMENTS............................................................................30
   ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............31

PART III.........................................................................................................32

   ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
                 THE EXCHANGE ACT................................................................................32
   ITEM 10.      EXECUTIVE COMPENSATION..........................................................................34
   ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................38
   ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................40
   ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K................................................................42

SIGNATURES......................................................................................................44
</TABLE>

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         This annual report on Form 10-KSB contains forward-looking  statements.
These statements relate to future events or our future financial performance. In
some cases, you can identify  forward-looking  statements by terminology such as
may, will, should, expect, plan, intend, anticipate, believe, estimate, predict,
potential  or  continue,   the  negative  of  such  terms  or  other  comparable
terminology. These statements are only predictions. Actual events or results may
differ  materially.  In evaluating  these  statements,  you should  specifically
consider  various  factors,  including the risks  outlined in the "Risk Factors"
section below.  These factors may cause our actual results to differ  materially
from any forward-looking statement.

         Although   we  believe   that  the   expectations   reflected   in  the
forward-looking  statements are reasonable,  we cannot guarantee future results,
levels of activity,  performance or achievements.  Moreover,  neither we nor any
other person assumes  responsibility  for the accuracy and  completeness  of the
forward-looking  statements.  We  are  under  no  duty  to  update  any  of  the
forward-looking  statements after the date of this annual report to conform such
statements to actual results or to changes in our expectations

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW

         MCY.com,  Inc.  ("MCY.com") is a holding company that conducts business
through its wholly owned operating  subsidiary,  MCY Music World,  Inc.  ("Music
World").  Both  companies  are  incorporated  in the State of  Delaware  and are
headquartered in New York City.  Unless otherwise  specified,  the terms we, us,
our  and  other  comparable   terminology  refer  to  MCY.com  and  all  of  its
subsidiaries.

         We  are  a   next-generation   media  company,   focused  on:  (i)  the
acquisition,  production and sale of premium music and media products across all
available  channels;  and (ii) the  development  and  licensing  of  proprietary
digital rights management and digital asset management  technologies that enable
the secure and accountable delivery of digital assets over digital channels.

         During  2000,  we focused our efforts on the  further  development  and
initial  commercialization of our content and technology operations. In 2001 and
moving forward,  we expect to continue to expand the focus and potential of each
business and increase  commercialization efforts in keeping with expected growth
and maturity of the market.

         Our  media  business  acquires,  develops  and  sells  premium  musical
entertainment  products.  Our goal for the  business  is to acquire or license a
wide variety of  intellectual  property  rights from musical artists and to then
develop  and sell or license  the  resultant  creative  products  across a broad
spectrum of distribution channels including broadcast, cable, Internet, wireless
and physical  distribution  channels.  Our productions have included live events
from  artists  such  as  Luciano  Pavarotti,  Alexandru  Badea,  The  Who,  Pete
Townshend, *NSYNC, The Backstreet Boys and Paul McCartney. These events, as well
as a selection of digital music owned by third  parties,  are also  available on
our Internet portal, www.mcy.com.

         Our  technology  business  designs,  develops  and  maintains  software
applications  for the secure and  accountable  distribution of our digital media
properties  across  all  digital  distribution  channels.  In January  2001,  we
established  NETrax(TM)   Technologies,   Inc.  ("NTI"),  a  new,  wholly  owned
subsidiary  focused on the marketing and sale of these  technologies,  and began
the process of transferring  all essential  assets necessary for the independent
operation of NTI into NTI.  Through  NTI, we have  developed a suite of software
products that is collectively called  "NETrax(TM)." Our NETrax(TM) product suite
can  provide  users  with  an  end-to-end   digital  asset   delivery   platform
encompassing storage,  packaging,  promotion,  distribution,  sales, accounting,
payment,  rights  management  and royalty  tracking.  In early April of 2001, we
determined  that it would be  prudent  to share  the risks  associated  with the
further development and  commercialization  of NETrax(TM) and commenced a search
aimed at finding a strategic or financial partner for NTI.

GENERAL DEVELOPMENT OF OUR BUSINESS

         The concept behind our business was developed by Mr. Bernhard  Fritsch,
our  chief  executive  officer,  who has been  involved  in the  production  and
marketing of multi-media and electronic music entertainment products since 1979.
In 1991,  Mr.  Fritsch  formed  Fritsch & Friends  Audio  Produktions  GmbH (now
Fritsch & Friends  Mediagroup  GmbH or "Fritsch & Friends")  for high-end  audio
post-production  and  multimedia  content  production,  sales and

                                      -3-
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distribution. Starting in 1995, Fritsch & Friends entered into the nascent field
of Internet digital music distribution.  Music World was incorporated on January
8, 1999 in the state of Delaware to acquire certain predecessor  companies based
in Germany and to further  develop its planned  operations,  which  included the
creation  and  opening to the public of an online  service  platform  to provide
worldwide  promotional  and sales  services for the music buying  public and the
music  industry.  On August 2, 1999,  we completed a reverse  merger into Health
Builders International, Inc. ("HBI"), a public company incorporated in the state
of Delaware  which had no commercial  operations at the time of the merger.  The
merger was  consummated  through an  exchange  of shares  that  resulted  in our
stockholders holding 43,324,988 shares of common stock (excluding 121,667 shares
of common stock issuable to creditors) or 90.4% of the then  outstanding  common
shares of HBI and  1,000,000  shares of Series 1  Preferred  Stock (100% of such
class) and  existing  stockholders  of HBI  holding  4,611,000  shares of common
stock. The merger was accounted for as a recapitalization and retroactive effect
was given to the recapitalization in the accompanying  financial statements.  In
connection with the merger, HBI changed its name to MCY.com, Inc.

         On July 2, 1999,  we acquired  the assets of Datatek  Services  Limited
("Datatek") including the stock of MCY America, Inc. ("MCY America") and Fritsch
& Friends  (collectively  the  "predecessor  companies") in exchange for cash of
$1,050,000,  4,500,000  shares of our common  stock  valued at  $22,500,000  and
5-year warrants to acquire 2,000,000 shares of common stock at an exercise price
of $5.00 per share, valued at $3,000,000,  for an aggregate cost of $26,550,000.
In  addition,  we agreed to pay to Datatek,  on a quarterly  basis,  1% of gross
revenues  either,  (i) for a period of 20 years,  or (ii) until such time as the
payments total  $9,000,000.  As of the date of the acquisition,  the predecessor
companies owed us $1,243,000  representing the balance of loans made by us prior
to the acquisition.  Our founder,  controlling  stockholder and Chairman was the
Chief Executive  Officer,  a director and owned a 47.5%  beneficial  interest in
Datatek  which  was  transferred  to  the  other  Datatek  stockholders  for  no
consideration  immediately prior to the closing of the acquisition.  Datatek and
its subsidiaries had been involved in the development, purchase and licensing of
the  technology,  intellectual  property  and  other  business  assets  that are
required for our business  operations.  The  transaction  was accounted for as a
purchase by us of a 52.5%  ownership in the Datatek assets and a contribution to
us of  the  47.5%  interest  formerly  owned  by  our  founder  and  controlling
stockholder.  Such  contributed  interest  was recorded at the basis cost of the
controlling stockholder which approximated 47.5% of the stockholders' deficiency
of the predecessor companies at the acquisition date. In addition,  47.5% of the
loss of  predecessor  companies for the period from January 1, 1999 through July
2, 1999 was reflected in our results of operations on the equity method and 100%
of the results of operation of the predecessor  companies were consolidated with
our  results  of  operation  from  July  2,  1999.  The  aggregate  cost  of the
acquisition  of  the  52.5%  interest,   amounting  to  $27,793,900,   including
$1,243,000 of loans receivable from predecessor companies, reduced by $1,069,000
representing 47.5% of the stockholders'  deficiency of the predecessor companies
at the acquisition date was allocated to assets acquired and liabilities assumed
at the date of acquisition.  The contingent consideration was accounted for as a
liability  (royalties) and has been expensed as it has become  payable.  Also in
connection  with this  transaction,  founders  of Music  World  agreed to return
2,000,000 shares of common stock, which were then canceled.  For the fiscal year
ending December 31, 2000, our net loss,  including write-offs for the impairment
of long-lived  assets,  including  acquired  intangibles,  was  $(86,208,000) or
$(1.46) per common share. Our net loss,  including  amortization of the acquired
intangibles,  for the period January 8, 1999 through  December 31, 1999 amounted
to $(69,713,000) or $(1.66) per common share.

         In  October   2000,  we  entered  into  an  agreement  to  license  our
proprietary, secure digital encryption and distribution technologies,  including
our NETrax(TM)  software,  to Applied  Digital  Solutions,  Inc.  ("ADSX").  The
agreement,  as amended on March 30, 2001,  allows ADSX to utilize our NETrax(TM)
technology  for certain  non-entertainment,  business-to-business  applications,
including medical and education, among others. Under the terms of the agreement,
on April 3, 2001, we received net consideration of approximately  $4,000,000 for
the grant of the license,  consisting of 11,816,141 shares of ADSX common stock,
reduced by 615,976  shares of our common stock  issued to ADSX and cash,  not to
exceed  $9,000,000  derived from the sale by us of the ADSX common  stock.  Such
consideration  is based on the quoted  market price of our common stock and ADSX
common stock on April 3, 2001,  the date the  software and shares were  released
from escrow.  The consideration  received will be applied to reduce the carrying
value  of the  NETrax(TM)  software.  Pursuant  to  the  terms  of  the  amended
employment  agreements  entered  into on April 1, 2001,  in exchange  for salary
reductions and restructuring of their employment agreements, Mr. Fritsch and Mr.
Mitchell  Lampert  will each  receive  consideration  of: (i) the amount of ADSX
stock required to equal $200,000 based on the closing bid price of ADSX on April
3, 2001;  and (ii) 10% of the net ADSX shares  retained  by us after  payment to
ADSX of the $9,000,000 derived from the sale by us of the ADSX common stock.

         We  account  for  impairment  of  long-lived   assets,   including  our
intangible  assets,  in  accordance  with  Statement  of  Financial   Accounting
Standards ("SFAS") No. 121,  "Accounting for the impairment of Long-Lived Assets
and for  Long-Lived  Assets to be  Disposed  of".  SFAS No.  121  requires  that
long-lived  assets be  reviewed  for

                                      -4-
<PAGE>

impairment  whenever events or changes in  circumstances  indicate that the book
value of the asset may not be  recoverable.  We evaluate at each  balance  sheet
date whether  events and  circumstances  have occurred  that  indicate  possible
impairment.  In  accordance  with SFAS No. 121, we use an estimate of the future
undiscounted net cash flows of the related assets over their remaining estimated
useful  lives in  measuring  whether  the assets are  recoverable.  Based on the
limited  revenues  to date  earned by us related to  acquired  intangibles,  and
giving further consideration to the impact of events outside of our control such
as rapidly changing market  circumstances on consumer acceptance of our business
model and proposed product offerings,  and the delayed development of technology
conducive  to  our  intended  operations,  including,  but  not  limited  to the
development of broadband  transmission networks, we have revised our projections
of future cash flows as they relate to the acquired intangibles. As a result, we
no longer expect  reasonably  estimable future net cash flows related to the use
of our acquired  technology  over the  remaining  estimated  useful lives of the
intangibles   to  be  adequate  to  recover  our   investment  in  the  acquired
intangibles,  and  further  believe  the fair  value of such  intangibles  to be
nominal.   Accordingly,   as  of  June  30,  2000,  we  wrote  off  $21,985,000,
representing  the  then  unamortized  balance  of such  intangibles,  consisting
principally of the excess of cost over the fair value of identifiable net assets
acquired.  In addition,  we have revised our projections of future cash flows as
they relate to certain of our equipment and software.  As a result, we no longer
expect reasonable  estimable future net cash flows related to the use of certain
of our equipment and software over the remaining  estimated  useful lives of the
assets to be adequate to recover our  investment  in the selected  equipment and
software,  and further  believe the fair value of such equipment and software to
be nominal.  Accordingly,  as of December  31,  2000,  we wrote off  $6,400,000,
representing the then undepreciated balance of such equipment and software.

         Our  principal  executive  offices  are  located at 1133  Avenue of the
Americas,  28th Floor,  New York,  New York 10036,  and our telephone  number is
(212) 944-6664.

PRODUCTS AND SERVICES

         During  fiscal  year  2000,  we  focused  our  efforts  on the  further
development  and  initial   commercialization  of  our  content  and  technology
operations.  In 2001 and moving  forward,  we expect to  continue  to expand the
focus and potential of each business and increase  commercialization  efforts in
keeping with expected market growth and maturity.

Media Business

         Our  media  business  acquires  or  licenses  rights to  premium  music
entertainment,  produces audio and audio-visual  products from such rights,  and
distributes these products across all available channels. Our products currently
include, but are not limited to, songs, live events, documentaries, studio clips
(documentary  footage),  music videos,  music programming and music movies.  The
media  vehicles the Company and its  licensees  use  currently  include  digital
downloads,  digital streams, analog and digital broadcast, DVDs, videocassettes,
CDs,  and  CD-ROMS.  Our  distribution   channels  currently  include  Internet,
wireless,  satellite and cable. We serve mail order and physical retail channels
through third parties.

         We  are  also  a  majority  joint  venture  partner  in  Pyramid  Music
Corporation ("Pyramid"), a Delaware corporation.  Pyramid is a new venture which
will seek to acquire exclusive rights from well-known artists.  Artists targeted
by the  venture are  typically  "heritage"  artists  who had earlier  successful
careers  with record  labels and are not  currently  signed with a major  record
label or who have reacquired certain of their rights from their record label.

Technology Business

          Our technology  group has designed and built  proprietary and patented
technology solutions for the secure and accountable  distribution of our digital
media properties across all digital  distribution  channels.  These technologies
are currently  being  marketed and  exploited  through our  subsidiary,  NTI. We
believe  that  NTI is a viable  provider  of  end-to-end  secure  digital  media
distribution  solutions that allows  customers to build an entire secure digital
distribution  business around the NETrax(TM) product suite. We are targeting our
sales and licensing  efforts at retailers,  broadcasters,  service providers and
others.  Our  revenue  model  for NTI is  based  upon a  mixture  of  NETrax(TM)
technology licensing fees,  implementation  services,  maintenance fees, network
service fees and  clearinghouse  fees. To date,  we have not generated  revenues
from any of such sources.

         Currently the NETrax(TM)  vertically  integrated product suite includes
CAM,  DRM and DDP  applications.  The  NETrax(TM)  Content  Aggregation  Modules
("CAM") deliver the "plug-in" logistics compatibility and

                                      -5-
<PAGE>

functionality required for the delivery of different vertical-market content
types, such as music, video, games and software. The NETrax(TM) Digital Rights
Management ("DRM") system delivers copy protection, royalty and rights tracking
and royalty disbursement functionality. The DRM application is the result of a
5-year development program based on certain patented and proprietary
innovations. The NETrax(TM) Digital Distribution Platform ("DDP") is the
foundation application for the delivery of digital products and integrates
content management, e-commerce, payment and customer relationship management
solutions through a proprietary platform architecture.

          Our  Internet  portal,  www.mcy.com,  was  launched  in June  1999 and
retails a broad  range of music audio and  audio/visual  products  delivered  as
either secure  NETrax(TM)  downloads or streaming  files. The portal is a client
of, and a showcase for, NTI technologies.

STRATEGY

         We intend  to build  our  media  business  through  the  following  key
initiatives:

         EXPAND CONTENT RIGHTS ACQUISITION AND EXPLOITATION ACTIVITIES.  We will
continue  to  review   opportunities  to  significantly  expand  the  number  of
performance rights we either permanently  acquire or acquire for limited use. It
is our plan to acquire all available  rights from and related to certain artists
and content.  As a result,  we expect to target our acquisition  efforts towards
artists and content that are capable of delivering a full rights portfolio.

         NEGOTIATE  BULK  PURCHASE  AGREEMENTS  WITH OUR  SUPPLIERS  OF  CONTENT
PRODUCTION  SERVICES.  We are  investigating  ways to lower the production costs
associated  with the  creation of both digital and  physical  media  products by
working with  suppliers of  production  services to obtain price  reductions  in
return for a guaranteed supply of work.

         EXPAND THE NUMBER AND DIVERSITY OF OUR CONTENT  DISTRIBUTION  PARTNERS.
In tandem with building our catalog of rights and lowering our production costs,
we are  continuing  to expand the  number and  diversity  of  customers  for our
exclusive content. These customers include pay-per-view broadcasters,  satellite
companies, DVD distributors and operators of other Internet web sites.

         CREATE  ADDITIONAL  JOINT  VENTURE   RELATIONSHIPS   WITH  OTHER  MEDIA
COMPANIES  THAT CAN HELP US EXPAND OUR ACCESS TO MEDIA RIGHTS  PROVIDERS  AND/OR
CUSTOMERS. Our relationship with Pyramid was formed so that we could have access
to a specific  set of musical  artists who can profit from the  exploitation  of
multiple  performance  rights  across a wide  array of  media  channels.  We are
currently  in the  process of  locating  other  partners to expand our access to
artists and content.

         We intend to continue building our technology business in the following
ways:

         FIND A STRATEGIC OR FINANCIAL PARTNER THAT CAN HELP US TO COMMERCIALIZE
NETRAX(TM).  We believe that a  well-chosen  joint  venture  partner can help us
bring NETrax(TM) to market more quickly, obtain customers more readily and lower
our financial risk profile.

         ESTABLISH  NETRAX(TM)  AS A  LEADING  TECHNOLOGY  FOR  THE  SECURE  AND
ACCOUNTABLE  DISTRIBUTION  OF DIGITAL  MEDIA.  In March 2001,  we completed  the
development of a significant  version upgrade of NETrax(TM).  We are now engaged
in marketing  activities  designed to develop  sales of  NETrax(TM)  to targeted
customers  through two  primary  distribution  means:  a) through our own direct
sales force, and b) through a network of channel marketing partners.

         CONTINUE TO DEVELOP AND COMMERCIALIZE  TECHNOLOGIES THAT FACILITATE THE
SECURE  DISTRIBUTION OF DIGITAL MEDIA ACROSS A WIDER ARRAY OF VERTICAL  BUSINESS
SEGMENTS.  Our NETrax(TM) product suite is currently focused on digital music as
its  initial  vertical  business  segment.  In the  future,  we plan to  develop
NETrax(TM) to serve other vertical  business  segments that may utilize  digital
distribution e.g. books, software, games and business communications.

MARKETING AND SALES

         Our media sales group  licenses  entertainment  products  for  physical
distribution (CD, DVD, VHS), broadcast (TV, cable, satellite, wireless), pay-per
view (cable, satellite,  internet, wireless), and other licensed uses. The media
sales  group  has  built  relationships  with a series of  channel,  media,  and
region-specific  sales partners in order to achieve maximum rights exploitation.
In  addition,   our  media  sales  team  has  developed   content   distribution
relationships with numerous audio/visual  distributors and cable,  satellite and
Internet companies such as Image

                                      -6-
<PAGE>

Entertainment, Inc., DirecTV, iN Demand, and RealNetworks. Although these
companies collectively account for approximately 15% of our revenues for the
fiscal year ending December 31, 2000, we anticipate this percentage to increase
significantly in the future.

         Pyramid intends to utilize our media sales group to market and sell its
audio-visual  products.  In the case of audio-only  products (primarily CDs), an
affiliate of our Pyramid joint venture partner  currently has a distribution and
sales agreement with Orpheus  Productions,  Inc. and therefore  utilizes the EMI
Music  Distribution  ("EMD")  system  and  sales  force to place  CDs in  retail
outlets.

         We are now engaged in marketing activities designed to develop sales of
NETrax(TM) to targeted  customers  through two primary  distribution  means:  1)
through  our own  direct  sales  force,  and 2)  through  a network  of  channel
marketing  partners.  Primary  sales  targets for our  NETrax(TM)  product suite
include major retailers,  broadcasters,  media and telecommunications  companies
who have yet to adopt a digital asset delivery strategy.

         Marketing efforts in 2000 were primarily focused on the exploitation of
our media  division's  exclusive  events.  We expect a  reduction  in  marketing
expenditures  in  2001  due  to  the  shift  of  almost  all  content  marketing
expenditures to business-to-business licensing and distribution partners.

PARTNERSHIPS

         We have developed key strategic associations in content, publishing and
marketing.   We  have  previously   engaged  in  sponsorship  and   co-marketing
relationships with companies  including MSN, Real Networks,  DirecTV, iN Demand,
Qwest/US West,  and others.  Our media division has in the past been involved in
strategic content acquisition relationships with companies and artists including
Arista/BMG,  Jive/Zomba,  Lieberberg Entertainment,  Paul McCartney Productions,
Michael Jackson Productions, Tibor Rudas, The Backstreet Boys, The Firm, The Who
and Pete Townshend. Our media division and Pyramid maintain content distribution
partnerships  with companies  including EMD, Image  Entertainment,  DirecTV,  iN
Demand, Real Networks, and others worldwide.

         Our technology  business  benefits from key strategic  associations and
partnerships   that  were   developed  by  us  including   those  with  Sapient,
Broadvision, Digital Island, Microsoft, Real Networks, Fraunhofer, and Thompson.

PATENTS & LICENSES

         We have  developed,  licensed and integrated  technologies  and systems
that enable the digital delivery of content in secure and user-friendly formats,
which will be  transferred to our NTI subsidiary in fiscal 2001. We use advanced
encryption and security protocols to ensure that transactions  conducted on, and
product  delivered  through,  our client systems are protected  from  tampering,
piracy or unlawful distribution. This proprietary copyright protection system is
based on MMP technology licensed by us from Fraunhofer.

         As of January 17, 2001, Mr. Fritsch  received notices of allowance with
respect  to  two  patent  applications  for  several  of the  key  technological
inventions, including our sales and royalty tracking systems, shopping list, and
the  personalized  NETrax(TM)  software player which Mr. Fritsch has licensed to
us. The patents are currently pending final issuance in the United States Patent
and Trademark Office.

         Mr.  Fritsch has licensed the allowed  patents to us under an exclusive
license  agreement.  Our  exclusive  worldwide  license has a term of either the
later of twenty (20) years or the expiration of any patents licensed thereunder,
and requires that we pay Mr.  Fritsch an annual fee of $1,000.  Mr.  Fritsch may
terminate the license if we fail to pay him  compensation  equal to 0.25% of our
gross revenue  pursuant to the terms of his employment  agreement.  We have also
received  notices of allowance from the U.S. Patent and Trademark Office for the
trademarks  NETrax(TM),  On  Click,  Music On  Click,  Entertainment  On  Click,
MCY.com, and MCY.

         We use  MP3  compression  technology  which  we  employ  pursuant  to a
non-exclusive  license from Thomson Consumer Electronic Sales GmbH ("Thompson").
Under  this  license  agreement,  we are  required  to pay a royalty  payment to
Thomson of 1% of our gross  revenue  from  digital  downloads  with a  US$15,000
annual  minimum.  The license  agreement  was  effective  on January 1, 1999 and
expires on the  expiration  date of the last to expire of the  licensed  patents
which,  according to the current  schedule of the  agreement  and subject to the
payment by  Thomson of certain  periodic  patent  maintenance  fees,  expires on
September 12, 2016.  Alternative  licenses for the use of the MP3 technology are
readily available to us in the event the Thomson license is terminated.

                                      -7-
<PAGE>

         We use  advanced  encryption  and  security  protocols  to ensure  that
transactions  conducted on our website are secure and music selections cannot be
pirated or unlawfully  distributed over the Internet.  Our encryption technology
is called Multimedia Protection Protocol or "MPP" and our subsidiary,  Fritsch &
Friends,  currently  has  a  non-exclusive  perpetual  license  from  Fraunhofer
Institut fur Integrierte Schaltungen  ("Fraunhofer") to incorporate Version 1 of
its  proprietary  MMP software  into our products  which enables us to offer for
download  encrypted  versions of songs  recorded  in the MP3  format.  Fritsch &
Friends  entered  into  the  non-exclusive   perpetual  license  agreement  with
Fraunhofer  on March 20,  1997.  Under the  license  agreement,  a payment of DM
25,000 was due on March 20,  1997 and a payment of DM 25,000 was due on June 30,
1997.  On May 14, 1999, we entered into a  non-exclusive  five year license with
Fraunhofer Gesellschaft zur Forderung der angewandten Forschung e.V. for the use
of Version 2 of its MMP software  which will enable us to provide more  advanced
encryption  capabilities,  such as  downloads  that can only be played a limited
number of times,  and allows us to  sublicense  the  technology to our strategic
alliance partners.  Under the terms of the license agreement,  in September 1999
we paid a royalty  payment  of DM  140,000  in  consideration  of the rights and
license granted to us.

RESEARCH AND DEVELOPMENT

         Our research and  development  activities are related to our technology
business  and are  focused on  improving  our  expertise  in  broadband  network
management,   wireless   communications,   database   programming,   application
development, website management, player development, digitization, and interface
design.  Our technology  development team, which we intend to transfer to NTI in
the  second  quarter  of 2001,  will  focus  on the  following  priorities:  (i)
continued refinement of the NETrax(TM) platform architecture; (ii) the continued
creation  of  "plug-ins"  to  allow  for  compatibility  of the  digital  rights
management  ("DRM")  technologies  with  hardware  players  and  other  software
players;  (iii) the development and integration of new technologies  that enable
delivery  through  wireless,  interactive  television and other emerging digital
networks;  and (iv)  development  of new and  improved  marketing  and  customer
profiling  functionalities.  Since  inception,  we have spent  over $21  million
designing  and  building  NETrax(TM)  including  expenses  related to  software,
equipment,  personnel and direct research and development  expenses.  Our direct
research and  development  expenses  were $2.4 million and $6.2 million for 1999
and 2000 respectively.

COMPETITION

         Our media business  competes  against a number of media  companies that
offer  exclusive  music media products for  syndicated  broadcast or sale across
analog and digital channels, including such diversified conglomerates as Viacom,
AOL/Time Warner,  Real Networks and others.  Many of these companies have longer
operating histories,  greater brand name recognition,  larger customer bases and
significantly  greater financial,  technical and marketing resources than we do.
We believe the key success  factors in the sale of music media  products  lie in
the areas of multiple rights acquisition and cross-channel  distribution.  Based
on an analysis of our existing  competition,  our main  priorities for our media
business  are:  (i)  the  aggressive  acquisition  of  exclusive  premium  music
distribution  rights;  and (ii) the  production,  sale and  licensing  of unique
entertainment experiences from these rights.

         Our  technology  business  competes  against  a  number  of  technology
companies that are offering or plan to offer products,  services or technologies
for the digital  delivery of music over the  Internet.  We believe  that the key
competitive factors include: (i) marketing and sales leadership; (ii) technology
leadership;  and (iii) strategic partnerships.  Our main priorities are: (i) the
licensing of our current  technologies to develop a strong client base; (ii) the
acquisition  and/or  development  of exclusive  technologies  related to digital
content distribution; and (iii) the formation of joint ventures and partnerships
that will increase our chances for success.  We believe that  eventually  only a
limited  number of  competitors  will dominate the market and that a substantial
number of smaller  companies  will focus on niche  markets.  We believe that our
main competitors include IBM,  Intertrust,  Microsoft,  Real Networks and Liquid
Audio. These companies have positioned  themselves as contenders for significant
market share in the U.S. and worldwide.  Also a major  challenge to our success,
and to the digital  distribution  industry as a whole, is the potential consumer
adoption of and preference for unlicensed  distribution of digital files through
"peer-to-peer" file sharing systems such as Napster,  Gnutella and others, which
deny  rights  holders  their  share  of  potential  revenue  from  the  licensed
distribution of digital files.  The key competitive  factors on which we plan to
focus include: (i) sales leadership; (ii) technology leadership;  (iii) speed of
implementation; and (iv) strategic partnerships.

                                      -8-
<PAGE>

RISK FACTORS

LIMITED OPERATING HISTORY

         We were  organized in January  1999.  Our  predecessors,  for operating
history purposes,  were Datatek Services Limited,  originally formed in November
1997,  MCY America,  Inc.,  originally  formed in December  1997,  and Fritsch &
Friends Audio  Productions  GmbH,  originally  formed in 1991. We have a limited
operating  history upon which an evaluation  of our prospects can be based.  Our
prospects  must be considered in light of the risks,  expenses and  difficulties
frequently   encountered  by  companies  in  an  early  stage  of   development,
particularly  companies engaged in new and rapidly evolving markets, such as the
digital  music  delivery  industry.  To achieve  and sustain  profitability,  we
believe we must, among other things,  do the following:  (i) provide  compelling
and unique content for licensing and distribution; (ii) effectively develop new,
and maintain  existing,  relationships with artists and music content providers;
(iii) continue to develop and upgrade our technology and network infrastructure;
(iv)  respond  to   competitive   developments;   (v)   successfully   introduce
enhancements to our existing  products and services to address new  technologies
and standards;  (vi) control our costs; and (vii)  effectively sell our products
and services.

HISTORY OF LOSSES; ANTICIPATED LOSSES; NEGATIVE CASH FLOW

         Our   research,   development,   sales,   marketing   and  general  and
administrative  expenses have resulted in significant  losses from inception and
may continue to create  losses in the future.  We can give no assurance  that we
can achieve,  sustain or increase revenues or profitability in the future. There
also can be no assurance that our revenue will increase in the future or that we
will  achieve or maintain  profitability  or generate  cash from  operations  in
future periods. We expect to incur additional operating losses and to experience
continued negative cash flow from operations for the foreseeable future.

UNPROVEN BUSINESS MODEL; ABILITY TO DEVELOP PRODUCTS AND MARKET

         Our media  business  revenue  model for  generating  sales  through the
distribution of digital music downloads,  online sales of CDs, pay-per-view live
events,  advertising and sponsorship fees from third parties and sublicensing of
media rights is unproven.  Our technology  business  model for generating  sales
through  business-to-business  technology licensing fees, network services fees,
commercial  transaction  clearinghouse fees, and professional  services, is also
unproven.  We are no longer  aggressively  pursuing retail consumers through our
website  at  this  time.  Use of the  Internet  by  consumers  as a  medium  for
entertainment  and for downloading music is at an early stage of development and
acceptance of related  services is highly  uncertain.  Leading record labels and
other  rights  holders  continue  to  take a  highly  conservative  approach  to
permitting the digital distribution of their recordings through the Internet and
other digital channels  because they fear illegal copying,  have secured limited
economic  benefit from  Internet-based  distribution and are unwilling to create
conflicts  with their  existing  distribution  relationships.  As a result,  our
future success will depend significantly upon our ability to successfully:

         o        Deliver entertaining and compelling music-related content over
                  a wide variety of licensing and digital distribution channels;
         o        Develop and maintain volume usage of our digital music
                  distribution services;
         o        Establish and maintain licensing and distribution
                  relationships with record companies, producers, artists and
                  other rights holders;
         o        Deliver market-leading technology products;
         o        Aggressively expand, manage and enhance our products and
                  services;
         o        Offer competitively priced products and services to our
                  customers; and
         o        Support current product lines and develop and release new
                  versions of our products to ensure compatibility with current
                  and future software and hardware products, platforms and
                  systems.

         Our business,  results of operations and financial  condition  would be
materially adversely affected if:

         o        We are unable to develop content that allows us to attract,
                  retain, and expand a loyal user and licensing base;
         o        The technology we use to prevent illegal copying of music
                  content proves to be ineffective or is not adopted by the
                  music industry;
         o        We are not able to successfully compete with other entities
                  offering services and products similar or superior to our
                  services and products;

                                      -9-
<PAGE>

         o        Our financial, personnel and infrastructure resources are
                  insufficient to meet the costs and demands required to carry
                  out our business plans and effectively compete in the market;
         o        We are unable to anticipate, monitor, and successfully respond
                  to rapidly changing consumer tastes and preferences so as to
                  continually attract a sufficient number of users to our
                  website;
         o        There continues to be significant delays in the rollout,
                  penetration or acceptance of broadband services such as DSL or
                  cable modems in the market;
         o        Adoption of digital commerce by manufacturers of digital
                  products is delayed or is otherwise encumbered;
         o        The adoption of digital commerce by consumers and other
                  purchasers and end users is delayed; or
         o        Infrastructure investment in digital commerce by businesses is
                  canceled or deferred by our potential and prospective
                  customers and partners.

DEPENDENCE ON MAJOR RECORD COMPANIES AS SUPPLIERS OF CONTENT

         The rights to  distribution  of  musical  content  are the single  most
important "input" for music distributors. The supply market is primarily divided
among the five major record label companies  including  Bertelsmann Music Group,
Inc.  ("BMG"),  Sony Music  Entertainment,  Inc.,  Warner Music  Group,  EMI and
Vivendi/Universal,  which in the aggregate account for the majority of the music
industry's  revenue,  and smaller  independent record label companies.  While we
have  signed  limited  digital  content  distribution  agreements  with  BMG and
Universal,  these deals cover only a very  limited  library of content and we do
not currently  anticipate that these agreements will generate  material revenues
for the  Company.  If we do not  succeed in  obtaining  additional  or  material
licenses for digital music distribution from the major record labels, we will be
limited  in  the  content  we  can  distribute.  Although  we  have  established
arrangements  with  artists  and  independent  labels  directly,  we can give no
assurance  that we will be able to enter into material  arrangements  with major
record labels or that, in any event, this will be a material source of revenue.

DEPENDENCE ON SALES, LICENSING AND DISTRIBUTION RELATIONSHIPS

          Our  media  sales  team  has  built  relationships  with a  series  of
distribution  channel,  media,  and  region-specific  sales partners in order to
achieve  maximum  rights  exploitation.  In  addition,  our media sales team has
developed  content   distribution   relationships  with  numerous   audio/visual
distributors  and  cable,   satellite  and  Internet  companies  such  as  Image
Entertainment,  Inc.,  DirecTV,  iN Demand,  and RealNetworks  which will play a
significant  role in our future revenues.  If our  relationship  with any one or
more of our sales or distribution  partners or licensees becomes  impaired,  the
result would have a material adverse effect on our revenues and profit/loss.

RAPID GROWTH HAS STRAINED OUR RESOURCES

         Our rapid  growth has placed a  significant  strain on our  managerial,
operational  and  financial  resources.  During  the  past  year,  we  built  an
organization in anticipation of significant  growth. The cost of such growth did
not correlate  with revenue  generation  and we are in the process of downsizing
some of our infrastructure to conserve capital resources.  To continue to manage
effectively for expected  growth,  we will be required to further  implement and
improve our managerial  controls and procedures  and  operational  and financial
systems. In addition, we will be required to hire, train, integrate,  manage and
retain  our  workforce  including  technical  support,  advertising,  sales  and
business  development staff.  Locating and retaining  qualified personnel in our
business  is  extremely  competitive.  We can  give no  assurances  that we have
adequately allowed for or have the capital resources to fund the costs and risks
associated  with  expansion or that our systems,  procedures or controls will be
adequate to support our operations.  We can also give no assurances that we will
be  able  to  successfully  locate,  train  and  integrate  personnel  into  our
workforce.

DEPENDENCE ON KEY MANAGEMENT PERSONNEL

         Our future success  depends upon the continued  services of certain key
management  personnel including Mr. Bernhard Fritsch. The loss of one or more of
our key management  personnel could  materially  adversely  affect our business,
results of operations and financial  condition.  We have a five year  employment
agreement  with Mr.  Fritsch that  includes a  non-competition  provision  which
prohibits Mr. Fritsch from gaining  employment with, or associating or investing
in,  any  entity  in  the  United  States  which  is  involved  in  the  digital
distribution  of music for a period of one year  after  the  termination  of his
employment  with us. We have also  entered  into a  license  agreement  with Mr.
Fritsch  for  the  use of  certain  significant  intellectual  property  rights,
including  technology and patents for the encryption,  shopping cart and royalty
tracking features of our delivery and sales

                                      -10-
<PAGE>

systems. This license agreement, however, only continues in effect so long as we
continue to pay Mr. Fritsch compensation of 0.25% of our gross revenue as
provided in his employment agreement, and will survive the termination of Mr.
Fritsch's employment, so long as such payments are made. Furthermore, under the
terms of the license agreement between Mr. Fritsch and us, Mr. Fritsch possesses
sole discretion over whether further prosecution of any patent applications with
respect to such technology will continue. Several of our employees, including
Mr. Fritsch, have entered into agreements agreeing, among other things, not to
compete with us if they leave our employ. If those employees, including Mr.
Fritsch, breach those agreements and become employed by or associated with one
of our competitors, such action will likely have a materially adverse effect on
our business, results of operations and financial condition. We have no key-man
life insurance for any of our officers or directors.

NEED FOR ADDITIONAL FINANCING; FINANCING MAY NOT BE AVAILABLE; FUTURE DILUTION

         We may need to raise additional funds to do the following:

         o        Pay cash advances to record labels, artists, publishers and
                  other rights holders to gain distribution licensing rights for
                  commercially exploitable content and programming;
         o        Purchase new hardware and software to support the development
                  of our websites and the development of our technology;
         o        Acquire or partner with other complementary businesses or
                  assets;
         o        Develop adequate sales and service infrastructure; and
         o        Fund working capital and/or other obligations.

         If we raise  additional  funds by issuing  equity or  convertible  debt
securities  in the future,  such  securities  may have  rights,  preferences  or
privileges  senior  to those of our  existing  stockholders  and the  percentage
ownership of our  stockholders  will be diluted.  We can give no assurance  that
additional financing will be available on favorable terms or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to
fund our business, take advantage of opportunities,  develop or enhance services
or products or otherwise respond to competitive  pressures will be significantly
limited.

DIFFICULTIES ASSOCIATED WITH BRAND DEVELOPMENT

         The importance of brand  recognition will increase in the future as the
number of competitive  digital media companies and technology service developers
and providers increases.  There are many music distributors and other retailers,
both online and  traditional,  which enjoy  customer brand  recognition  and may
attempt  to  compete  with  us  in  the  digital   distribution   and  streaming
pay-per-view markets.  Larger and more established  technology companies,  which
have broad  trade  brand  recognition  and  credibility,  may attempt to provide
directly competitive  technologies and services.  Most of these distributors and
technology companies have superior financial strength and resources.  We believe
that  establishing  and increasing  awareness of our brand and the technology it
represents is a critical aspect of our efforts to continue to attract  customers
and content providers. We can give no assurances that our efforts to build brand
awareness will be successful or that we will have sufficient financing to pursue
brand development successfully.

SIGNIFICANT COMPETITION

         The  market  for the  distribution  of  digital  products  and  related
technologies  and services is  competitive.  Barriers to entry in our businesses
are  relatively   low  and   competition  is  likely  to  continue  to  increase
significantly in the future. We face competitive  pressures from numerous actual
and  potential  competitors,  many of which  have  longer  operating  histories,
greater brand name recognition,  larger customer bases and significantly greater
financial,  technical and marketing resources than we do. Such competition could
result in reduced  margins,  lower growth or loss of market share,  any of which
could have a material adverse effect on our business,  results of operations and
financial condition. The existence and operation of "peer-to-peer" networks such
as Napster has had a  substantial  negative  impact on the  revenues  related to
secure and legal digital  distribution  and the overall  market  penetration  of
secure and legal  digital  distribution.  The  failure of the music  industry or
government  to  eliminate  or  control  the  existence  and  operation  of these
"peer-to-peer"  networks  may have a material  adverse  effect on our  business,
results of operations  and financial  condition as well as future  entertainment
industry revenues derived from digital distribution.


                                      -11-
<PAGE>

POTENTIAL LIABILITY FOR INFORMATION DISPLAYED ON OUR WEBSITES

         We may be  subject  to  claims  for  defamation,  libel,  violation  of
privacy,  copyright or trademark  infringement or claims based on other theories
relating to the information we publish or gather on our websites. These types of
claims have been brought, sometimes successfully, against online services in the
past.  We could  also be  subject  to  claims  based  upon the  content  that is
accessible from our websites through links to other websites.  Our insurance may
not adequately protect us against these claims.

SECURITY RISKS

         A  party  who  is  able  to  circumvent  our  security  measures  could
misappropriate proprietary information or cause interruptions in our operations.
Consumer  concern over Internet  security has been,  and could continue to be, a
barrier to  commercial  activities  that  require  consumers  to send  sensitive
information over the Internet.  Computer viruses,  break-ins,  or other security
problems  could  lead  to  misappropriation   of  proprietary   information  and
interruptions, delays, or cessation in service to our customers. Moreover, until
more comprehensive security technologies are developed, the security and privacy
concerns  of  existing  and  potential  customers  may inhibit the growth of the
digital  distribution  channel  merchandising  medium.  In  addition,  we may be
subject  to  "hacker  attacks"  such as those  made on the  sites  of  companies
including Yahoo!,  Inc., eBay, Inc. and E*Trade Group Inc. We may be required to
expend  significant  capital  resources  to protect  against  the threat of such
security  breaches or "hacker  attacks" or to alleviate  problems caused by such
events.  We  can  give  no  assurance  that  our  digital  distribution  channel
operations are completely secure against potential  interruptions or that we can
alleviate the problems should they occur.

         Security breaches to our encryption  technology may harm our reputation
and  business  and may cause us to expend  significant  additional  resources to
protect against future  breaches.  While we will expend  significant  efforts to
make unauthorized access increasingly  difficult, it is expected that determined
hackers  will  continue  their  attempts  to crack the secure  codes which are a
significant  element of our products and may prove successful.  We may be forced
to expend  significant  resources to alleviate problems caused by these attempts
to infiltrate and disrupt our products.

INTELLECTUAL PROPERTY

         We  expect  to rely on a  combination  of patent  law,  copyright  law,
trademark law, contract law, and other intellectual  property protection methods
to protect our musical content,  license rights, and proprietary  technology and
information, but we can give no assurance that such laws will provide sufficient
protection or that the laws will not be amended or repealed. We believe that our
use of material  on our  websites  and other  digital  distribution  channels is
protected  under  current  provisions  of  copyright  law.  However,   effective
trademark,  copyright,  and other  intellectual  property  protection may not be
available in every country in which our technology and services are  distributed
or made available through the Internet and other digital distribution  channels.
We can give no assurance that our methods of protecting our  proprietary  rights
in the United States or abroad will be adequate. In addition, because patent law
relating to the scope of claims in the technology  field in which we do business
is still  evolving,  the degree of future  protection  for our  proprietary  and
licensed rights is uncertain.

         Mr.  Fritsch is  pursuing  patent  protection  with  respect to certain
technologies  that are important to us, including the encryption,  shopping cart
and royalty tracking  technology.  Mr. Fritsch has received notices of allowance
for both patent  applications  filed in his name for these  technologies  in the
United  States.  We can give no  assurance  that any  patents  will be issued or
allowed  outside  of the  United  States.  Until  such time as the  patents  are
actually  issued in the United States or  internationally,  if ever, the license
from Mr.  Fritsch will be ineffective to grant any patent rights with respect to
this  technology.  Moreover,  Mr.  Fritsch is under no  obligation to pursue the
prosecution of further patent claims related to the allowed  patents.  See "Risk
Factors - Dependence  on Key  Management  Personnel,"  "-Dependence  on Licensed
Technology."

         We can give no  assurances  that others  will not develop  technologies
that are similar or superior to our technology, that third parties will not copy
or otherwise obtain and use our technologies and products without  authorization
and that we will be able to  continue  to  maintain  our  rights to our  current
content  catalog.  If we are unable to  maintain  rights to our  technology  and
catalog,  such  inability  will have a material  adverse effect on our business,
results of operations, and financial condition.

         There are no pending lawsuits against us regarding  infringement of any
existing  patents  or other  intellectual  property  rights of  others  with the
exception  of  certain  claims  in the Ozzy  Osbourne  matter  described  in the
"Litigation"  section.  We can give no  assurance  that third  parties  will not
assert patent or other  intellectual  property

                                      -12-
<PAGE>

litigation in the future. If any such claims are asserted and determined to be
valid, we can give no assurance that we will be able to obtain licenses of the
intellectual property rights in question on reasonable terms. If we become
involved in any patent dispute, other intellectual property dispute, or action
to protect proprietary rights, our involvement, regardless of outcome, will
likely have a material adverse effect on our business, results of operations,
and financial condition. If any litigation is determined against us, such
adverse determination may subject us to significant liabilities to third
parties, require us to seek licenses from third parties, and prevent us from
manufacturing and selling our products. Furthermore, we can give no assurance
that others will not independently develop similar, alternative or superior
technologies, or design around the patented technologies developed by us. Any of
these situations would have a material adverse effect on our business, results
of operations, and financial condition.

POTENTIAL FOR ERRORS IN PRODUCTS AND SERVICES

         Our products  will need to be upgraded and  improved  periodically.  If
maintenance  and  upgrades to our  technology  products  disrupt our  customers'
operations, we may suffer lost revenues and harm to our reputation. In addition,
upgrading or  deploying a new version of our  technology  products  requires the
cooperation of existing customers which we may not be able to obtain.  Customers
may be reluctant to upgrade our products  since this process can be  complicated
and time-consuming and poses the risk of network failures.  If periodic upgrades
and maintenance cause disruptions, we will lose revenue-generating transactions,
customers  may elect to use other  solutions  and we may also be the  subject of
negative   publicity  that  may  further   adversely  affect  our  business  and
reputation.  Our customers and distribution  channel partners must integrate our
technology solutions into their existing systems or into a new system. Thus, the
success of product upgrades depends upon the timely and successful deployment of
our  solutions  by customers  and their  distribution  channel  partners for the
distribution and licensing of digital goods.

         We offer  complex  products and services  which may contain  undetected
errors when first  introduced  or when new versions are  released.  If we market
products and services that have errors or that do not function properly,  we may
experience negative  publicity,  loss of or delay in market acceptance or claims
against us by customers,  any of which may have a material adverse effect on our
business, results of operations, and financial condition.

DEPENDENCE ON THE INTERNET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE

         Use of the digital  distribution  channels by  consumers is at an early
stage of development, and market acceptance of the digital distribution channels
and other  digital  channels as a medium for commerce is subject to a high level
of  uncertainty.  Digital  channels  may not  prove  to be a  viable  commercial
marketplace because of inadequate  development of the necessary  infrastructure,
such  as  reliable  network  backbones,   or  complementary  services,  such  as
high-speed modems and security  procedures for financial  transactions or delays
in the development and adoption of new standards and protocols (for example, the
next generation  digital channel protocol) to handle increased levels of digital
channel activity or due to increased government  regulation.  Our future success
will depend on our ability to significantly  increase revenue which will require
the  development  and  widespread  acceptance  of the  Internet  as a medium for
commerce.  We can give no assurance  that digital  channels  will be  successful
retailing  destinations.  If the use of digital  channels  does not  continue to
grow, or if the necessary digital  distribution  infrastructure or complementary
services are not developed to  effectively  support  growth that may occur,  our
business,  results of operations,  and financial  condition  could be materially
adversely affected.

RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS; BANDWIDTH

         The  delivery  of  digital  entertainment,  music and other  rich media
online is and will continue to be, like the Internet,  characterized  by rapidly
changing   technology,   evolving  industry   standards,   changes  in  customer
requirements,  and  frequent  new  service  and  product  introductions.  Online
delivery of music,  at current  compression  rates,  requires  large  amounts of
Internet  bandwidth to download to a customer's  computer in an acceptable  time
span.  Currently,  only a  limited  number  of  consumers  have  such  bandwidth
capability. Unless there is widespread access to high speed Internet connections
or  deeper  compression  of rich  media  files,  consumers  may  continue  to be
frustrated  with long  download  times and the market for online  digital  media
distribution  will remain limited.  Our success will depend upon the development
and consumer  acceptance of an Internet  infrastructure that makes large amounts
of  bandwidth  available  to a wide  number  of users  through  such  high-speed
technologies as cable and digital  subscriber  lines at a price suitable for the
mass consumer market. Our success will also depend on our ability to effectively
use leading  technologies to continue to develop our technological  expertise to
enhance  our  current  services,  to develop  new  services  that meet  changing
customer requirements and to influence and respond to

                                      -13-
<PAGE>

emerging industry standards and other technological changes on a timely and
cost-effective basis. If a universal standard for the electronic delivery of
music, such as the one contemplated by the Secured Digital Music Initiative, is
generally adopted or mandated and is not compatible or otherwise competes with
NETrax(TM), such adoption or mandate will likely have a material adverse effect
on our business, results of operations, and financial condition. In addition,
our business could be adversely affected if an industry standard for hardware
used in the storage and playback of our products fails to develop in a timely
manner or at all.

DEPENDENCE ON THIRD PARTIES FOR INTERNET OPERATIONS

         We also rely on the cooperation of owners of copyrighted  materials and
Internet  search services and on our  relationships  with third party vendors of
software  development tools and technologies.  We can give no assurance that the
necessary  cooperation  from  third  parties  will be  available  on  acceptable
commercial  terms  or  at  all.  If  we  are  unable  to  develop  and  maintain
satisfactory  relationships  with such third  parties on  acceptable  commercial
terms, or if our competitors are better able to leverage such relationships, our
business,  results of  operations  and  financial  condition  will be materially
adversely affected.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE WORLD WIDE WEB

         Existing  domestic and international  laws or regulations  specifically
regulate  communications  or  commerce  on the World  Wide Web or the  Internet.
Furthermore,  laws and  regulations  that address  issues such as user  privacy,
pricing, online content regulation, taxation and the characteristics and quality
of online products and services are under consideration by federal, state, local
and foreign governments and agencies. Several telecommunications  companies have
petitioned  the United  States  Federal  Communications  Commission  to regulate
Internet service  providers and online service  providers in a manner similar to
the regulation of long distance  telephone carriers and to impose access fees on
such  companies.  This  regulation,  if  imposed,  could  increase  the  cost of
transmitting  data  over the  World  Wide Web.  Moreover,  it may take  years to
determine  the  extent  to  which  existing  laws  relating  to  issues  such as
intellectual property ownership and infringement,  libel, obscenity and personal
privacy are  applicable to the World Wide Web. The United  States  Federal Trade
Commission  and government  agencies in certain  states have been  investigating
certain Internet companies regarding their use of personal information. We could
incur  additional  expenses,  and could also be subject to  restrictions  on our
ability  to  use  and  provide  customer  information,  if any  new  regulations
regarding the use of personal  information  are  introduced or if these agencies
choose  to  investigate  our  privacy  practices.  Any new  laws or  regulations
relating  to the World Wide Web, or certain  application  or  interpretation  of
existing  laws,  could  decrease  the  growth in the use of the World  Wide Web,
decrease  the demand for our  products  and  services  or  otherwise  materially
adversely affect our business.

         The Children's  Online Privacy  Protection Act ("COPPA"),  which became
effective on April 21, 2000, and its  implementing  rules,  regulates the online
collection and use of personal  information  provided by and concerning children
under the age of  thirteen  years.  COPPA  specifically  requires  operators  of
websites that are either directed to children under the age of thirteen years or
that have actual  knowledge  that such children are providing  information  to a
website to provide  notice of the  information  that it collects and how it will
use such  information,  to provide parents with access to review and change such
information  and the  manner  in  which  it is used,  and to  obtain  verifiable
parental consent before  collecting and using certain personal  information.  In
addition,  such website operators must provide for the secure maintenance of the
collected  information,  and not collect  more  information  than is  reasonably
necessary under the circumstances to allow children to participate in activities
on their website.

         We currently share  statistical  information about users of our website
with our business partners.  We do not currently sell information about users of
our website to third parties. Laws such as COPPA, if applicable,  could restrict
or limit our ability to share and use information  about our users or require us
to incur  additional  expenses in order to comply with the  requirements of such
laws.  Any new laws or  regulations  relating  to the World Wide Web, or certain
application or interpretation of existing laws, could decrease the growth in the
use of the World Wide Web,  decrease  the demand  for our  website or  otherwise
materially adversely affect our business.

DEVELOPMENT OF WEBSITE AND DIGITAL CATALOG

         Although we have completed the initial  development of our website,  we
must  continually  update it to incorporate new features,  services and content.
The number of digitally  downloadable music tracks and performances which may be
acquired by purchasers  is limited and we can give no assurance  that we will be
able to expand the selection of tracks and performances

                                      -14-
<PAGE>

available for  purchase.  If we are unable to cause an increase in the number of
NETrax(TM) tracks and performances  available for purchase, we will be unable to
generate sufficient revenue to support continued development.

DEPENDENCE ON LICENSED TECHNOLOGY AND MEDIA RIGHTS

         We rely on certain  technology  licensed from third parties,  including
Mr.  Fritsch,  our chief  executive  officer,  from whom we license  certain key
technologies and trademarks and may need to license  additional  technologies in
the future in order to support  NETrax(TM).  There can be no assurance  that new
third party  technology  licenses will be available to us on acceptable terms or
at all. In addition,  we license  music  content from record labels and artists,
and we can give no assurance that any particular music content will be available
to us on acceptable  terms or at all. The  intellectual  property upon which our
technology business relies includes certain technology that is licensed to us by
Mr. Fritsch.  Such license,  however, only continues in effect so long as we pay
compensation  equal to 0.25% of gross revenue to Mr.  Fritsch until the later of
20 years or the expiration of any of the patents which may be issued. If we fail
to pay Mr. Fritsch such  compensation,  we will lose our license and our ability
to utilize such  technology.  We can give no assurance that Mr. Fritsch will not
terminate the license for other  reasons.  If Mr.  Fritsch were to terminate the
license,  such termination  will likely have a materially  adverse effect on our
business.  See "Business -  Technology".  We have not obtained  licenses for the
public performance of all copyrighted musical works which will be the subject of
our business  operations.  We do not believe such licenses are necessary for the
conduct of our business, but will seek to obtain such licenses if necessary. The
companies that  administer  the reporting and  collection of royalties  based on
musical  performances  believe that the  downloading of digital music files is a
"performance," entitling them to receive payment. If such licenses are necessary
and we fail to obtain  them,  we may  become  subject  to  claims  of  copyright
infringement.

INTERNATIONAL MARKETS

         Our success depends on our ability to generate  international sales. We
can give no assurance  that we will be successful  in  generating  international
sales of our products.

         Our sales to customers in certain foreign countries may be subject to a
number of risks including:  foreign currency risk; the risks that agreements may
be  difficult  or  impossible  to enforce and  receivables  difficult to collect
through a foreign  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.  The possibility that the scarcity
of high speed Internet access,  the high cost of Internet access and the pace of
future  improvements  in access to the Internet in countries  outside the United
States  will limit the market  for  electronic  distribution  and  licensing  of
digital  goods  and  may  prevent  the  Company  from  developing  international
revenues.  Our failure to compete  successfully or to expand the distribution of
our offerings in  international  markets could have a material adverse effect on
our business, results of operations, and financial condition.

SINGLE STOCKHOLDER CONTROLS APPROXIMATELY 77% OF STOCKHOLDERS' VOTES

         Mr. Bernhard Fritsch beneficially owns approximately 23,831,391 shares,
or 38%, of our common stock and all of our outstanding  Series 1 preferred stock
which collectively carries approximately 77% of all voting rights held by all of
our stockholders.  Mr. Fritsch is able to control all matters requiring approval
by our  stockholders,  including  the election of directors  and the approval of
significant  corporate  transactions.  This concentration in ownership will make
some  transactions  more  difficult  or  impossible  without  the support of Mr.
Fritsch and may have the effect of delaying, deterring or preventing a change of
control in our company.

LITIGATION

         On May 3, 2000, Andrew Sugerman, an individual who had been retained by
MCY  America,  Inc.  and Music World to obtain  equity  capital  from a specific
investor for Music World,  filed a complaint against the defendants MCY America,
Inc. and Music World in federal District Court in New York City, alleging claims
for breach of contract, promissory estoppel and unjust enrichment. The plaintiff
appears to allege a claim for breach of a written engagement  agreement and that
the defendants  allegedly breached an oral agreement to compensate the plaintiff
for enabling the defendants to obtain financing through a well-known  investment
banking firm. The plaintiff  asserts  further that he is entitled to a cash fee,
as  well  as  stock  options,  in  return  for his  alleged  involvement  in the
financing, and seeks damages of at least $13,315,000,  together with prejudgment
interest and costs. As we

                                      -15-
<PAGE>

believe that the plaintiff's claims lack substantial merit, we intend to
vigorously defend against this action and have filed a motion for summary
judgment which is currently pending before the court. We cannot predict the
outcome of this litigation. Any adverse determination would have a material
adverse effect on our financial position or results of operations.

         In July 2000,  Music World  commenced an action in the Supreme Court of
the State of New York, New York County against TBA Entertainment  Corp. ("TBA"),
arising  out of a  contract  to  acquire  certain  rights  relative  to  musical
performances at the "2000 Hard Rock Rockfest" concert  festival.  In the action,
we allege breach of contract,  misrepresentation and fraud in the inducement for
TBA's knowing failure to deliver rights necessary for Music World to exploit the
concert  rights on the  Internet  and  television  pursuant  to the terms of the
contract between the companies and to recover damages caused thereby.  Defendant
TBA and counterclaim plaintiff Hard Rock International (USA), Inc. have asserted
counterclaims  against  Music  World  for  breach  of  contract.  We  intend  to
vigorously  pursue our claims and  defenses.  This  matter is  currently  in the
discovery stage. Any adverse  determination would have a material adverse effect
on our financial position or results of operations.

         In  November  2000,  Ozzy  Osbourne,   Osbourne  Management  and  other
performers who appeared in the Ozzfest 2000 tour commenced an action against the
Company and its  sub-licensees  DirecTV  Enterprises,  Inc.  ("DirecTV")  and iN
Demand LLC ("iN  Demand") in the United  States  District  Court for the Central
District of California  in reference to  pay-per-view  television  broadcasts of
performances  from  the  Ozzfest  2000  tour  on  DirectTV  and iN  Demand.  The
plaintiffs  followed the filing of the action with an  application  to the court
for a temporary  restraining  order which was  subsequently  denied.  The matter
arises out of a sponsorship  agreement executed in April, 2000 (the "Agreement")
among World Music, Osbourne Management and SFX Holdings,  Inc. ("SFX"),  whereby
defendants  allege that we obtained the right,  among other things, to produce a
videotape of the Ozzfest 2000 concert tour and license the program for broadcast
in various  media outlets  including  pay-per-view  television.  Pursuant to the
Agreement,  we thereafter  entered into license  agreements  with DirecTV and iN
Demand  licensing  the program  for  specified  time  periods to  broadcast  the
videotape produced by us pursuant to the Agreement, on a pay-per-view television
or cable basis. In summary,  the complaint filed by the plaintiffs  alleges that
the  Agreement  only provided us the right to broadcast the program as a webcast
over the  Internet  and  that the  defendants  proceeded  with the  pay-per-view
television  and  cable  broadcasts  without  obtaining  the  allegedly  required
consents of the plaintiffs. Furthermore, plaintiffs allege claims against us, iN
Demand  and  DirecTV  for  federal  copyright  infringement,  federal  trademark
infringement,  federal trademark dilution, commercial appropriation of identity,
state  statutory  and common law  trademark  dilution,  unfair  competition  and
constructive  trust.  Plaintiff Osbourne  Management further has alleged a claim
against us for breach of the  Agreement.  Among other  claims and  defenses,  we
contend that we acted within our rights under the Agreement;  that the Agreement
was  breached by Osbourne  Management;  and that under the  Agreement,  Osbourne
Management  was  obligated to provide us with all necessary  clearances  for the
pay-per-view  broadcasts  which  occurred.  We further  contend that,  under the
Agreement,  as a result of the breach of the  Agreement by Osbourne  Management,
SFX is obligated to indemnify, hold harmless and defend us for any breach of the
Agreement by Osbourne Management,  and that both Osbourne Management and SFX are
obligated to indemnify,  hold harmless and defend us for the claims  asserted by
the plaintiffs who are not parties to the Agreement, as well as any claims which
hereafter may be asserted by any third parties.  We intend to vigorously  defend
this action and have filed  several  counterclaims  with our answer  against the
Osbourne  defendants,   including  breach  of  contract  and  interference  with
contract.  This  matter  has just  entered  the  discovery  stage.  Any  adverse
determination  would have a material adverse effect on our financial position or
results of operations.

         Subsequent  to  year-end,  Music World filed for  arbitration  with the
American  Arbitration  Association against SFX Marketing,  Inc. ("SFX") claiming
breach of contract arising out of an agreement  between the parties entered into
in September 2000. In summary,  among other claims,  we claim that SFX failed to
perform  under  the  terms  of the  agreement  between  the  parties  and  seeks
rescission  of the  agreement  and return of payments made by us to SFX. SFX has
filed a counter  arbitration  arising out of the same agreement seeking payments
under the contract totaling  $600,000.  Any adverse  determination  would have a
material adverse effect on our financial position or results of operations.

         From time to time,  we are  parties to various  other  claims and legal
proceedings incidental to our business. One or more adverse determinations would
have a  material  adverse  effect  on our  financial  position  and  results  of
operations.


                                      -16-
<PAGE>

CONTROL OF EXPENSES AND SPENDING

         If we are unable to adjust  spending in a timely  manner to  compensate
for current  economic  conditions,  there will be an immediate  material adverse
effect on our business, operating results and financial condition. To the extent
such expenses precede or are not subsequently followed by increased revenue, our
operating  results will fluctuate and net anticipated  losses in a given quarter
may be greater than expected. Accordingly, quarter-to-quarter comparisons of our
revenue and  operating  results will not  necessarily  be  meaningful,  and such
comparisons may not be accurate indicators of future  performance.  In addition,
quarterly  fluctuations  in our operating  results and  expenditures  may create
volatility in the market price for our common stock.

CERTAIN IMPLICATIONS OF TRADING OVER-THE COUNTER; "PENNY STOCK" REGULATIONS

         Our common stock is quoted for sale in the  over-the-counter  market on
the OTC Electronic  Bulletin  Board.  An investor will find it more difficult to
dispose of securities trading  over-the-counter than if such securities had been
approved for listing on a national securities exchange or on the NASDAQ SmallCap
market.  We can give no assurance that our securities will be listed on any such
market or that any market will develop for our securities.

         The Securities and Exchange  Commission (the  "Commission") has adopted
"penny stock" regulations which apply to securities traded over-the-counter. Our
common stock is subject to such regulations.  These regulations generally define
"penny  stock" to be any equity  security  that has a market  price of less than
$5.00 per share,  a warrant  that has an  exercise  price of less than $5.00 per
share,  an equity  security of an issuer  (assuming the  corporation has been in
existence  for at least  three  years)  with net  tangible  assets  of less than
$2,000,000 or an equity  security of an issuer with average  revenue in the last
three fiscal  years of less than  $6,000,000  as indicated in audited  financial
statements. Subject to certain limited exceptions, the rules for any transaction
involving a "penny stock" require the delivery,  prior to the transaction,  of a
risk  disclosure  document  prepared by a  broker-dealer  that contains  certain
information  describing the nature and level of risk associated with investments
in the penny stock market.  A  broker-dealer  also must disclose the commissions
payable to both the broker-dealer and the registered  representative and current
quotations for the securities.  Monthly  account  statements must be sent by the
broker-dealer  disclosing the estimated market value of each penny stock held in
the account or indicating  that the estimated  market value cannot be determined
because of the  unavailability  of firm quotes.  In  addition,  the rules impose
additional  sales  practice   requirements  on  broker-dealers   who  sell  such
securities  to  persons  other  than  established  customers  and  institutional
accredited   investors   (generally   institutions  with  assets  in  excess  of
$5,000,000).   These  practices  require  that,  prior  to  the  purchase,   the
broker-dealer determined that transactions in penny stocks were suitable for the
purchaser  and  obtained the  purchaser's  written  consent to the  transaction.
Consequently,  the "penny stock" rules may in the future restrict the ability of
broker-dealers  to sell our  securities and may affect the ability of purchasers
of our securities to sell them in the secondary market.

ACQUISITION OF COMPANIES

         In  conjunction  with our growth plans,  it may be necessary to acquire
other companies or equity interests in such companies for strategic reasons.  It
is possible that any such strategic  acquisition  needs will not be satisfied by
available  companies,  or that we will not be in a position  to finance  such an
acquisition  or to  integrate  such a company  that has been  acquired  into our
existing  business  activities.  In  addition,  takeover  negotiations  and  the
integration  of  companies  acquired may impinge on the time and capacity of our
management to such an extent that it is not able to devote its full attention to
business operations.  We can give no assurances that we can successfully acquire
such companies or equity interests.

EMPLOYEES

         As at December 31, 2000, we had  approximately  55 staff members in New
York, Munich and Los Angeles, separated into the following categories:

     Operations and Development                             15
     Sales and Marketing                                     8
     General and Administration                             16
     Content Acquisition                                    16
                                                            --
                                          Total             55
                                                            ==

         None of our employees are covered by a collective  bargaining agreement
or are  represented  by a labor  union or works  council.  We  believe  that our
relationship with our employees is good.

                                      -17-
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

         As of December 31, 2000, our New York corporate  headquarters,  located
at 1133 Avenue of the Americas,  28th Floor, New York, New York 10036, contained
approximately  14,000  square feet and is leased at a rate of $58,000 per month.
We also maintained an office in New York located at 307 7th Avenue,  23rd Floor,
New York, New York 10001, which contained approximately 2,500 square feet and is
leased at a rate of $2,379 per month. The Company no longer occupies the 307 7th
Avenue  office  as the  lease  expired  by its  terms in March  2001 and was not
renewed by the Company. As of December 31, 2000, forty-three full-time employees
worked in our New York  offices,  as well as several  programming  and  creative
staff working on a freelance basis.

         As of December  31, 2000,  our Munich  office  contained  approximately
7,000  square feet and is leased at a rate of $22,000 per month.  As of December
31, 2000, eight employees worked in the Munich office.

         As of December 31, 2000, our Los Angeles office contained approximately
1,100  square  feet and is leased at a rate of $3,000 per month.  As of December
31, 2000, four employees worked in the Los Angeles office.


                                      -18-
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         As previously reported,  the Company was a party to an arbitration with
a former trade  partner,  Mr. Xavier Ghali and an affiliated  investment  group.
This  matter was  settled in  November  2000 and closed  prior to  year-end.  In
addition,  as of December 31, 2000,  the Company was a party to a litigation  in
New York State  Supreme  Court filed by a former  employee of Music  World.  The
Company settled this matter subsequent to year end.

         On May 3, 2000, Andrew Sugerman, an individual who had been retained by
MCY  America,  Inc.  and Music World to obtain  equity  capital  from a specific
investor for Music World,  filed a complaint against the defendants MCY America,
Inc. and Music World, Inc. in federal District Court in New York City,  alleging
claims for breach of contract,  promissory  estoppel and unjust enrichment.  The
plaintiff appears to allege a claim for breach of a written engagement agreement
and that the defendants  allegedly  breached an oral agreement to compensate the
plaintiff for enabling the defendants to obtain  financing  through a well-known
investment  banking firm. The plaintiff asserts further that he is entitled to a
cash fee, as well as stock options, in return for his alleged involvement in the
financing, and seeks damages of at least $13,315,000,  together with prejudgment
interest and costs. As we believe that the plaintiff's  claims lack  substantial
merit,  we intend to  vigorously  defend  against  this  action and have filed a
motion for summary  judgment  which is currently  pending  before the court.  We
cannot predict the outcome of this litigation.  Any adverse  determination would
have a  material  adverse  effect  on  our  financial  position  or  results  of
operations.

         In July 2000,  Music World  commenced an action in the Supreme Court of
the State of New York, New York County against TBA Entertainment  Corp. ("TBA"),
arising  out of a  contract  to  acquire  certain  rights  relative  to  musical
performances at the "2000 Hard Rock Rockfest" concert  festival.  In the action,
we allege breach of contract, misrepresentation and fraud in the inducement for
TBA's knowing failure to deliver rights necessary for Music World to exploit the
concert  rights on the  Internet  and  television  pursuant  to the terms of the
contract between the companies and to recover damages caused thereby.  Defendant
TBA and counterclaim plaintiff Hard Rock International (USA), Inc. have asserted
counterclaims  against  Music  World  for  breach  of  contract.  We  intend  to
vigorously  pursue our claims and  defenses.  This  matter is  currently  in the
discovery stage.

         In  November  2000,  Ozzy  Osbourne,   Osbourne  Management  and  other
performers who appeared in the Ozzfest 2000 tour commenced an action against the
Company and its  sub-licensees  DirecTV  Enterprises,  Inc.  ("DirecTV")  and iN
Demand LLC ("iN  Demand") in the United  States  District  Court for the Central
District of California  in reference to  pay-per-view  television  broadcasts of
performances  from  the  Ozzfest  2000  tour  on  DirectTV  and iN  Demand.  The
plaintiffs  followed the filing of the action with an  application  to the court
for a temporary  restraining  order which was  subsequently  denied.  The matter
arises out of a sponsorship  agreement executed in April, 2000 (the "Agreement")
among World Music, Osbourne Management and SFX Holdings,  Inc. ("SFX"),  whereby
defendants  allege that we obtained the right,  among other things, to produce a
videotape of the Ozzfest 2000 concert tour and license the program for broadcast
in various  media outlets  including  pay-per-view  television.  Pursuant to the
Agreement,  we thereafter  entered into license  agreements  with DirecTV and iN
Demand  licensing  the program  for  specified  time  periods to  broadcast  the
videotape produced by us pursuant to the Agreement, on a pay-per-view television
or cable basis. In summary,  the complaint filed by the plaintiffs  alleges that
the  Agreement  only provided us the right to broadcast the program as a webcast
over the  Internet  and  that the  defendants  proceeded  with the  pay-per-view
television  and  cable  broadcasts  without  obtaining  the  allegedly  required
consents of the plaintiffs. Furthermore, plaintiffs allege claims against us, iN
Demand  and  DirecTV  for  federal  copyright  infringement,  federal  trademark
infringement,  federal trademark dilution, commercial appropriation of identity,
state  statutory  and common law  trademark  dilution,  unfair  competition  and
constructive  trust.  Plaintiff Osbourne  Management further has alleged a claim
against us for breach of the  Agreement.  Among other  claims and  defenses,  we
contend that we acted within our rights under the Agreement;  that the Agreement
was  breached by Osbourne  Management;  and that under the  Agreement,  Osbourne
Management  was  obligated to provide us with all necessary  clearances  for the
pay-per-view  broadcasts  which  occurred.  We further  contend that,  under the
Agreement,  as a result of the breach of the  Agreement by Osbourne  Management,
SFX is obligated to indemnify, hold harmless and defend us for any breach of the
Agreement by Osbourne Management,  and that both Osbourne Management and SFX are
obligated to indemnify,  hold harmless and defend us for the claims  asserted by
the plaintiffs who are not parties to the Agreement, as well as any claims which
hereafter may be asserted by any third parties.  We intend to vigorously  defend
this action and have filed  several  counterclaims  with our answer  against the
Osbourne  defendants,   including  breach  of  contract  and  interference  with
contract. This matter has just entered the discovery stage.


                                      -19-
<PAGE>

         Subsequent  to  year-end,  Music World filed for  arbitration  with the
American  Arbitration  Association against SFX Marketing,  Inc. ("SFX") claiming
breach of contract arising out of an agreement  between the parties entered into
in September 2000. In summary,  among other claims,  we claim that SFX failed to
perform  under  the  terms  of the  agreement  between  the  parties  and  seeks
rescission  of the  agreement  and return of payments made by us to SFX. SFX has
filed a counter  arbitration  arising out of the same agreement seeking payments
under the contract totaling $600,000.

         From time to time,  we are  parties to various  other  claims and legal
proceedings incidental to our business. One or more adverse determinations would
have a  material  adverse  effect  on our  financial  position  and  results  of
operations.

                                      -20-
<PAGE>

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

None.

                                      -21-
<PAGE>

                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)      Market Information

         Our common stock is presently traded on the Over-the-Counter Electronic
Bulletin Board ("OTCBB") under the trading symbol "MCYC".

         Our common stock's high and low bid information for each quarter within
the last two fiscal years is shown below.  The quotations  reflect  inter-dealer
prices,  without retail mark-up,  markdown or commission,  and may not represent
actual transactions.  Prior to August 2, 1999, our common stock traded under the
trading  symbol  "HBII".  On  August 2,  1999,  we  acquired  Music  World.  The
quotations in the following  table reflect a 2-for-1 forward stock split enacted
by our predecessor, HBI, on August 2, 1999.
<TABLE>
<CAPTION>
Period                                                       High               Low

Fiscal Year 1999:

<S>           <C>                                           <C>                  <C>
First Quarter 1999 (January, February, March)               $ .63                $ .28

Second Quarter 1999 (April, May, June)                    $ 17.75                $ .28

Third Quarter 1999 (July, August, September)              $ 27.00              $ 11.88

Fourth Quarter 1999 (October, November, December)         $ 13.63              $  5.50

Fiscal Year 2000:

First Quarter 2000 (January, February, March)              $17.00                $8.25

Second Quarter 2000 (April, May, June)                     $13.00                $7.13

Third Quarter 2000 (July, August, September)                $7.19                $1.06

Fourth Quarter 2000 (October, November, December)           $1.59                $ .25
</TABLE>

(b)      Holders of our common stock

         As of March 31, 2001, there were approximately 216 holders of record of
our common stock as reported to us by our  transfer  agent,  Interwest  Transfer
Co., Inc.

(c)      Dividends

         To date,  we have not paid any dividends on our common stock and do not
expect to do so in the  foreseeable  future.  Instead,  we expect to retain  all
earnings to finance the growth and development of our business.



                                      -22-
<PAGE>

         (d)      Recent Sales of Unregistered Securities

         The  following  table sets forth  certain  information  concerning  all
securities  issued by us which have not been registered under the Securities Act
for  the  current  fiscal  year.  In the  following  table,  all  references  to
securities means our common stock, unless otherwise indicated.

 NOTE REFERENCE   SHARES ISSUED        DATE ISSUED        CONSIDERATION RECEIVED
       (1)            500,000          January 2000            $   1,545,000
       (2)            657,333        February 3, 2000          $   3,944,999
       (3)          5,006,390           March 2000             $  34,347,260
       (4)            100,000           March 2000             $     454,000
       (5)            500,000           March 2000             $   1,890,000
       (6)             11,200     March - September 2000       $      27,664
       (7)             17,500          August 2000             $           0
       (8)          1,276,313       September 7, 2000          $   1,843,000
       (8)          1,071,428       September 7, 2000          $     750,000
       (8)             50,000       September 7, 2000          $      35,000
       (9)            148,750       November 15, 2000          $     124,000

(1)      In January 2000,  MCY.com agreed to issue the Backstreet Boys and their
         nominees an eighteen  month warrant to acquire up to 500,000  shares of
         MCY.com  common stock at a price of $9.75 per share in reliance upon an
         exemption  from the  registration  requirements  of the  Securities Act
         pursuant to Section 4(2) of the Securities Act.

(2)      In  February  2000,  Gruntal & Co.,  LLC,  the  holder of  warrants  to
         purchase  657,333  common  shares at $6.00  per  share,  exercised  the
         warrants  which were paid for by the return to us of 326,036  shares of
         common stock at an estimated market price of $12.10 per share.

(3)      In March 2000, we issued an aggregate of 5,006,390 shares of our common
         stock to 31 qualified  individual and institutional  investors at $7.50
         per  share in  connection  with a private  offering  of  securities  in
         reliance upon an exemption from the  registration  requirements  of the
         Securities  Act  pursuant to Section  4(2) of the  Securities  Act. The
         offering   was  made  in  an  off-shore   transaction   to  12  foreign
         institutional  purchasers  and 19  foreign  individual  purchasers  who
         certified  that they (i) were not U.S.  persons and were not  acquiring
         the securities  for the account or benefit of any U.S.  person and (ii)
         were an accredited or sophisticated purchaser; and agreed to resell the
         securities  only in  accordance  with  Regulation  S and to comply with
         certain other  provisions  of Regulation S. None of the investors  were
         affiliated  with  the  Company.  The  securities  were  issued  in four
         separate  tranches  as  follows:  2,268,000  shares  on March 7,  2000;
         1,700,000 shares on March 9, 2000;  1,013,350 shares on March 28, 2000;
         and 25,040  shares on March 29, 2000.  The net proceeds of the offering
         were  approximately  $34,347,260.  In  connection  with the March  2000
         offering,  we paid $654,119 in  commissions  to Gruntal & Co., LLC, the
         placement agent,  and $1,617,896 in commissions to Bank Sal.  Oppenheim
         Jr. & CIE.  (Schweitz) AG. In addition,  we paid $667,000 and $262,500,
         respectively,  as a  finder's  fee,  to two  individuals  who  are  not
         affiliated with the Company.

(4)      In March 2000,  MCY.com  agreed to issue to Bad Boy Touring,  Inc., the
         label of the artist,  Sean "Puffy"  Combs,  a twelve  month  warrant to
         acquire up to  100,000  shares of  MCY.com  common  stock at a price of
         $16.00 per share in reliance  upon an exemption  from the  registration
         requirements  of the  Securities  Act  pursuant to Section  4(2) of the
         Securities Act

(5)      In March  2000,  MCY.com  agreed  to issue  the band  `NSYNC  and their
         nominees a twelve  month  warrant  to  acquire up to 500,000  shares of
         MCY.com common stock at a price of $13.17 per share in reliance upon an
         exemption  from the  registration  requirements  of the  Securities Act
         pursuant to Section 4(2) of the Securities Act

(6)      In each of March,  April,  May, June, July,  August and September 2000,
         MCY.com agreed to issue the public relations firm, Susan Blonde,  Inc.,
         a twelve month warrant to acquire up to 1,600 shares of MCY.com  common
         stock at a price of $12.75,  $12.63,  $9.75,  $8.44,  $7.00, $3.50, and
         $2.13 per share,

                                      -23-
<PAGE>

         respectively in reliance upon an exemption from the registration
         requirements of the Securities Act pursuant to Section 4(2) of the
         Securities Act

(7)      In August  2000,  MCY.com  issued  17,500  shares  of  common  stock to
         Frankfurt  Balkind,  Inc.  in  reliance  upon  an  exemption  from  the
         registration  requirements  of the  Securities  Act pursuant to Section
         4(2) of the Securities Act in conjunction with an agreement to cancel a
         warrant to purchase 33,333 shares of common stock previously issued.

(8)      In September  2000,  MCY.com  agreed to issue the Internet  development
         consulting company,  Sapient  Corporation,  1,276,313 shares of MCY.com
         common  stock  valued  at $1.44 per  share.  Sapient  Corporation  also
         purchased a five-year  warrant to purchase  1,071,428  shares of common
         stock at $2.25 per share.  Sapient  Corporation  paid $750,000 for such
         warrant.  In  conjunction  with the warrant  purchased  by Sapient,  we
         agreed to issue a warrant to purchase  50,000 shares of common stock at
         $2.25 to Michael Drapkin,  a consultant.  The above issuances were made
         in reliance upon an exemption from the registration requirements of the
         Securities Act pursuant to Section 4(2) of the Securities Act.

(9)      In November  2000,  MCY.com  issued  148,750  shares of common stock to
         settle  disputes  with  vendors and former  employees  as follows:  (i)
         25,000 shares of common stock to Gray Jones,  a former  employee;  (ii)
         3,750 shares of common  stock to Cool Music,  a vendor;  (iii)  120,000
         shares of common stock divided equally  between Reich  Brothers,  Inc.,
         Strategic Solutions International,  and Steven Feinberg, in conjunction
         with an arbitration settled in November 2000 (see Item 3).

         The  transactions  described  in the table  above were  believed  to be
exempt transactions under Section 4(2) of the Securities Act of 1933, as amended
(the  "Securities  Act"),  as  transactions  by an issuer not involving a public
offering.  All such  shares of  common  stock  issued  were  deemed  "restricted
securities"  (as such term is defined under the  Securities  Act) and subject to
substantial  restrictions  on  transfer.  All of the shares of common stock were
issued for investment  purposes only and without a view to distribution.  All of
the persons who  acquired  such shares  were fully  informed  and advised  about
matters  concerning our company,  including our business,  financial affairs and
other matters.

                                      -24-
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         When used in this  discussion  and analysis,  the words  "anticipates,"
"estimates,"   "expects"   and   similar   terms  are   intended   to   identify
forward-looking  statements  regarding our activities  that are subject to risks
and  uncertainties,  including  those set forth above under "Risk Factors," that
could cause actual  results to differ  materially  from those  projected.  These
forward-looking  statements refer only to the date hereof. We expressly disclaim
any obligation or  undertaking  to release  publicly any updates or revisions to
any  forward-looking  statements  contained  herein to  reflect  any  changes in
events,  conditions or circumstances on which any statement is based. You should
read this discussion and analysis in conjunction  with the financial  statements
and other financial information contained in this Annual Report on Form 10-KSB.

Results of Operations

         We are a  next-generation  media company,  focused on the  acquisition,
production  and sale of premium  music and media  products  across all available
channels.  To enable the secure and accountable  delivery of digital assets over
digital  channels,  we also  develop  and  license  proprietary  digital  rights
management and digital asset management technologies.

       During  2000,  we focused  our  efforts on the  further  development  and
initial  commercialization of our content development and technology operations,
respectively.  In 2001 we anticipate  continued  growth in each business and are
planning for commercialization activities in keeping with expected market growth
and maturity.

         We are subject to the general risks associated with, in the case of our
technology business,  the growth of a development-stage  technology company that
is moving to commercialize its products,  and in the case of our media business,
a competitive market for the acquisition,  production and licensing of music and
media products.

         We have incurred  significant  net losses since inception and generated
minimal  revenues  related  to  our  planned  operations  during  2000.  We  may
experience  significant  fluctuations in operating results in future periods due
to a variety of factors, including:

o        general global economic conditions;
o        the amount and timing of capital expenditures and other costs relating
         to the expansion of our operations;
o        the speed and nature of broadband growth;
o        consumer and business demand for music media products;
o        consumer and business demand for digital content delivery solutions;
o        the introduction of new products and services by us or our competitors;
o        price competition or pricing changes in the entertainment and
         technology industries;
o        the availability of event and other music product rights for
         acquisition; and
o        actions of major music and media conglomerates.

Net Revenues

         For the year ended December 31, 2000, our consolidated  revenue totaled
$474,000  compared to $343,000  for the period from  January 8, 1999 to December
31, 1999.  Included in revenue is advertising  revenue in the amount of $360,000
and $330,000 during the year ended December 31, 2000 and the period from January
8, 1999 to December 31, 1999,  respectively.  Event revenue, an effort initiated
by us during  fiscal  year 2000,  generated  most of the  remaining  $114,000 of
revenue.

         Revenue  from  the  licensing  and   distribution  of  content  through
broadcast, cable, wireless and physical distribution channels is recorded in the
licensing period in which the broadcast and/or  distribution  takes place.  This
licensing  period may have a  lifetime  of  several  months  or, in some  cases,
several  years.  Advertising  revenues are derived from the sale of  advertising
space on our website and are recorded during the period in which the advertising
services are provided. We recognize revenue applicable to delivery of music when
the digital files and/or streams are delivered with related royalties charged to
the cost of sales.

                                      -25-
<PAGE>

          In February  2001,  we formed the joint  venture  with Pyramid for the
purpose of acquiring  exclusive rights from well-known  artists,  and developing
and selling multi-media products from these rights. In the future, we anticipate
revenues derived from the sublicensing of event rights to increase.

         In January 2001, we formed NTI, a new wholly owned  subsidiary of Music
World  focused  on  the  marketing,   sale  and  continued  development  of  our
technologies.  Revenues  expected to be  generated  from NTI include  technology
licensing fees,  implementation  service fees, maintenance fees, network service
fees and clearinghouse fees.

Sales, Marketing and Public Relations Expenses

         Sales, marketing and public relations expenses consist primarily of:

         o        Sales and marketing salaries and benefits, including
                  stock-based compensation;
         o        The cost of producing and promoting events and attending trade
                  shows;
         o        Consulting fees and related expenses for public relations
                  activities.

         Sales,  marketing  and  public  relations  costs were  $10,143,000  and
$9,823,000 in the years ended  December 31, 2000 and 1999,  respectively.  Sales
and marketing expenses in 2000 include a decrease in stock-based compensation of
$981,500  and an  increase of  $1,294,200  in the costs  related to  promotional
events,  consultant fees and the hiring of in-house public relations. As part of
our marketing strategy and in an effort to create brand awareness, a significant
portion of our sales and  marketing  costs in 2000 were  expended  on  acquiring
sponsorships  related to our premium  content  events,  attending  trade  shows,
broadening our sales  relationships and increasing our marketing and promotional
activities.

         We expect a reduction in sales and marketing  expenditures  in 2001 due
to: (1)  increased  outsourcing  of technology  sales through  performance-based
compensation  agreements;  and (2) the shift of  almost  all  content  marketing
expenditures to business-to-business licensing and distribution partners.

Research and Development Expenses

         Our  predecessor  companies  began  developing the NETrax(TM)  suite of
products in 1995. Research and development expenses consist principally of:

         o        software development;
         o        telecommunications and network services charges;
         o        www.mcy.com website development and maintenance; and
         o        salaries, including stock-based compensation, and other
                  expenses related to building our digital music distribution
                  platform and partnerships.

         Since inception,  we have spent over $21,000,000 designing and building
NETrax(TM)  including  expenses  related to software,  equipment,  personnel and
direct  research and development  expenses.  Our direct research and development
expenses were $2,434,000 for the year ended December 31, 1999 and $6,200,000 for
the year ended December 31, 2000. The increase in research and development costs
is primarily due to an increase in payroll,  consulting expenses, and web design
costs.

         We expect our research  and  development  costs to increase  moderately
during the first half of 2001 to reflect the ongoing  investment  in our product
development efforts, particularly in software engineering. Furthermore, with the
formation of our NTI subsidiary,  subject to availability of sufficient capital,
we expect an increase in the level of operational and developmental activities.

Content Development

         Costs incurred with respect to content development include amounts paid
to secure  rights to music and related media as well as the costs related to the
production  and delivery of finished  products to our  customers.  Total content
development  costs,  which  include  stock-based  compensation  and the costs of
employee  salaries  as well as  consultants  dedicated  to  content  acquisition
activities  totaled  $19,284,000  and $1,740,000 for the year ended December 31,
2000 and 1999, respectively. The increase in content development costs is due to
the  increase in

                                      -26-
<PAGE>

amortization of record company royalties, the increase in stock-based
compensation of $4,670,000, the impairment of prepaid event costs and the
increase in the costs of acquiring rights from master rights holders such as the
Backstreet Boys, *NSYNC and the Who, for exploitation via digital downloads,
webcast pay-per-view events, physical distribution, broadcast and related
sublicensing of these rights. In 1999, the events we acquired were part of our
marketing strategy to create brand awareness and were offered at no charge and,
therefore, were included in sales and marketing expenses.

General and Administrative Expenses

         General and  administrative  expenses consist  primarily of stock-based
compensation,  and executive  management,  finance,  legal,  administrative  and
related overhead costs, such as rent and insurance.  General and  administrative
expenses  for the years ended  December 31, 1999 and 2000 were  $52,883,500  and
$21,018,000 respectively. In 1999, $48,388,000 of our general and administrative
expenses was  attributable  to  stock-based  compensation. In 2000,  stock-based
compensation  totaled  $10,964,000.  This decrease in general and administrative
expenses is primarily  attributable to the decrease in stock-based  compensation
which  accounted for  $37,424,000  of this  difference,  partially  offset by an
increase in our insurance costs, an increase in rent expense  resulting from the
relocation of our facilities in September 1999, an increase in professional fees
incurred related to events  acquisition,  and an increase in payroll and related
costs  due to the  growth of our  business.  For 2001,  we  expect  general  and
administrative  expenses to decrease  due to cost cutting  initiatives  begun in
August 2000.

Equipment and Software

         Based on the  limited  revenues  to date  earned by us  related  to our
equipment and software, and giving further consideration to the impact of events
outside of our control such as rapidly changing market circumstances on consumer
acceptance of our business model and proposed product offerings, and the delayed
development of technology conducive to our intended operations,  including,  but
not limited to the  development  of  broadband  transmission  networks,  we have
revised  our  projections  of future cash flows as they relate to certain of our
investments  in  equipment  and  software.  As a  result,  we no  longer  expect
reasonable  estimable future net cash flows related to the use of certain of our
equipment and software over the remaining estimated useful lives of these assets
to be adequate to recover our investment in the selected equipment and software,
and further believe the fair value of such equipment and software to be nominal.
Accordingly, as of December 31, 2000, we wrote off $6,400,000,  representing the
then undepreciated balance of such equipment and software.

Amortization of Acquired Intangibles

         During 1999, Music World acquired certain predecessor  companies.  As a
result, we recorded intangible assets comprised as follows:
<TABLE>
<CAPTION>
<S>                                                                             <C>
         Technology and related contracts                                       $  4,410,000
         Record label contracts and catalogs                                    $    630,000
         Excess of cost over fair value of identifiable net assets acquired     $ 23,281,000
                                                                                ------------
                                                                                $ 28,321,000
                                                                                =============
</TABLE>


The identifiable  intangible assets were being amortized over a thirty-six month
period  and the  excess of cost  over  fair  value of  identifiable  net  assets
acquired  was being  amortized  over a sixty month period until June 30, 2000 as
discussed below.

                                      -27-
<PAGE>

         We  account  for  impairment  of  long-lived   assets,   including  our
intangible  assets,  in  accordance  with  Statement  of  Financial   Accounting
Standards ("SFAS") No. 121,  "Accounting for the impairment of Long-Lived Assets
and for  Long-Lived  Assets to be  Disposed  of".  SFAS No.  121  requires  that
long-lived  assets be  reviewed  for  impairment  whenever  events or changes in
circumstances  indicate that the book value of the asset may not be recoverable.
We evaluate at each balance  sheet date whether  events and  circumstances  have
occurred that indicate possible impairment.  In accordance with SFAS No. 121, we
use an estimate of the future  undiscounted net cash flows of the related assets
over their remaining  estimated useful lives in measuring whether the assets are
recoverable.  Based on the limited  revenues  to date earned by us our  acquired
intangibles, and giving further consideration to the impact of events outside of
our control such as rapidly  changing market  circumstances  related to consumer
acceptance of the company's business model and proposed product  offerings,  and
the delayed  development  of  technology  conducive to its intended  operations,
including,  but  not  limited  to  the  development  of  broadband  transmission
networks, we have revised our projections of future cash flows as they relate to
the acquired intangibles.  As a result, we no longer expect reasonably estimable
future net cash flows  related to the use of our  acquired  technology  over the
remaining  estimated  useful lives of the  intangibles to be adequate to recover
our investment in the acquired  intangibles,  and further believe the fair value
of such  intangibles to be nominal.  Accordingly,  as of June 30, 2000, we wrote
off $21,985,000,  representing the then unamortized balance of such intangibles,
consisting principally of the excess of cost over the fair value of identifiable
net assets acquired.

         Prior to Music World's acquisition of the above-referenced  predecessor
companies,  Bernhard  Fritsch  and  certain  other  individuals  employed by the
predecessor  companies  engaged in research  and  development  activities  which
included the  development,  purchase,  licensing  and  acquisition  of rights to
utilize  technology and property rights including patent,  copyright,  trademark
and trade secrets.  These acquired rights and software  assets  developed by Mr.
Fritsch and others to distribute media under these rights include:

o        digital distribution and encrypted delivery of all forms of media;
o        physical distribution and delivery of such media;
o        online, Internet or electronic distribution, transfer or delivery of
         such media;
o        digital warehousing of such media;
o        physical warehousing of such media;
o        database storage of such media ;
o        search of such media by any means and through any medium now known or
         as may become known in the future; and
o        operation of a "shopping basket" for the purchase of such media.

         Prior to the formation of NTI,  costs  incurred as a result of engaging
in the above  described  activities  were primarily  concentrated  in the rights
acquisition  area followed by the payment of salaries in the  development of the
software  to  exploit  such  rights.  The  result of such  activities  and costs
incurred  in  obtaining  the  various  rights   described  above  prior  to  the
acquisition of the  predecessor  companies by Music World was the development of
the NETrax(TM) player, our proprietary  software for playing  downloadable music
and proprietary  encryption software contained within the NETrax(TM) player. NTI
will continue to evolve and develop new features  within the NETrax(TM)  product
suite and further develop its digital distribution technology.

Stock Based Compensation

         We  recorded  charges  related  to stock  based  compensation  totaling
$16,927,000  and  $49,904,000  for the years  ended  December  31, 2000 and 1999
respectively.  We recorded a compensation  charge to operations of approximately
$23,741,000 during August 1999 in connection with a sale by holders of 4,000,000
shares of HBI common stock of approximately  3,970,000 of such shares to certain
of  our  stockholders  who  also  served  as  advisors  to the  Company.  Future
amortization related to stock based compensation will be:

                   Year Ending December 31,             Amount

                   2001                                 $  5,187,000
                   2002                                 $  3,568,000
                   2003                                 $    454,000

                                      -28-
<PAGE>

Liquidity and Capital Resources

         Our cash balance as of December 31, 2000 was $10,300,000.  During 2000,
net cash of  $35,521,000  was used for  operating  activities  consisting of net
losses of $86,208,000, substantially offset by:

         o        non-cash expense of $16,927,000 associated with stock and
                  stock-based compensation;
         o        non-cash expense of $ 3,618,000 associated with the
                  amortization of intangibles;
         o        non-cash expense of $ 28,385,000 associated with the
                  impairment of fixed assets and intangibles; and
         o        non-cash expense of $ 814,000 associated with the depreciation
                  of capital assets.

For the period from inception through December 31, 1999, net cash of $15,132,000
was used for  operating  activities  consisting  of net  losses of  $69,713,000,
substantially offset by stock-based compensation of $49,904,000, amortization of
intangibles  of  $3,168,000  and the  Company's  share of losses of  predecessor
companies of $663,000.

         In the year ended December 31, 2000, we purchased $3,683,000 in capital
equipment and incurred  $6,746,000 in internal-use  software  development costs.
From inception through December 31, 1999, we purchased approximately $689,000 in
capital equipment and incurred  $777,000 to develop  internal-use  software.  We
expect to incur negative cash flow from operations for the  foreseeable  future,
as we continue to develop our business.

         During the year ended  December  31,  2000,  we raised net  proceeds of
approximately  $34,353,000  through the sale of  5,006,390  shares of our common
stock at $7.50 per share less related costs of approximately $3,200,000. For the
period from  inception  through  December  31,  1999,  we raised net proceeds of
$45,656,000  through the sale of common  stock at prices  ranging  from $2.75 to
$6.00 per share less  related  costs of  $4,784,000  during the period  from May
through December 1999.

     We lease  facilities and equipment under  non-cancelable  operating  leases
expiring  through  October  2004.  Such leases  provide  for annual  payments as
detailed below. In connection with the aforementioned leases, we are required to
provide  security  totaling  $1,156,000.  Such  security  has been  provided  by
deposits and collateralized letters of credit totaling $1,156,000.

         Future  minimum  annual  lease  payments as of December 31, 2000 are as
follows:

                    For The Period Ending
                         December 31,
                    ---------------------
                2001                            $  1,603,000
                2002                               1,254,000
                2003                                 405,000
                2004                                 332,000
                                                 -------------

                                                 $ 3,594,000

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


                                      -29-
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         The Financial  Statements are included at the end of this Annual Report
on Form 10-KSB beginning on page 45.



                                      -30-
<PAGE>



CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

         None.


                                      -31-
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

(a)      Directors and Executive Officers

         Our directors,  executive  officers and all persons nominated or chosen
to become such and their ages, as of December 31, 2000,  are listed on the table
below.  All directors hold office until the next annual meeting of  shareholders
or until  their  successors  have been duly  elected or  qualified  or until his
earlier death,  resignation or removal.  Executive officers are appointed by and
serve at the discretion of our board of directors.
<TABLE>
<CAPTION>
---------------------------------- ------------------- ---------------------------------------------------
Name                                      Age          Position
---------------------------------- ------------------- ---------------------------------------------------
<S>                                        <C>
Bernhard Fritsch                           39          Chairman of the Board, Chief
                                                       Executive Officer, President and
                                                       Director
---------------------------------- ------------------- ---------------------------------------------------
P. William Staby                           48          Chief Financial Officer of the Company and Music
                                                       World
---------------------------------- ------------------- ---------------------------------------------------
Martin Eric Weisberg                       49          Director and Secretary of the Company and Music
                                                       World
---------------------------------- ------------------- ---------------------------------------------------
Hubertus von Hesse                         41          Director
---------------------------------- ------------------- ---------------------------------------------------
Norbert Jahns                              48           *
---------------------------------- ------------------- ---------------------------------------------------
Susanne Weblus                             36           **
---------------------------------- ------------------- ---------------------------------------------------
Larry Stessel                              48           ***
---------------------------------- ------------------- ---------------------------------------------------
Mitchell Lampert                           41           ****
---------------------------------- ------------------- ---------------------------------------------------
Paul Cuthbertson                           38           *****
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
-----------------------------------

* Norbert Jahns died on January 13, 2001.

** Susanne Weblus resigned on June 14, 2000.

***Larry Stessel ceased to be employed by us effective March 12, 2001.

**** Effective April 1, 2001, Mitchell Lampert became employed by Music World as
its  Manager of  Business  Affairs  and  ceased to act as General  Counsel or an
officer of Music World.

*****Paul Cuthbertson ceased to be employed by us effective March 31, 2001.

         BERNHARD  FRITSCH has served as Chairman of the Board,  Chief Executive
Officer,  President and a Director  since the completion of the merger on August
2, 1999. Mr.  Fritsch is also Chairman of the Board,  Chief  Executive  Officer,
President and a director of MCY Music World,  Inc. Mr.  Fritsch is also a member
of our Audit Committee and Compensation  Committee.  Mr. Fritsch has also served
as President and Chief Executive  Officer of Datatek  Services Limited since its
formation in 1997. In 1991, Mr.  Fritsch  founded  Fritsch & Friends  Mediagroup
GmbH, a company which functioned as a high-end audio  post-production  house and
also maintained a significant  presence in multimedia content production,  sales
and  distribution.  From 1989 to 1991, Mr. Fritsch served on the management team
of Harman  International  where he worked to develop and execute  their  digital
equipment  marketing  strategy.  Prior to 1989,  Mr. Fritsch worked on radio and
television audio  productions in West Berlin.  Mr. Fritsch received a Tonmeister
Degree from the  Technical  University  of Berlin.  For the past six years,  Mr.
Fritsch  has  been a guest  lecturer  at New  York  University's  graduate-level
studies in Music Technologies.

         P. WILLIAM STABY joined MCY.com as Chief Financial Officer in November
2000. Mr. Staby has more than 15 years of experience in structuring, negotiating
and funding sophisticated financial transactions. Most recently, Mr. Staby was
employed by Prudential Securities, where he helped to build a leading investment
banking presence in the consumer products sector and represented a variety of
corporate buyers and sellers in merger and acquisition transactions. While at
Prudential, Mr. Staby also served on the advisory board, and later as interim
CEO, of Joe's Production & Grille, Inc., a Colorado-based independent music web
site and compact disc production company. Before joining Prudential, Mr. Staby
headed North American mergers and

                                      -32-
<PAGE>

acquisitions at Rabobank International. Previously, Mr. Staby held senior
finance positions with Xerox, First Boston and Citibank. He holds a B.A. in
Business Administration from The City University of New York and an M.B.A. in
Finance from New York University's Stern School of Business.

         MARTIN ERIC WEISBERG has served as Secretary of the Company and Music
World since June 13, 2000. Mr. Weisberg is a shareholder of the law firm,
Jenkens & Gilchrist Parker Chapin LLP, which serves as special outside counsel
to our company. Mr. Weisberg specializes in the areas of securities, mergers and
acquisitions, financing and international transactions and has been in the
private practice of law for 24 years. Mr. Weisberg is a summa cum laude graduate
of Union College (B.A. 1972) and received his law degree from The Northwestern
University School of Law (1975), where he graduated summa cum laude, was
Articles Editor of the Law Review and was elected to the Order of the Coif. Mr.
Weisberg also attended the London School of Economics and Political Science.

         HUBERTUS VON HESSE has served as a Director since the completion of the
merger of August 2, 1999. Mr. von Hesse also serves as a director of MCY Music
World, Inc. Mr. von Hesse, a founding partner of the law firm of Merleker & v.
Hesse, advises on commercial, corporate and real estate law matters. He has
advised us on legal matters since our incorporation. After a two year training
program at Hypovereinsbank AG/Munich, he studied law at Munich Ludwig-
Maximilians-University and University of Lausanne. He received his law degree
from Munich LMU. Mr. von Hesse passed the First state exam in 1986 and the
Second (final) in 1989. He was admitted to the Bar in Berlin in 1990.

 (b)     Compliance with Section 16(a) of the Exchange Act

          To the best of our knowledge, all officers and directors complied with
Section 16(a) of the Exchange Act.

                                      -33-
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The  following  table  shows  information  concerning  the  annual  and
long-term  compensation of our chief executive officer and each of the following
executives (collectively,  the "Named Executive Officers") at the end of each of
the last two fiscal years (1999,  2000) for  services in all  capacities  to our
company and our subsidiaries.
<TABLE>
<CAPTION>
                           Summary Compensation Table
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Name and Prinicpal Positions       Fiscal                                                          Long-Term
of the Named Executive             Year           Annual                          Other Annual     Compensation
Officers                           2000           Salary           Bonus          Compensation     Options
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
<S>                                <C>           <C>             <C>            <C>                <C>
Bernhard Fritsch,                  1999          $ 300,000       $100,000           $1,500(1)          400,000(3)
Chief Executive Officer,                                                            $6,000(2)          450,000(4)
Chairman of the Board,                                                                    (16)         450,000(5)
President and Director             ---------- --------------- ----------------- ------------------ -------------------
                                   2000          $ 330,000       $100,000           $1,500(1)
                                                                                    $6,000(2)          200,000(6)
                                                                                          (17)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Mitchell Lampert,                  1999          $ 250,000       $ 95,000          $ 1,000(1)          400,000(3)
General Counsel                                                                                        450,000(4)
                                                                                                     1,000,000(5)
                                   ---------- --------------- ----------------- ------------------ -------------------
                                   2000          $ 275,000       $ 95,000          $ 1,000(1)
                                                                                  $185,000(15)         200,000(6)
                                                                                          (18)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Larry Stessel, *                   1999                N/A            N/A              N/A                 N/A
President, Music Division          ---------- --------------- ----------------- ------------------ -------------------
                                   2000          $ 300,000             -0-              -0-          1,000,000(7)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Hubertus von Hesse,                1999          $ 218,172             -0-              -0-            200,000(8)
Managing Director,                                                                                     450,000(9)
MCY Europe                         ---------- --------------- ----------------- ------------------ -------------------
                                   2000         $  208,076             -0-              -0-                 -0-
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
P. William Staby,                  1999                N/A            N/A              N/A                 N/A
                                   ---------- --------------- ----------------- ------------------ -------------------
Chief Financial Officer            2000          $ 205,000             -0-              -0-            500,000(10)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Ray Short,                         1999          $ 175,000       $ 35,000            $ 600(1)          200,000(11)
Senior Vice President, Strategic   ---------- --------------- ----------------- ------------------ -------------------
Planning and Business Development  2000          $ 192,500       $185,000          $ 1,000(1)          300,000(12)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
Justin Summer,                     1999          $ 114,000             -0-              -0-             50,000(13)
Vice President, Business and       ---------- --------------- ----------------- ------------------ -------------------
Legal Affairs                      2000          $ 130,967       $ 45,000               -0-             50,000(14)
---------------------------------- ---------- --------------- ----------------- ------------------ -------------------
----------------------------------
</TABLE>

(1)      We provide the employee with a monthly automobile allowance of up to
         such amount.
(2)      Through December 15, 2000, we reimbursed Mr. Fritsch for
         business-related housing expenses of up to $6,000 per month.

(3)      The option was granted on August 2, 1999. 50,000 options vested on
         August 2, 1999. The balance of 350,000 options vest over three years at
         an exercise price of $1.50 per share.

(4)      The option was granted on September 20, 1999. 225,000 options vested on
         September 20, 1999 and 225,000 options vested on March 20, 2000 at an
         exercise price of $3.20 per share.

(5)      The option was granted on September 27, 1999. For Mr. Fritsch, 225,000
         options vested on September 27, 1999; 225,000 options vested on March
         27, 2000 at an exercise price of $3.20 per share. For Mr. Lampert,
         500,000 options vested on September 27, 1999; 500,000 options vested on
         March 27, 2000 at an exercise price of $3.20 per share.

(6)      The option was granted and vested on May 1, 2000.

(7)      The option was granted on August 22, 2000. The options vest over a
         36-month period at an exercise price of $6.00 per share.

                                      -34-
<PAGE>

(8)      The option was granted on August 2, 1999. The options vest over a
         36-month period at an exercise price of $1.50 per share.

(9)      The option was granted on September 20, 1999. 225,000 options vested on
         September 20, 1999 225,000 options vested on March 20, 2000 at an
         exercise price of $3.20 per share.

(10)     The option was granted on November 16, 2000. The options vest over a
         36-month period at an exercise price of $6.00 per share.

(11)     The option was granted on August 11, 1999. The options vest over a
         36-month period at an exercise price of $ 9.50 per share.

(12)     The option was granted on May 1, 2000. The options vest over a 36-month
         period at an exercise price of $5.00 per share.

(13)     This option was granted on December 17, 1999. The options vest over a
         36-month period at an exercise price of $11.00 per share.

(14)     This option was granted on May 1, 2000. The options vest over a
         36-month period at an exercise price of $10.00 per share. (15) In May
         2000, we amended our employment agreement dated July 11, 1999 with
         Mitchell Lampert by an amendment which provided a single lump sum
         payment of $185,000 to Mr. Lampert as consideration for his agreement
         not to engage in the practice of law outside of Music World legal
         matters.

(16)     We have  agreed  to pay Mr.  Fritsch  a sum equal to 0.25% of our gross
         revenues in accordance  with our employment  agreement with Mr. Fritsch
         dated July 11, 1999, as amended.

(17)     Effective April 1, 2001, Mr. Fritsch agreed to reduce his annual salary
         to $285,000 per year.  As  consideration  therefore,  we have agreed to
         deliver to Mr.  Fritsch  10% of the net shares  retained  by MCY of the
         Applied  Digital  Solutions,  Inc.  (ADSX)  shares which we received in
         connection with a licensing transaction.

(18)     Effective April 1, 2001, Mr. Lampert's  employment agreement with Music
         World was terminated upon mutual consent, without payment of severance.
         Mr. Lampert has executed a new one year employment agreement with Music
         World pursuant to which he shall serve as Manager of Business  Affairs,
         provide  services  eight days per month and receive  $174,000 per annum
         plus  10% of the net  shares  retained  by  us of the  Applied  Digital
         Solutions,  Inc.  (ADSX) shares which we received in connection  with a
         licensing transaction.

* Larry Stessel ceased to be employed by us effective March 12, 2001.

                                      -35-
<PAGE>


Option/SAR Grants in Last Completed Fiscal Year (2000)
<TABLE>
<CAPTION>
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
                                                                                    Market Price
                                                                                    of Shares
                                                                                    Underlying
                                                                                    Option on
                                                                                    Date of Grant
                                                  Persent of                        if the
                            Number of             Total                             Exercise
                            Securities            Options/SARs                      Price is less
                            Underlying            Granted to                        than the
                            Options/SARs          Employees in     Exercise or      Market Price
                            Granted in Fiscal     Fiscal Year      Base Price       on the Date
Name of Executive Officer   2000                  2000             ($/sh)           of Grant        Expiration Date
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
<S>                         <C>                        <C>             <C>             <C>
Bernhard Fritsch            200,000 shares             8.3%            $ 5.00/sh       $   9.75     Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Mitchell Lampert            200,000 shares             8.3%            $ 5.00/sh       $   9.75     Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Larry Stessel*              1,000,000 shares          41.7%           $  6.00/sh         N/A        Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
P. William Staby            500,000 shares            20.8%           $  6.00/sh         N/A        Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Ray Short                   300,000 shares            12.5%           $  5.00/sh       $   9.75     Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Hubertus von Hesse          0 shares                   0.0%            N/A               N/A        N/A
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Justin Summer               50,000 shares              2.1%            $10.00/sh         N/A        Five years
                                                                                                    from the date
                                                                                                    of grant
--------------------------- --------------------- ---------------- ---------------- --------------- ------------------
</TABLE>


*        Larry Stessel ceased to be employed by us effective March 12, 2001.

Aggregated Option/SAR Exercises in Last Completed Fiscal Year (2000) and Fiscal
Year-End 2000 Option/SARs Values

         The following table shows certain information  concerning  exercises of
options to purchase the Company's Common Stock in the fiscal year ended December
31, 2000 and the number and value at  December  31, 2000 of shares of our common
stock subject to unexercised options held by each Named Executive Officer.

                                      -36-
<PAGE>
<TABLE>
<CAPTION>
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
                                                  Number of
                                                  Shares                             Value of          Value of
                                                  Underlying      Number of Shares   Unexercised       Unexercised
                                                  Unexercised     Underlying         In-the-Money      In-the-Money
                          Shares                  Options at      Unexercised        Options at        Options at
                          Acquired                Fiscal          Options at         Fiscal Year-End   Fiscal Year-End
Name of "Named"           on          Value       Year-End        Fiscal Year-End    Year-End          Year-End
Executive Officer"        Exercise    Realized    (Exercisable)   (Unexercisable)    (Exercisable)     (Unexercisable)
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
<S>                       <C>         <C>           <C>                <C>                      <C>                <C>
Bernhard Fritsch          133,750     $528,672      1,191,250          175,000                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
Mitchell Lampert          133,750     $528,672      1,741,250          175,000                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
Larry Stessel*            None        None            111,111          888,889                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
P. William Staby          None        None             13,889          486,111                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
Ray Short                 None        None            128,000          372,000                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
Hubertus von Hesse        None        None            550,000          100,000                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
Justin Summer             None        None             27,000           73,000                 -0-                -0-
------------------------- ----------- ----------- --------------- ------------------ ----------------- -----------------
</TABLE>

*        Larry Stessel ceased to be employed by us effective March 12, 2001.

Long-Term Incentive Plan ("LTIP") Awards

         During  fiscal year 2000, we did not give any LTIP awards to any of our
Named Executive Officers.

Compensation of Directors

         Members of the board of directors are not compensated in such capacity.
However,  members of the board are  reimbursed for  reasonable  travel  expenses
incurred in attending board of directors meetings.

Employment Contracts and Termination of Employment, and Change-in-Control
Arrangements

         Bernhard Fritsch entered into a five-year  employment agreement with us
on July 11, 1999, as amended,  pursuant to which he receives:  (i) a base salary
of $300,000 which increases 10% per annum;  (ii) a guaranteed bonus of $100,000;
(iii) a sum equal to 0.25 % of annual  gross  revenue  generated  by us; (iv) an
automobile allowance of $1,500 per month; (v) reimbursement for business-related
housing  of up to $6,000  per month;  (vi) upon a change of  control,  a payment
equal  to the  product  of 2.99  and his  base  salary;  and  (vii)  such  other
compensation  as our board of directors  may grant.  This  agreement was amended
effective April 1, 2001 (see Item 10).

         Mitchell Lampert entered into a three-year employment agreement with us
on July 11, 1999  pursuant to which he  receives:  (i) a base salary of $250,000
which  increases  10% per annum;  (ii) a guaranteed  bonus of $65,000;  (iii) an
automobile  allowance  of $1,000 per  month;  (iv) upon a change of  control,  a
payment  equal to the  product of 1.00 and his base  salary;  and (v) such other
compensation as our board of directors may grant.  The employment  agreement was
subsequently  amended  in May 2000 to provide a single  lump sum  payment to Mr.
Lampert of  $185,000 as  consideration  for his  agreement  not to engage in the
practice of law outside of Company  legal  matters.  This  agreement was amended
effective April 1, 2001 (see Item 10).

                                      -37-
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the number and percentage of outstanding
shares of our securities,  as of December 31, 2000, owned by: (i) holders of our
securities  known to us to  beneficially  own more than five (5%) percent of our
securities;  (ii) each of our directors;  (iii) each executive  officer named in
the Summary  Compensation  Table under the caption  "Executive  Compensation" in
Item 10 of this Annual Report on Form 10-KSB;  and (iv) all of our directors and
executive officers as a group.

         At December 31,  2000,  there are (i)  60,996,864  shares of our common
stock issued and outstanding  (including  1,326,313 common shares payable);  and
(ii) 1,000,000 shares of our Series 1 preferred stock issued and outstanding.
<TABLE>
<CAPTION>
Name and Address                               Shares of            Percent of      Share of Series 1     Percent of
                                             Common Stock           Class (2)        Preferred Stock      Class (2)
<S>                                              <C>        <C>          <C>              <C>                 <C>
Bernhard Fritsch                                 23,831,391 (3)          38%              1,000,000           100%
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

Gontard & Metallbank                              4,000,000 (4)           7%
Guiollettstrasse 54
60325 Frankfurt, Germany

Tintagle Trading Co., Ltd.                        3,388,700 (5)           6%
c/o Chapman Davis & Co.
No. 2 Chapel Court
London SE1 England

Hubertus von Hesse                                  700,000 (6)           1%
c/o MCY Europe GmbH
Maximilian Strasse 35b
80538 Munich Germany

Martin Eric Weisberg                                  _____ (7)           *
Powder Hill Road
Waccabuc, New York 10597

Norbert Jahns                                       225,000 (8)           *
Bilingerweg 2
14089 Berlin, Germany

Mitchell Lampert**                                1,886,163 (9)           3%
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

Ray Short                                           170,000 (10)          *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

P. William Staby                                     55,556 (11)          *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

Larry Stessel***                                    166,667 (12)          *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

Paul Cuthbertson                                      _____               *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

                                      -38-
<PAGE>

Justin Summer                                         _____               *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036

All directors and named
executive officers as a group (10
persons)                                         27,034,777              42%
</TABLE>

** Effective April 1, 2001,  Mitchell  Lampert became employed by Music World as
its  Manager of  Business  Affairs  and  ceased to act as General  Counsel or an
officer of Music World.

*** Larry Stessel ceased to be employed by us effective March 12, 2001.

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

(1)      We believe that the beneficial  owners of our common stock listed above
         have sole  investment  and voting  power with  respect to such  shares.
         Shares  subject to options  are  considered  beneficially  owned to the
         extent  currently  exercisable  or  exercisable  within  60 days  after
         December 31, 2000.

(2)      Asterisk  indicates  less than 1%. Shares  subject to such options that
         are considered to be beneficially owned are considered outstanding only
         for the purpose of computing the percentage of outstanding common stock
         which  would  be  owned  by the  option  holder  if such  options  were
         exercised,  but (except for the calculation of beneficial  ownership by
         all  executive  officers and  directors as a group) are not  considered
         outstanding  for the purpose of computing the percentage of outstanding
         common stock owned by any other person.

(3)      Includes: (i) 203,750 shares underlying options exercisable at $1.50
         per share; and (ii) 787,500 shares underlying options exercisable at
         $3.20 per share; (iii) 200,000 shares underlying options exercisable at
         $5.00 per share, held by Mr. Fritsch.

(4)      Gontard & Metallbank is a Frankfurt-based investment bank.

(5)      Tintagle Trading Co., Ltd. is an entity which we believe is controlled
         by Michael Wilson-Smith.

(6)      Includes: (i) 100,000 shares underlying options exercisable at $1.50
         per share; and (ii) 450,000 shares underlying options exercisable for
         $3.20 per share, held by Mr. von Hesse.

(7)      Effective June 13, 2000, Martin Eric Weisberg was appointed as
         secretary of the Company and Music World by the Board of Directors.

(8)      Includes 50,000 shares underlying options which are exercisable at
         $1.50 per share held by Mr. Jahns. Mr. Jahns died on January 13, 2001.

(9)      Includes:  (i) 203,750 shares underlying  options  exercisable at $1.50
         per share;  (ii) 1,337,500  shares  underlying  options  exercisable at
         $3.20 per share; (iii) 200,000 shares underlying options exercisable at
         $5.00 per share,  held by Mr. Lampert;  and (iv) 60,000 shares owned by
         Mr. Lampert's wife.

(10)     Includes: (i) 68,000 shares underlying options exercisable at $ 9.50
         per share; and (ii) 102,000 shares underlying options exercisable at
         $5.00 per share, held by Mr. Short.

(11)     Includes 55,556 shares underlying options exercisable at $6.00 per
         share held by Mr. Staby.

(12)     Includes 166,667 shares underlying options exercisable at $6.00 per
         share held by Mr. Stessel.


                                      -39-
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         All share  numbers  presented  below have been  adjusted to reflect the
two-for-one split of our common stock effected on May 20, 1999.

         On April 26,  1999,  we issued an  aggregate  of  35,661,352  shares of
common stock to our  stockholders  (net of 2,000,000  shares returned on July 2,
1999 as described  below).  This amount includes:  25,282,652 shares (fair value
$0.001 per share)  issued to founders;  1,857,480  shares (fair value $0.074 per
share)  which  we  were  contractually  obligated  to  issue  to  employees  and
consultants  prior to  incorporation;  and 8,721,220 shares (fair value of $0.28
per share)  issued on April 26, 1999 to employees and  consultants  for services
rendered.

         On June 14,  1999,  we issued  1,000,000  shares of Series 1  preferred
stock to Mr. Bernhard Fritsch, our Chairman of the Board of Directors, President
and Chief Executive Officer for $1,000.

         On July 2, 1999, we acquired the assets of Datatek  including the stock
of MCY America,  Inc. and Fritsch & Friends or the  "Predecessor  Companies"  in
exchange for an aggregate  consideration  of $ 26,550,000  structured  as: (i) $
1,050,000  in cash;  (ii)  4,500,000  shares  of our  common  stock  valued at $
22,500,000  (fair value $5.00 per share);  and (iii) 5-year warrants to purchase
2,000,000  shares of our common  stock at an exercise  price of $ 5.00 per share
valued at $  3,000,000.  In addition,  we agreed to pay Datatek,  on a quarterly
basis, 1% of gross revenues either:  (i) for a period of 20 years; or (ii) until
such time as the  payments  had  totaled $  9,000,000.  As of July 2, 1999,  the
predecessor  companies  owed us  approximately  $  1,243,000,  representing  the
balance of loans made by us prior to the acquisition.  Mr. Fritsch was Datatek's
chief executive officer,  director and a 47.5% beneficial owner of Datatek which
47.5%   interest  was   transferred  to  other  Datatek   stockholders   for  no
consideration.   Datatek  and  its   subsidiaries   had  been  involved  in  the
development, purchase and licensing of the technology, intellectual property and
other business assets required for our business operations. Mr. Fritsch and Mrs.
Sibylle  Fritsch,  Bernhard  Fritsch's mother returned an aggregate of 2,000,000
shares of our common stock to us for cancellation.

         On July 2, 1999,  we issued to Mr.  James  Burger,  our former  general
manager and  treasurer,  options to acquire an  aggregate  of 400,000  shares of
common  stock.  Mr.  Burger  resigned in all  capacities  in September  1999. In
December 1999 we entered into a termination agreement with Mr. Burger,  pursuant
to which we paid him the sum of $100,000 as termination  compensation  under his
employment  agreement and further as compensation for the cancellation of all of
his options.

         On July 29, 1999, we entered into a license  agreement with Mr. Fritsch
for exclusive  worldwide  rights to certain  technology.  The license remains in
effect  as long as the  compensation  equal to 0.25% of gross  revenues  is paid
annually to Mr.  Fritsch  until the later of 20 years or the  expiration  of the
underlying patents as provided in his employment agreement.  We believe that the
terms  of this  license  agreement  are as fair to us as terms  under a  license
agreement  which we could have  obtained  from an unrelated  third party through
arms-length negotiations.

         On August 2, 1999,  we completed a merger with Music World,  whereby an
acquisition  subsidiary  merged  with and into Music  World,  with  Music  World
becoming a subsidiary of our company. As a result,  outstanding shares of common
stock and  preferred  stock of Music World were  converted,  respectively,  on a
1-for-1 basis into our common stock and preferred stock having identical rights.
In  addition,  all  holders of options  and  warrants  of Music World were given
options and warrants  having  identical  features  under a newly  adopted  stock
option plan and their existing options and warrants were cancelled.

         On August 2, 1999,  HBI,  our  predecessor,  enacted a 2-for-1  forward
stock  split,  increasing  the  number of issued and  outstanding  shares of its
common  stock to  4,611,000.  In  connection  with the  merger,  HBI amended its
certificate of incorporation and did the following: (i) increased its authorized
capital from 50,000,000  shares of common stock to 100,000,000  shares of common
stock;  (ii) designated  1,000,000 shares of preferred stock "Series 1 Preferred
Stock"; and (iii) changed its corporate name to MCY.com,  Inc. In addition,  HBI
issued:  (A) 42,924,988  shares of our common stock to the holders of the common
stock of Music  World,  (B)  2,000,000  warrants  to the  holders of Music World
warrants,  (C) options to holders of Music World options to acquire shares under
the HBI 1999  Incentive  Option  Plan,  and (D)  1,000,000  shares  of  Series 1
preferred  stock  to Mr.  Fritsch.  All of our  former  officers  and  directors
resigned and the current officers and directors were subsequently elected.

                                      -40-
<PAGE>

         In connection with the merger, L. Dee Hall, Glen Hatch, Robert Blackley
and Reed Jensen, the holders of approximately 4,000,000 shares of HBI common
stock, agreed to sell approximately 3,970,000 of such shares to Mr. William
Bossung, Mr. Todd Sanders and their associates for $0.02 per share. Ms. Hall and
Messrs. Hatch, Blackley and Jensen were shareholders of our predecessor and
currently have no affiliation with us. Messrs. Bossung and Sanders were former
consultants to our company and currently have no affiliation with us.

         In August 1999, we issued 5,000 shares (fair value of $6.00 per share)
of our common stock to David Rowland, one of our stockholders, in consideration
for the making a loan to us in the amount of $100,000 and for the accrued
interest on the loan.

         In December 1999, we entered into an agreement with DL Hawk
Communications, Inc. (the "Consultant Company"), a company owned by Richard
Lubic, a former director of Music World, pursuant to which we paid such company
the sum of $100,000 as compensation for terminating a consulting agreement with
the Consulting Company. In connection with such agreement, Mr. Lubic resigned as
a director of Music World and we entered into a revised consulting agreement
with the Consultant Company. The revised agreement, which was terminated in June
2000, was for one year and reduced payments to the Consulting Company from
$175,000 per annum under the old, terminated agreement to $50,000 per annum.

         As of December 31, 1999, we had made non-interest-bearing advances
which contained no repayment terms of approximately $107,000 to Mr. Fritsch.

         In May 2000, we initiated a stock buyback plan offering certain
shareholders the ability to sell back a specified number of shares to the
Company. Mitchell Lampert, General Counsel, sold back 75,000 shares at $7.00 per
share. Lisa Short, the former Secretary and Vice President of Marketing of the
Company and Music World and a sibling of Ray Short who is a Senior Vice
President, sold back 75,000 shares at $7.00 per share. Hubertus von Hesse, a
director, sold back 50,000 shares at $7.00 per share. Norbert Jahns, a director,
through an entity named M&N Buero Consult GmbH, sold back 25,000 shares at $7.00
per share. Andreas Noack, a consultant and a sibling of Thomas Noack, a former
Senior Vice President of Music World, sold back 25,000 shares at $5.00 per
share. In order to participate in the stock buyback, Andreas Noack exercised
options at $1.50 per share.

         In May 2000, Music World amended the employment agreement dated July
11, 1999 with Mitchell Lampert by an amendment which provided a single lump sum
payment of $185,000 to Mr. Lampert as consideration for his agreement not to
engage in the practice of law outside of Music World legal matters. Effective
April 1, 2001, Mr. Lampert entered into a new one-year employment agreement with
Music World pursuant to which he ceased to be an officer or General Counsel and
became the Manager of Business Affairs of Music World. See Item 10.

         Effective April 1, 2001, Mr. Fritsch's employment agreement was amended
to the extent that his salary was reduced to $285,000 per annum. See Item 10.

                                      -41-
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits and Index

         Exhibit Number  Description of Exhibits
         --------------  -----------------------
<TABLE>
<CAPTION>
<S>      <C>                                                                     <C>
         2.1             Agreement and Plan of Reorganization dated as of August 2, 1999 among Health Builders
                         International, Inc., HBI Sub, Inc. and MCY Music World, Inc. (1)

         3.1             Amended and Restated Certificate of Incorporation. (1)

         3.2             By-laws, as amended. (2)

         4.1             Warrant to Purchase Common Stock of MCY.com, Inc. issued to U S West Internet Ventures, Inc.,
                         December 31, 1999. (3)

         4.2             Form of Warrant to Purchase Common Stock of MCY.com, Inc. issued to the Back Street Boys, as
                         amended (Cashless Exercise Form).(4)

         4.3             Form of Warrant to Purchase Common Stock of MCY.com, Inc. issued to the Back Street Boys, as
                         amended (Non-Cashless Exercise Form) (4)

         4.4             Warrant to Purchase Common Stock of MCY.com, Inc. issued to Bad Boy Touring, March 14, 2000.
                         (4)

         4.5             Warrant to Purchase Common Stock of MCY.com, Inc. issued to Susan Blond, Inc., on April 1,
                         2000. (4)

         4.6             Warrant to Purchase Common Stock of MCY.com, Inc. issued to Sapient Corporation on September
                         12, 2000. (6)

         10.1            License Agreement dated July 29, 1999 by and between Bernhard Fritsch and MCY Music World,
                         Inc. (3)

         10.2            U S West Communications Services, Inc. and MCY Music World, Inc. Collaborative Development
                         Agreement effective as of December 31, 1999 (3)

         10.3            Confidentiality and Non-Circumvention Agreement effective as of November 28, 1999. (3)

         10.4            Employment Agreement made as of July 11, 1999 by and between MCY Music World, Inc. and
                         Bernhard Fritsch. (3)

         10.5            Amendment to Employment Agreement made as of July 28, 1999 by and between MCY Music World,
                         Inc. and Bernhard Fritsch. (3)

         10.6            Employment Agreement made as of July 11, 1999 by and between MCY Music World, Inc. and
                         Mitchell Lampert. (3)

         10.7            Employment Agreement between MCY Music World, Inc. and Scott Citron dated as of July 21,
                         1999. (3)*

         10.8            Employment Agreement between MCY Music World, Inc. and Ray Short dated as of August 8, 1999.
                         (3)

         10.9            Employment Agreement dated September 1, 1999 by and between MCY Music World, Inc. and Thomas
                         Noack. (3)

         10.10           Amendment dated May 2, 2000 to Employment Agreement made as of July 11, 1999 by and between
                         MCY Music World, Inc. and Mitchell Lampert.(4)

         10.11           MCY Agreement dated as of October 19, 2000 (6)

         10.12           ADS Agreement dated as of October 19, 2000 (6)

         10.13           Escrow and Payment Agreement dated as of October 19, 2000 (6)

                                      -42-
<PAGE>

         10.14           MCY Registration Rights Agreement dated as of October 19, 2000 (6)

         10.15           ADS Registration Rights Agreement dated as of October 19, 2000 (6)

         10.16           MCY Technology License Agreement dated as of October 19, 2000 (6)

         10.17           ADS Technology License Agreement dated as of October 19, 2000 (6)

         10.18           Employment Agreement between MCY Music World, Inc. and P. William Staby dated as of November
                         16, 2000. (6)

         10.19           Employment Agreement between MCY Music World, Inc. and Nick Kromenacker dated as of December
                         7, 2000. (6)

         10.20           Employment Agreement between MCY Music World, Inc. and Larry Stessel dated as of August 22,
                         2000. (6)**

         10.21           Amendment to Employment Agreement made as of April 1, 2001 by and between MCY Music World,
                         Inc. and Bernhard Fritsch. (6)

         10.22           Employment Agreement made as of April 1, 2001 by and between MCY Music World, Inc. and
                         Mitchell Lampert. (6)

         10.23           Amendment to Employment Agreement made as of February 15, 2001 by and between MCY Music
                         World, Inc. and Larry Stessel. (6)

         21.1            Subsidiaries of Registrant. (3)

         23.1            Consent of Richard A. Eisner & Company, LLP (6)

         99.1            MCY.com, Inc. Amended and Restated 1999 Stock Incentive Plan (5)
</TABLE>

-----------------
(1)      Incorporated  by  reference  from our current  report on Form 8-K dated
         August 2, 1999 (date of  earliest  event  reported),  as filed with the
         Securities  and Exchange  Commission  on August 17,  1999;  SEC File #:
         333-9809.

(2)      Incorporated  by  reference  from  Exhibit  3.3  to  our   registration
         statement on Form SB-2 as filed with the Securities Exchange Commission
         on August 9, 1996; SEC File #: 333-9809.

(3)      Incorporated by reference from our Annual Report on Form 10-KSB, as
         filed with the Securities and Exchange Commission on March 30, 2000;
         SEC File#: 000-29099.

(4)      Incorporated  by  reference  from  Amendment  No.1 to our  registration
         statement  on Form 10-SB,  as filed with the  Securities  and  Exchange
         Commission on June 15, 2000; SEC File #: 000-29099.

(5)      Incorporated by reference from our current report on Form 8-K dated
         October 13, 1999 (date of earliest event reported), as filed with the
         Securities and Exchange Commission on October 15, 1999; SEC File #:
         333-09809.

(6)      Filed herewith.

* Scott Citron ceased to be employed by us effective March 16, 2000.

 **Larry Stessel ceased to be employed by us effective March 12, 2001.

(b)      Reports on Form 8-K.

 None in fiscal year 2000.


                                      -43-
<PAGE>


SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  registrant  has caused this Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                      MCY.com, Inc.

                                                      By: /s/ Bernhard Fritsch
                                                         ---------------------
                                                      Name: Bernhard Fritsch
                                                      Title:   President

                                                      Date:  April 16, 2001

         In  accordance  with the Exchange  Act,  this Report on Form 10-KSB has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
             Signature                                  Title

<S>                                         <C>
/s/         Bernhard Fritsch             Chairman of the Board of Directors, Chief Executive Officer,
Name:   Bernhard Fritsch                 President and Director

Date:  April 16, 2001



/s/        P. William Staby              Chief Financial Officer
Name: P. William Staby

Date:  April 16, 2001



/s/        Martin Eric Weisberg          Director, Secretary
Name: Martin Eric Weisberg

Date:  April 16, 2001



/s/        Hubertus von Hesse            Director
Name: Hubertus von Hesse

Date:  April 16, 2001
</TABLE>

                                       44

<PAGE>
                         MCY.COM, INC. AND SUBSIDIARIES

                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2000








                                       45
<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
MCY.com, Inc.
New York, New York

We have audited the accompanying consolidated balance sheet of MCY.com, Inc. and
subsidiaries  (a  development  stage  company) as of  December  31, 2000 and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the year  then  ended,  the  period  from  January  8,  1999  (date of
inception)  through  December  31, 1999 and for the period from  January 8, 1999
(date of inception)  through December 31, 2000.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material  respects,  the consolidated  financial  position of MCY.com,  Inc. and
subsidiaries,  as of December 31, 2000,  and the  consolidated  results of their
operations and their cash flows for the year then ended, the period from January
8, 1999 (date of  inception)  through  December 31, 1999 and for the period from
January 8, 1999 (date of inception) through December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.


Richard A. Eisner & Company, LLP
New York, New York
April 3, 2001


<PAGE>



MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S>                                                                                        <C>
   Cash and cash equivalents                                                               $      10,300,000
   Sundry receivables                                                                                343,000
   Advances to officer                                                                               101,000
   Other current assets                                                                               63,000
                                                                                           -----------------

      Total current assets                                                                        10,807,000

Equipment and software, net                                                                        9,034,000

Other assets, including security deposits of $ 3,789,000, record company advances
       of $500,000 and prepaid event costs of $670,000                                             4,989,000
                                                                                           -----------------

                                                                                           $      24,830,000
                                                                                           =================

LIABILITIES
Current liabilities:
   Accounts payable, accrued expenses and sundry liabilities                               $       4,538,000
   Current portion of capital lease obligation                                                       713,000
   Deferred revenue                                                                                  471,000
                                                                                           -----------------

      Total current liabilities                                                                    5,722,000

   Capital lease obligation, net of current portion                                                1,681,000
                                                                                           -----------------

                                                                                                   7,403,000
 Commitments and contingencies (Note G)                                                    -----------------


STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized;
   1,000,000  shares of Series 1 Preferred  Stock issued and  outstanding  1,000
Common stock - $.001 par value; 100,000,000 shares authorized;
   59,670,551 shares issued and outstanding                                                           59,000
Common stock payable (1,326,313 shares)                                                            2,360,000
Additional paid-in capital                                                                       182,961,000
Deficit accumulated during the development stage                                                (158,491,000)
Cumulative foreign currency translation adjustment                                                  (190,000)
                                                                                           ------------------

                                                                                                  26,700,000

Unamortized deferred compensation                                                                 (9,209,000)
Stock subscriptions receivable                                                                       (64,000)
                                                                                           -----------------

                                                                                                  17,427,000
                                                                                           -----------------

                                                                                           $      24,830,000
                                                                                           =================
</TABLE>

See notes to financial statements                                             2

<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                              FOR THE              FOR THE
                                                                                            PERIOD FROM          PERIOD FROM
                                                                                             JANUARY 8,          JANUARY 8,
                                                                                                1999                1999
                                                                           FOR THE          (INCEPTION)          (INCEPTION)
                                                                         YEAR ENDED           THROUGH              THROUGH
                                                                        DECEMBER 31,        DECEMBER 31,        DECEMBER 31,
                                                                            2000                1999                2000
                                                                     -----------------   ----------------   ------------------
<S>                                                                  <C>                 <C>                <C>
REVENUE:
   Revenues                                                          $         474,000   $        343,000   $          817,000
                                                                     -----------------   ----------------   ------------------
EXPENSES:
   Sales, marketing and public relations                                    10,143,000          9,823,000           19,966,000
   Product development                                                       6,200,000          2,434,000            8,634,000
   Content development                                                      19,284,000          1,740,000           21,024,000
   General and administrative                                               21,022,000         52,884,000           73,906,000
   Amortization of acquired intangibles                                      3,168,000          3,168,000            6,336,000
   Write-off of impaired intangibles, equipment and software                28,385,000                              28,385,000
                                                                     -----------------   ----------------   ------------------
                                                                            88,202,000         70,049,000          158,251,000
                                                                     -----------------   ----------------   ------------------
Operating loss                                                             (87,728,000)       (69,706,000)        (157,434,000)
Share of loss of predecessor companies                                                           (663,000)            (663,000)
Interest income, net of interest expense                                     1,520,000            656,000            2,176,000
                                                                     -----------------   ----------------   ------------------

NET LOSS                                                             $     (86,208,000)  $    (69,713,000)  $     (155,921,000)
                                                                     =================   ================   ==================

NET LOSS PER COMMON SHARE - BASIC AND DILUTED                              $(1.46)            $(1.66)
                                                                           ======             ======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                               59,028,000          41,929,000
                                                                         ==========          ==========
</TABLE>
See notes to financial statements                                             3
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 2000
<TABLE>
<CAPTION>
                                                         PREFERRED STOCK           COMMON STOCK         COMMON      ADDITIONAL
                                                         ---------------           ------------          STOCK        PAID-IN
                                                        SHARES      AMOUNT      SHARES      AMOUNT      PAYABLE       CAPITAL
                                                        ------      ------      ------      ------      -------       -------
<S>                                                                            <C>        <C>
Issuance of common stock at par ($.001 per share)to
   founders as of January 8, 1999, net of shares
   returned (Note B)                                                           25,282,652 $  25,000
Issuance of common stock to employees and
   consultants at $0.074 per share, as of January 8,
   1999                                                                        1,857,480      2,000                $     135,000
Issuance of common stock to employees, consultants
   and creditors at $0.28 per share - April 1999                               8,721,220      9,000                    2,433,000
Sale of common stock at $2.75 per share - May 1999
   less related costs of $10,000                                                 363,636                                 990,000
Sale of common stock at $3.75 per share - May 1999
   less related costs of $310,000                                               2,400,000     2,000                    8,688,000
Sale of common stock at $5.00 per share - May 1999
   less related costs of $10,000                                                 200,000                                 990,000
Issuance of preferred stock at par ($.001 per share)
   to a founder - June 1999                             1,000,000   $  1,000
Issuance of common stock in connection with
   acquisition at $5.00 per share - July 1999                                  4,500,000      5,000                   22,495,000
Issuance of warrants to purchase 2,000,000 shares of
   common stock issued in connection with acquisition -
   July 1999                                                                                                           3,000,000
Issuance of warrants to purchase 50,000 shares of
   common stock issued in connection with acquisition -
   July 1999                                                                                                              90,000
Issuance of warrants to purchase 33,333 shares of
   common stock for services to the Company - July
   1999                                                                                                                   50,000
Stockholders' deficiency of acquired entities applicable
   to 47.5% interest owned by the Company's
   controlling stockholder                                                                                             2,164,000
Cancellation of common stock issued to a consultant -
   July 1999                                                                    (400,000)                               (112,000)
Stock issued for outstanding HBI shares - August 2,
   1999 in connection with reverse merger                                      4,611,000      5,000                       (5,000)
Compensation resulting from sale by HBI shareholders
   of 3,970,000 shares at $0.02 per share - August 1999                                                               23,741,000
Sale of common stock at $6.00 per share - August
    and October 1999, less related costs of $4,454,000                         6,573,333      6,000                   34,980,000
Issuance of common stock in payment of debt and
   accrued interest at $6.00 per share - August 1999                             121,667                                 730,000
Issuance of warrants for minimal consideration to
   purchase 476,190 shares of common stock in
   connection with collaborative agreement -
    December 1999                                                                                                      2,247,000
Common stock issuable (110,000 shares) to a
   consultant in connection with collaborative
   agreement - December 1999                                                                          $ 1,155,000
Options issued to employees & consultants - various
   dates                                                                                                              41,447,000
Amortization of deferred compensation
Comprehensive loss:
   Loss on foreign currency translation
   Net loss for period

Total comprehensive loss
                                                      -----------  ---------  ----------  ---------   -----------  -------------
Balances at December 31, 1999                           1,000,000   $  1,000   54,230,988 $  54,000   $ 1,155,000  $ 144,063,000
                                                      -----------   --------  ----------- ---------   -----------  -------------
                                                                    DEFICIT      UMULATIVE
                                                                   ACCUMULATED     FOREIGN
                                                                   DURING THE     CURRENCY    UNAMORTIZED     STOCK
                                                        TREASURY   DEVELOPMENT   TRANSLATION   DEFERRED   SUBSCRIPTIONS
                                                         STOCK        STAGE      ADJUSTMENT  COMPENSATION   RECEIVABLE     TOTAL
                                                         -----        -----      ----------  ------------   ----------     -----
Issuance of common stock at par ($.001 per share)to
   founders as of January 8, 1999, net of shares
   returned (Note B)                                                                                        $ (25,000) $          0
Issuance of common stock to employees and
   consultants at $0.074 per share, as of January 8,
   1999                                                                                                                     137,000
Issuance of common stock to employees, consultants
   and creditors at $0.28 per share - April 1999                                                                          2,442,000
Sale of common stock at $2.75 per share - May 1999
   less related costs of $10,000                                                                                            990,000
Sale of common stock at $3.75 per share - May 1999
   less related costs of $310,000                                                                                         8,690,000
Sale of common stock at $5.00 per share - May 1999
   less related costs of $10,000                                                                                            990,000
Issuance of preferred stock at par ($.001 per share)
   to a founder - June 1999                                                                                    (1,000)            0
Issuance of common stock in connection with
   acquisition at $5.00 per share - July 1999                                                                            22,500,000
Issuance of warrants to purchase 2,000,000 shares of
   common stock issued in connection with acquisition -
   July 1999                                                                                                              3,000,000
Issuance of warrants to purchase 50,000 shares of
   common stock issued in connection with acquisition -
   July 1999                                                                                                                 90,000
Issuance of warrants to purchase 33,333 shares of
   common stock for services to the Company - July
   1999                                                                                                                      50,000
Stockholders' deficiency of acquired entities applicabl
   to 47.5% interest owned by the Company's
   controlling stockholder                                        $(2,570,000)                                             (406,000)
Cancellation of common stock issued to a consultant -
   July 1999                                                                                                               (112,000)
Stock issued for outstanding HBI shares - August 2,
   1999 in connection with reverse merger                                                                                         0
Compensation resulting from sale by HBI shareholders
   of 3,970,000 shares at $0.02 per share - August 1999                                                                  23,741,000
Sale of common stock at $6.00 per share - August
    and October 1999, less related costs of $4,454,000                                                                   34,986,000
Issuance of common stock in payment of debt and
   accrued interest at $6.00 per share - August 1999                                                                        730,000
Issuance of warrants for minimal consideration to
   purchase 476,190 shares of common stock in
   connection with collaborative agreement -
    December 1999                                                                                                         2,247,000
Common stock issuable (110,000 shares) to a
   consultant in connection with collaborative
   agreement - December 1999                                                                                              1,155,000
Options issued to employees & consultants - various
   dates                                                                                     $(41,447,000)                        0
Amortization of deferred compensation                                                          22,491,000                22,491,000
Comprehensive loss:
   Loss on foreign currency translation                                           $ (15,000)                                (15,000)
   Net loss for period                                             (69,713,000)                                         (69,713,000)
                                                                                                                       ------------
Total comprehensive loss                                                                                                (69,728,000)
                                                                  ------------   ----------  ------------ -----------  ------------
Balances at December 31, 1999                                     $(72,283,000)   $ (15,000) $(18,956,000)  $ (26,000) $ 53,993,000
                                                                  ------------   ----------  ------------ -----------  ------------
</TABLE>

See notes to financial statements                                             4

<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

FOR THE PERIOD FROM JANUARY 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 2000 (CONTINUED)

                                                         PREFERRED STOCK           COMMON STOCK          COMMON      ADDITIONAL
                                                         ---------------           ------------          STOCK        PAID-IN
                                                        SHARES      AMOUNT      SHARES      AMOUNT      PAYABLE       CAPITAL
<S>                  <C> <C>                            <C>         <C>        <C>        <C>         <C>          <C>
Balances at December 31, 1999                           1,000,000   $  1,000   54,230,988 $  54,000   $ 1,155,000  $144,063,000

Sale of common stock at $7.50 per share - February
   and March 2000, less related costs of $3,195,000                             5,006,390      5,000                  34,348,000
Repurchase of 277,000 shares of common stock
Cancellation of treasury stock                                                   (277,000)                           (1,835,000)
Options issued to employees & consultants - various
   Dates                                                                                                              5,678,000
Exercise of options to purchase 267,500 shares of
   common stock, net of 79,874 shares of
   common stock returned as payment                                              187,626
Exercise of options to purchase 25,000 shares of
   common Stock                                                                   25,000                                 38,000
Cancellation of options issued to employees and
   consultants - various dates                                                                                       (4,156,000)
Issuance of warrants to purchase 1,161,200 shares of
   common stock, principally to artists                                                                               3,951,000
Sale of warrants to purchase 1,071,428 shares of
   common stock                                                                                                         750,000
Exercise of warrants to purchase 657,333 shares of
   common stock, net of 326,036 shares of common
   stock returned as payment                                                     331,297
Issuance of common stock upon cancellation of
    warrants to purchase 33,333 shares of common stock                            17,500
Issuance of common stock in settlement of disputes                               148,750                                124,000
Common stock issuable (1,276,313 shares) to a vendor                                                    1,835,000
Cancellation of 60,000 shares of common stock
    issuable to a consultant                                                                             (630,000)
Amortization of deferred compensation
Comprehensive loss:
   Loss on foreign currency translation
   Net loss for period
Total comprehensive loss
                                                      -----------  ---------  ----------  ---------   -----------  ------------
Balances at December 31, 2000                           1,000,000   $  1,000   59,670,551 $  59,000   $ 2,360,000  $182,961,000
                                                      ===========   ========  =========== =========   ===========  ============

                                                                               DEFICIT       CUMULATIVE
                                                                             ACCUMULATED       FOREIGN
                                                                             DURING THE       CURRENCY       UNAMORTIZED
                                                               TREASURY      DEVELOPMENT     TRANSLATION      DEFERRED
                                                                STOCK           STAGE        ADJUSTMENT     COMPENSATION
                                                                -----           -----        ----------     ------------

Balances at December 31, 1999                                               $(72,283,000)     $ (15,000)    $(18,956,000)

Sale of common stock at $7.50 per share - February
and

   March 2000, less related costs of $3,195,000
Repurchase of 277,000 shares of common stock                   (1,835,000)
Cancellation of treasury stock                                  1,835,000
Options issued to employees & consultants - various
   Dates                                                                                                      (5,678,000)
Exercise of options to purchase 267,500 shares of
   common stock, net of 79,874 shares of
   common stock returned as payment
Exercise of options to purchase 25,000 shares of
common

   Stock
Cancellation of options issued to employees and
   consultants - various dates                                                                                 4,156,000
Issuance of warrants to purchase 1,161,200 shares of
   common stock, principally to artists
Sale of warrants to purchase 1,071,428 shares of
   common stock
Exercise of warrants to purchase 657,333 shares of
   common stock, net of 326,036 shares of common
   stock returned as payment
Issuance of common stock upon cancellation of
    warrants

   to purchase 33,333 shares of common stock
Issuance of common stock in settlement of disputes
Common stock issuable (1,276,313 shares) to a vendor
Cancellation of 60,000 shares of common stock
    issuable

   to a consultant
Amortization of deferred compensation                                                                         11,269,000
Comprehensive loss:
   Loss on foreign currency translation                                                         (175,000)
   Net loss for period                                                       (86,208,000)
Total comprehensive loss
                                                      -                    -------------    -----------
Balances at December 31, 2000                                               $(158,491,000)    $ (190,000)   $(9,209,000)
                                                      =                     =============     ==========    ===========





                                                               STOCK
                                                            SUBSCRIPTIONS
                                                             RECEIVABLE          TOTAL
                                                            ----------           -----
Balances at December 31, 1999                             $     (26,000)   $  53,993,000

Sale of common stock at $7.50 per share - February
and March 2000, less related costs of $3,195,000                              34,353,000
Repurchase of 277,000 shares of common stock                                  (1,835,000)
Cancellation of treasury stock
Options issued to employees & consultants - various
   Dates
Exercise of options to purchase 267,500 shares of
   common stock, net of 79,874 shares of
   common stock returned as payment
Exercise of options to purchase 25,000 shares of
common Stock
Cancellation of options issued to employees and
   consultants - various dates                                  (38,000)
Issuance of warrants to purchase 1,161,200 shares of
   common stock, principally to artists                                        3,951,000
Sale of warrants to purchase 1,071,428 shares of
   common stock                                                                  750,000
Exercise of warrants to purchase 657,333 shares of
   common stock, net of 326,036 shares of common
   stock returned as payment
Issuance of common stock upon cancellation of
    warrants  to purchase 33,333 shares of common stock
Issuance of common stock in settlement of disputes                               124,000
Common stock issuable (1,276,313 shares) to a vendor                           1,835,000
Cancellation of 60,000 shares of common stock
    issuable to a consultant                                                    (630,000)
Amortization of deferred compensation                                         11,269,000
Comprehensive loss:
   Loss on foreign currency translation                                         (175,000)
   Net loss for period                                                       (86,208,000)
                                                                           -------------
Total comprehensive loss                                                     (86,208,000)
                                                          -------------    -------------
Balances at December 31, 2000                             $     (64,000)   $  17,427,000
                                                          =============    =============

</TABLE>

See notes to financial statements                                             5

<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                  FOR THE           FOR THE
                                                                                                PERIOD FROM       PERIOD FROM
                                                                                                JANUARY 8,         JANUARY 8,
                                                                                                   1999               1999
                                                                               FOR THE          (INCEPTION)       (INCEPTION)
                                                                              YEAR ENDED          THROUGH           THROUGH
                                                                             DECEMBER 31,      DECEMBER 31,       DECEMBER 31,
                                                                                 2000              1999               2000
                                                                          ----------------   ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                       <C>                <C>               <C>
   Net loss                                                               $    (86,208,000)  $    (69,713,000) $   (155,921,000)
      Adjustments to reconcile net loss to net cash used in operating
        activities:
           Depreciation and amortization of equipment and software                 814,000            276,000         1,090,000
           Amortization of intangibles                                           3,168,000          3,168,000         6,336,000
           Write-off of impaired intangibles, equipment and software            28,385,000                           28,385,000
           Stock-based compensation                                             16,927,000         49,904,000        66,831,000
           Share of loss of predecessor companies                                                     663,000           663,000
           Changes in:
              Receivables                                                          (87,000)          (261,000)         (348,000)
              Other current assets                                                 986,000           (350,000)          636,000
              Other assets                                                        (150,000)          (482,000)         (632,000)
              Accounts payable, accrued expenses and sundry
                liabilities                                                        644,000          1,663,000         2,307,000
                                                                          ----------------   ----------------  ----------------

                   Net cash used in operating activities                       (35,521,000)       (15,132,000)      (50,653,000)
                                                                          ----------------   ----------------  ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Cost of developing internal-use software                                     (6,746,000)          (777,000)       (7,523,000)
   Datatek acquisition, net of acquired companies cash of $565,000                                 (1,748,000)       (1,748,000)
   Payment of security deposits                                                 (2,867,000)          (925,000)       (3,792,000)
   Purchase of equipment                                                        (3,683,000)          (689,000)       (4,372,000)
                                                                          ----------------   ----------------  ----------------

                   Net cash used in investing activities                       (13,296,000)        (4,139,000)      (17,435,000)
                                                                          ----------------   ----------------  ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of warrants                                                  750,000                              750,000
   Purchase of treasury stock                                                   (1,835,000)                          (1,835,000)
   Principal payments on line of credit                                                               (40,000)          (40,000)
   Proceeds from sale of stock, net of related costs                            34,353,000         45,656,000        80,009,000
                                                                          ----------------   ----------------  ----------------

                   Net cash provided by financing activities                    33,268,000         45,616,000        78,884,000
                                                                          ----------------   ----------------  ----------------

Effect of exchange rate changes on cash                                           (211,000)          (285,000)         (496,000)
                                                                          ----------------   ----------------  ----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                           (15,760,000)        26,060,000        10,300,000
Cash and cash equivalents, beginning of period                                  26,060,000
                                                                          ----------------   ----------------  ----------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                  $     10,300,000   $     26,060,000  $     10,300,000
                                                                          ================   ================  ================

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
      Issuance of stock for stock subscription receivable                 $         38,000   $         26,000  $         64,000
      Issuance of stock and warrants in connection with Datatek
        Acquisition                                                                          $     25,590,000  $     25,590,000
      Deferred compensation to consultants and employees by
        issuance of options                                               $      5,678,000   $     41,447,000  $     41,447,000
      Issuance of warrants for prepaid services and fixed assets          $      5,724,000
      Issuance of stock for notes payable and accrued interest                               $        730,000  $        730,000
      Acquisition of fixed assets by capital lease                        $      2,394,000
</TABLE>

See notes to financial statements                                             6
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

NOTE A - THE COMPANY

MCY Music World, Inc.  ("MusicWorld") was incorporated on January 8, 1999 in the
state of Delaware to acquire certain predecessor companies based in Germany (see
Note B) and to further  develop  its  planned  operations,  which  included  the
creation  and  opening to the public of an online  service  platform  to provide
worldwide  promotional  and sales  services for the music buying  public and the
music industry.  On August 2, 1999,  MusicWorld  completed a reverse merger into
Health  Builders  International,   Inc.  ("HBI"),  an  inactive  public  company
incorporated  in the state of Delaware.  The merger was  consummated  through an
exchange  of  shares  that  resulted  in  stockholders  of  MusicWorld   holding
43,324,988  shares of common  stock  (excluding  121,667  shares of common stock
issuable to  creditors)  or 90.4% of the  outstanding  common  shares of HBI and
1,000,000  shares of Series 1 Preferred  Stock (100% of such class) and existing
stockholders  of HBI holding  4,611,000  shares of common  stock.  The merger is
being accounted for as a recapitalization  and retroactive effect has been given
to the recapitalization in the accompanying financial statements.  In connection
with the merger, HBI changed its name to MCY.com, Inc. (the "Company").

The Company operates an Internet website offering an interactive environment and
virtual music store where music buyers can purchase  digital music downloads and
web-casts in an encrypted and enhanced format, as well as other products. Due to
several  factors which occurred in the year ended December 31, 2000,  which were
beyond the control of the Company, it repositioned its operations to that of (i)
the acquisition,  production and sales through  broadcast,  cable,  Internet and
physical distribution channels of premium music and media products, and (ii) the
development  and sale of NETrax  technology  that will  provide  customers  with
solutions for the secure and  accountable  distribution of digital assets across
all of the emerging digital channels,  i.e.,  Internet,  broadband and wireless.
These two businesses, although complementary,  are not dependent upon each other
for customers or revenue.  The Company is  considered  to be in the  development
stage since,  although  planned  operations have  commenced,  there have been no
significant revenues therefrom.

The Company is subject to those general risks associated with development  stage
companies,  as well as special  risks  unique to emerging  E-commerce  companies
which, by definition,  seek to create new markets for their innovative  products
and services. As shown in the accompanying financial statements, the Company has
incurred substantial net losses,  including the write-down of the carrying value
of intangibles and certain equipment and software, and utilized substantial cash
in operating activities. Further, the Company has generated minimal revenues. In
response thereto,  management has repositioned its operations as described above
and implemented a plan to reduce operating expenses,  including the reduction of
personnel.  The Company's  business concept and business model are unproven and,
accordingly,  the  Company's  viability  is  uncertain.  In order to finance its
continued  development the Company is presently  attempting to raise  additional
financing through additional private placements.  However, there is no assurance
that the Company will be successful in that effort, nor that it will ever attain
profitable operations and operating cash flow.

NOTE B - ACQUISITION

On July 2, 1999,  MusicWorld  acquired  the assets of Datatek  Services  Limited
("Datatek") including the stock of MCY America, Inc. ("MCY America") and Fritsch
& Friends  Mediagroup GmbH ("Fritsch & Friends")  (collectively the "predecessor
companies") in exchange for cash of $1,050,000, 4,500,000 shares of MusicWorld's
common  stock valued at  $22,500,000  and 5-year  warrants to acquire  2,000,000
shares of  common  stock at an  exercise  price of $5.00  per  share,  valued at
$3,000,000,  for an aggregate  cost of  $26,550,000.  In  addition,  the Company
agreed to pay to Datatek, on a quarterly basis, 1% of gross revenues either, (i)
for a  period  of 20  years,  or (ii)  until  such  time as the  payments  total
$9,000,000.  As of the date of the acquisition,  the predecessor  companies owed
MusicWorld $1,243,000 representing the balance of loans made by MusicWorld prior
to the acquisition.  MusicWorld's founder,  controlling stockholder and Chairman
was the  Chief  Executive  Officer,  a  director  and  owned a 47.5%  beneficial
interest in Datatek which was transferred to the other Datatek  stockholders for
no consideration  immediately  prior to the closing of the acquisition.  Datatek
and  its  subsidiaries  had  been  involved  in the  development,  purchase  and
licensing of the  technology,  intellectual  property and other business  assets
that  were  required  for  MusicWorld's   intended  business   operations.   The
transaction  has been  accounted  for as a

                                                                               7
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

purchase by MusicWorld of a 52.5% ownership interest in the Datatek assets and a
contribution,  effective  as of  January  8, 1999,  to  MusicWorld  of the 47.5%
interest  formerly owned by MusicWorld's  founder and  controlling  stockholder.
Such  contributed  interest has been  recorded at the  predecessor  basis to the
controlling stockholder which approximates 47.5% of the stockholders' deficiency
of the  predecessor  companies at the  effective  date of the  contribution.  In
addition, 47.5% of the loss of predecessor companies for the period from January
1, 1999 through July 2, 1999 is reflected in the Company's results of operations
on the equity method and 100% of the results of  operations  of the  predecessor
companies are consolidated with those of the Company from July 2, 1999.

The  aggregate  cost of the  acquisition  of the 52.5%  interest,  amounting  to
$27,793,000,   including   $1,243,000  of  loans   receivable  from  predecessor
companies,  reduced  by  $1,069,000  representing  47.5%  of  the  stockholders'
deficiency  of the  predecessor  companies  at the  acquisition  date  has  been
allocated to assets acquired and  liabilities  assumed at date of acquisition as
follows:
<TABLE>
<CAPTION>
<S>                                                               <C>
     Cash                                                         $       565,000
     Sundry receivables                                                   137,000
     Due from related parties                                             109,000
     Equipment and software, net                                          370,000
     Other assets                                                         146,000
     Intangibles (see Note E)                                          28,321,000
                                                                  ---------------
                                                                       29,648,000
                                                                  ---------------

     Accounts payable, accrued expenses and sundry liabilities          2,884,000
     Line of credit                                                        40,000
                                                                   --------------
                                                                        2,924,000
                                                                  ---------------

     Cost of net assets acquired                                  $    26,724,000
                                                                  ===============
</TABLE>

The  contingent  consideration  will be accounted  for as royalty  expense as it
becomes  payable.  Also  in  connection  with  this  transaction,   founders  of
MusicWorld  agreed to return 2,000,000  shares of common stock,  which were then
canceled.  The return of the shares was  accounted  for as an  adjustment of the
original issuance of shares to founders.

Assuming  the  acquisition  had  occurred as of January 8, 1999,  the  Company's
unaudited   pro-forma  net  loss,   including   amortization   of  the  acquired
intangibles,  would have amounted to  $(73,467,000)  or $(1.66) per common share
for the period January 8, 1999 through December 31, 1999.

NOTE C - SIGNIFICANT ACCOUNTING POLICIES

[1]    BASIS OF PRESENTATION:

       The  consolidated  financial  statements have been prepared in accordance
       with generally accepted accounting principles and include the accounts of
       the Company and it's wholly-owned  subsidiaries  after elimination of all
       significant inter-company transactions and balances.

[2]    CASH:

       For purposes of the  statement of cash flows,  the Company  considers all
       highly liquid  investments  purchased with an original  maturity of three
       months or less to be cash  equivalents.  From time to time, the Company's
       cash  balances  with any  single  financial  institution  exceed  Federal
       Deposit Insurance Corporation ("FDIC") and Securities Investor Protection
       Corporation ("SIPC") limits. At December 31, 2000 cash equivalents amount
       to  $9,407,000  and consist of an  investment  in a money market fund and
       investments in short-term debt instruments.

[3]    EQUIPMENT AND SOFTWARE, NET:


                                                                               8
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

       In accordance  with Statement of Position  ("SOP") 98-1,  "Accounting for
       the Costs of Computer  Software  Developed or Obtained for Internal  Use"
       costs  related to the  development  of  software in  connection  with the
       Company's  Internet  website,  other than those costs incurred during the
       application  development stage, are expensed as incurred.  Costs incurred
       during the  application  development  stage are capitalized and amortized
       using the  straight-line  method over an  estimated  useful life of three
       years beginning when the software is ready for its intended use.

       Equipment is stated at cost less accumulated  depreciation.  Depreciation
       is computed  using the  straight-line  method over the  estimated  useful
       lives of three to seven years.

[4]    USE OF ESTIMATES:

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

[5]    STOCK-BASED COMPENSATION:

       The Company has elected to follow the intrinsic value method set forth in
       Accounting  Principles Board Opinion No. 25, "Accounting for Stock Issued
       to Employees" in accounting for its stock option incentive plan. As such,
       deferred  compensation  expense  is  recorded  on the  date of  grant  of
       employee  options if the current  market  price of the  underlying  stock
       exceeds the exercise price of the option,  and such deferral is amortized
       and  charged  to  operations  over the  vesting  period  of the  options.
       Options,  warrants or stock  awards  issued to  non-employees  are valued
       using the fair value  method and  expensed  over the period  services are
       provided in  accordance  with the  applicable  provisions of Statement of
       Financial   Accounting   Standards  ("SFAS")  No.  123,  "Accounting  for
       Stock-Based Compensation."

[6]    IMPAIRMENT OF LONG-LIVED ASSETS:

       The Company evaluates the recoverability of its identifiable  intangibles
       and other long-lived assets in accordance with SFAS No. 121,  "Accounting
       for the  Impairment  of  Long-Lived  Assets and  Long-Lived  Assets to be
       Disposed  of."  SFAS  No.  121  requires  recognition  of  impairment  of
       long-lived assets in the event the net book value of these assets exceeds
       the  estimated  future  undiscounted  cash  flows  attributable  to these
       assets.  The Company  assesses  potential  impairment  to its  long-lived
       assets  when there is evidence  that  events or changes in  circumstances
       have made  recovery of the asset's  carrying  value  unlikely.  Should an
       impairment  exist,  the  impairment  loss would be measured  based on the
       excess of the carrying  value of the asset over the asset's fair value or
       discounted estimates of future cash flows. See Note D.

       The Company  periodically  evaluated the amortization  period assigned to
       the excess of cost over fair value of identifiable net assets acquired to
       determine  whether  later  events  and  circumstances  warranted  revised
       estimates of useful life. If estimates were changed, the unamortized cost
       would have been allocated to the revised remaining period. In addition, a
       reduction in the carrying amount of the unamortized  excess would be made
       if it  exceeded  the  estimated  future  undiscounted  cash  flows  to be
       generated by the Company. During 2000, such an impairment existed and the
       impairment loss was measured based on the excess of the carrying value of
       the asset over its estimated fair value or discounted estimates of future
       cash flows. See Note E.

[7]    PREPAID EVENT COSTS:

       Costs incurred to acquire or license the rights to produce and exhibit or
       sub-license  media events,  as well as the production costs thereof,  are
       capitalized  and  amortized  over the related  period the Company has the
       right to earn revenue  therefrom.  Amortization  commences when the event
       has been produced and is available  for  exhibition  or  sub-license.  If
       events or changes in circumstances  have made recovery of the


                                                                               9
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

       unamortized  costs  unlikely,  an impairment  loss is recognized  for the
       excess of such costs over the  estimated  fair value of the media  event.
       During the fourth quarter of 2000, an impairment  loss related to prepaid
       media  events  of   approximately   $6,700,000  was  charged  to  content
       development expense.

[8]    REVENUE RECOGNITION:

       Revenue  from (i) the  delivery of music over the  Internet  and (ii) the
       delivery of NETrax technology is, or will be, recognized when the digital
       files  and/or  streams  or  technology   are   delivered.   Revenue  from
       sublicensing of media events is recognized during the period in which the
       recorded  event  is  delivered  and  available  for  exhibition.  Related
       royalties  will be charged to cost of sales to match the  recognition  of
       revenue,   as  applicable.   Advertising   revenue,   which  consists  of
       advertising space on the Company web-site,  is recorded during the period
       in which the  advertising  services are provided.  Included in revenue is
       advertising  revenue in the amount of $330,000  and  $360,000  during the
       period January 8, 1999 through  December 31, 1999 and year ended December
       31, 2000, respectively. The Company purchased television advertising time
       of  $325,000  and  $360,000,  respectively  from the same  customer.  The
       remaining  $114,000  of  revenue  in the year  ended  December  31,  2000
       primarily consisted of sub-licensing of media events. Deferred revenue in
       the accompanying  balance sheet represents  revenue received for recorded
       events which do not meet the criteria for recognition described above.

[9]    ADVERTISING:

       Advertising  expense  is  comprised  of print,  television  and  internet
       related  marketing   expenses.   Advertising   expenses  are  charged  to
       operations during the period incurred, except for expenses related to the
       development of major  commercial or media  campaigns which are charged to
       operations  during the period in which the advertising  campaign is first
       presented by the media.  Advertising  and marketing  expenses  charged to
       operations totaled $1,015,000 and $3,700,000 during the period January 8,
       1999  through  December  31,  1999  and year  ended  December  31,  2000,
       respectively.

[10]   NET LOSS PER SHARE:

       Basic and  diluted net loss per share was  computed  by dividing  the net
       loss for the  period by the  weighted  average  number  of common  shares
       outstanding  during the period  including  shares  issuable to  creditors
       after giving retroactive effect to a 2-for-1 stock split during May 1999.
       All  share  issuances  prior  thereto   reflected  in  the  statement  of
       stockholders  equity  have been  retroactively  adjusted  to reflect  the
       split.  No effect has been given to exercise  of options and  warrants in
       the  calculation  of diluted net loss per share as their  effect would be
       anti-dilutive.

[11]   FOREIGN CURRENCY:

       The assets and liabilities of the Company's  German  subsidiaries,  whose
       functional  currency  is the  Deutsche  Mark,  are  translated  into U.S.
       dollars at exchange  rates as of the balance  sheet  date.  Expenses  are
       translated  at the  average of the rates  prevailing  during the  period.
       Translation  adjustments  are  accumulated  as a  separate  component  of
       stockholders' equity.

                                                                              10
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

[12]   COMPREHENSIVE INCOME:

       The  Company   adopted  the  provisions  of  SFAS  No.  130,   "Reporting
       Comprehensive  Income." SFAS No. 130 establishes  standards for reporting
       comprehensive   income  and  its  components  in  financial   statements.
       Comprehensive  income,  as defined,  includes  all changes in equity (net
       assets) during a period from non-owner  sources.  Comprehensive  loss for
       the period  consists of the net loss and the loss from  foreign  currency
       translation.

[13]   SEGMENT INFORMATION:

       The Company  adopted the provisions of SFAS No. 131,  "Disclosures  about
       Segments of an  Enterprise  and Related  Information."  SFAS 131 requires
       public  companies to report financial and descriptive  information  about
       their reportable operating segments. The Company identifies its operating
       segments based on how management  internally evaluates separate financial
       information,  business  activities  and  management  responsibility.  The
       Company believes that its operations, as of December 31, 2000, constitute
       a single,  reportable segment. Non-U.S. results of operations,  equipment
       and software, and total assets are immaterial.

[14]   FINANCIAL INSTRUMENTS:

       The  carrying  amounts  of  the  Company's  cash  and  cash  equivalents,
       receivables, and accounts payable approximate fair value.

[15]   RECLASSIFICATIONS:

       Certain reclassifications have been made to the 1999 financial statements
       in order to conform to the current year presentation.

NOTE D - EQUIPMENT AND SOFTWARE

Equipment  and  software  at  December  31,  2000  consisted  of  the  following
components:

        Equipment                                             $     3,212,000
        Software                                                    4,518,000
        Equipment and software under capital lease                  2,394,000
                                                              ---------------
                                                                   10,124,000
        Less:  accumulated depreciation and amortization           (1,090,000)
                                                               --------------

                                                              $     9,034,000
                                                              ===============

As of  December  31,  2000,  for the reasons  specified  in Note E as related to
equipment and software, the Company wrote off $6,400,000,  representing the then
undepreciated balance of certain equipment and software.


                                                                              11
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

NOTE E - INTANGIBLE ASSETS

In connection with  MusicWorld's  acquisition of the predecessor  companies (see
Note B), the Company had  recorded  identifiable  intangible  assets  which were
being  amortized over a thirty-six  month period and an excess of cost over fair
value of  identifiable  net assets  acquired  which was being  amortized  over a
sixty-month period.

Based on the  limited  revenues  earned by the Company  related to its  acquired
intangibles, and giving further consideration to the impact of events outside of
the Company's control, such as rapidly changing market circumstances on consumer
acceptance of the Company's business model and proposed product  offerings,  and
the delayed  development  of  technology  conducive to its intended  operations,
including,  but  not  limited  to  the  development  of  broadband  transmission
networks,  the Company has revised its  projections of future cash flows as they
relate to the acquired  intangibles.  As a result, the Company no longer expects
reasonably  estimable  undiscounted  future net cash flows related to the use of
its  acquired  technology  over  the  remaining  estimated  useful  lives of the
intangibles   to  be  adequate  to  recover  its   investment  in  the  acquired
intangibles,  and  further  believes  the fair value of such  intangibles  to be
nominal.  Accordingly,  as of June 30, 2000, the company wrote off  $21,985,000,
representing the then unamortized balance of such intangibles, consisting of the
following:
<TABLE>
<CAPTION>
<S>                                                                                  <C>
        Technology and related contracts                                             $     4,410,000
        Record label contracts and catalogs                                                  630,000
        Excess of cost over fair value of identifiable net assets acquired                23,281,000
                                                                                     ---------------

                                                                                          28,321,000
        Less:  accumulated amortization                                                   (6,336,000)
                                                                                     ---------------
        Unamortized balance written off                                              $    21,985,000
                                                                                     ===============
</TABLE>


NOTE F - INCOME TAXES

As of  December  31,  2000,  the  Company  has an  estimated  United  States net
operating loss carry-forward of approximately  $53,000,000 which expires through
2020. As of December 31, 2000,  Fritsch & Friends and MCY Europe have a combined
estimated net operating  loss  carry-forward  of  approximately  $8,100,000  (DM
17,400,000),  which under German tax law does not expire.  The Company has a net
deferred tax asset of $27,900,000  resulting from the  aforementioned  operating
loss carry-forwards. Such amount is fully offset by a valuation allowance as the
Company has not  determined  that it is more likely than not that the  available
net  operating  loss  carry-forwards  will be  utilized.  During  the year ended
December 31, 2000 and the period from January 8, 1999 through December 31, 1999,
the valuation allowance increased $19,338,000 and $8,562,000, respectively.

The  reconciliation  of income tax benefit computed at the federal statutory tax
rate to the income tax benefit in the  consolidated  statement of operations for
both 1999 and 2000 is as follows:

               Federal                                         (34)%
               State and local, net of federal benefit         (11)%
               Increase in valuation allowance                  45 %
                                                             -----
               Income tax benefit                                0 %
                                                             =====

The Company has recorded state and local franchise taxes based on capital during
the year ended  December  31, 2000 and the period from  January 8, 1999  through
December 31, 1999 in the amount of $75,000 and $94,000,  respectively,  which is
included under the caption general and administrative  expenses on the statement
of operations.

NOTE G - COMMITMENTS AND CONTINGENCIES


                                                                              12
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000


[1]    LEASE COMMITMENTS:

      (a)  Operating:

       The  Company  leases   facilities  and  equipment  under   noncancellable
       operating  leases expiring  through October 2004. Such leases provide for
       annual payments as detailed below. In connection with the  aforementioned
       leases,   the  Company  has  provided  security  deposits  of  $1,186,000
       (included in other assets.)

       Future  minimum  annual  lease  payments as of  December  31, 2000 are as
       follows:

                     FOR THE YEAR ENDING
                         DECEMBER 31,
                     -------------------
                   2001                                      $   1,603,000
                   2002                                          1,254,000
                   2003                                            405,000
                   2004                                            332,000
                                                             -------------

                                                             $   3,594,000
                                                             =============

      Rent  expense  for the year ended  December  31,  2000 and the period from
      January  8,  1999  to  December  31,  1999,  approximated  $2,059,000  and
      $402,000, respectively.

(b)      Capital:

       The Company entered into a 36-month lease,  effective January 1, 2001, to
       finance  computer  equipment and software.  This lease has been accounted
       for as a capital  lease.  The net book value of equipment held under this
       capital lease was $2,394,000 at December 31, 2000. In connection with the
       lease,  the  Company  has  provided  deposits  of $75,000  and  deposited
       $2,529,000  as  collateral  for letters of credit issued by a bank to the
       lessor and equipment vendor. Such amounts are included in other assets in
       the accompanying balance sheet.

       Future lease payments as of December 31, 2000 are as follows:

                       FOR THE YEAR ENDING
                          DECEMBER 31,
                     -------------------
                   2001                                         $     900,000
                   2002                                               900,000
                   2003                                               900,000
                                                                 ------------

               Total minimum lease payments                         2,700,000
               Less amounts representing interest                     306,000
                                                                -------------

               Present value of future lease payments           $   2,394,000
                                                                =============

       On March 23, 2001,  the Company and the lessor  entered into an agreement
       to terminate the lease. In return for a cash payment of $2,330,000 to the
       lessor, the Company took ownership of the leased equipment and software.
       The carrying  value of the  equipment  and software was  increased by the
       $262,000 excess of the payment over the $2,068,000 carrying amount of the
       capital lease obligation at such date.

[2]      LEGAL PROCEEDINGS:

                                                                              13
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000


The Company was a party to an  arbitration  with a former  trade  partner and an
affiliated  investment  group.  This  matter  was  settled in  November  2000 by
issuance of 120,000 shares of common stock valued at $97,500. In addition, as of
December  31, 2000,  the Company was a party to a  litigation  in New York State
Supreme Court filed by a former employee of MusicWorld. The Company settled this
matter subsequent to year end by payment of $50,000.

On May 3, 2000, an individual who had been retained by MCY America, Inc. and MCY
Music World,  Inc. to obtain  equity  capital  from a specific  investor for MCY
Music World,  Inc., filed a complaint  against the defendants MCY America,  Inc.
and MCY Music World,  Inc. in federal District Court in New York City,  alleging
claims for breach of contract,  promissory  estoppel and unjust enrichment.  The
plaintiff appears to allege a claim for breach of a written engagement agreement
and that the defendants  allegedly  breached an oral agreement to compensate the
plaintiff for enabling the defendants to obtain  financing  through a well-known
investment  banking firm. The plaintiff asserts further that he is entitled to a
cash fee, as well as stock options, in return for his alleged involvement in the
financing, and seeks damages of at least $13,315,000,  together with prejudgment
interest  and costs.  The  Company  believes  that the  plaintiff's  claims lack
substantial  merit and intends to vigorously  defend against this action and has
filed a motion for summary judgment.

In November 2000, Ozzy Osbourne,  Osbourne  Management and other  performers who
appeared in the Ozzfest 2000 tour  commenced  an action  against the Company and
its sub-licensees  DirecTV Enterprises,  Inc. ("DirecTV") and iN Demand LLC ("iN
Demand")  in the  United  States  District  Court for the  Central  District  of
California in reference to  pay-per-view  television  broadcasts of performances
from the  Ozzfest  2000 tour on  DirectTV  and iN Demand.  The  plaintiffs  seek
$20,000,000 in damages,  as well as profits earned by the defendants,  copyright
infringement  damages,  legal fees and the film footage. The plaintiffs followed
the  filing of the  action  with an  application  to the  court for a  temporary
restraining  order which was  subsequently  denied.  The matter  arises out of a
Sponsorship  Agreement executed in April, 2000 (the "Agreement") among MCY World
Music, Inc. ("MCY"), Osbourne Management and SFX Holdings, Inc. ("SFX"), whereby
defendants allege that MCY obtained the right,  amongst other things, to produce
a  videotape  of the  OZZfest  2000  concert  tour and  license  the program for
broadcast in various media outlets including pay-per-view  television.  Pursuant
to the Agreement,  MCY thereafter  entered into license  agreements with DirecTV
and iN Demand  licensing the program for specified time periods to broadcast the
videotape  produced  by  MCY  pursuant  to  the  Agreement,  on  a  pay-per-view
television or cable basis.  In summary,  the complaint  filed by the  plaintiffs
alleges that the  Agreement  only  provided  MCY the right to broadcast  the MCY
videotape as a Web-cast over the Internet and that the defendants proceeded with
the pay-per-view television and cable broadcasts without obtaining the allegedly
required  consents of the  plaintiffs.  Furthermore,  plaintiffs  allege  claims
against MCY, iN Demand and DirecTV for federal copyright  infringement,  federal
trademark infringement,  federal trademark dilution, commercial appropriation of
identity, state statutory and common law trademark dilution,  unfair competition
and constructive  trust.  Plaintiff  Osbourne  Management  further has alleged a
claim against MCY for breach of the Agreement.  Among other claims and defenses,
MCY  contends  that it acted  within its rights  under the  Agreement;  that the
Agreement  was breached by Osbourne  Management;  and that under the  Agreement,
Osbourne  Management was obligated to provide MCY with all necessary  clearances
for the pay-per-view broadcasts which occurred. MCY further contends that, under
the  Agreement,  as a  result  of  the  breach  of  the  Agreement  by  Osbourne
Management,  SFX is obligated to indemnify, hold harmless and defend MCY for any
breach  of  the  Agreement  by  Osbourne  Management,  and  that  both  Osbourne
Management and SFX are obligated to indemnify,  hold harmless and defend MCY for
the claims  asserted by the plaintiffs who are not parties to the Agreement,  as
well as any claims which  hereafter  may be asserted by any third  parties.  MCY
intends to  vigorously  defend this action and has filed  several  counterclaims
with its answer against the Osbourne  plaintiffs,  including  breach of contract
and interference with contract. This matter is in the early discovery stage.

In July 2000,  MusicWorld  commenced an action in the Supreme Court of the State
of New York, New York County against TBA Entertainment  Corp.  ("TBA"),  arising
out of a contract to acquire certain rights relative to musical  performances at
the "2000 Hard Rock  Rockfest"  concert  festival.  In the  action,  the Company
alleges  breach of contract,  misrepresentation  and fraud in the inducement for
TBA's knowing failure to deliver rights  necessary for MusicWorld to exploit the
concert  rights on the  Internet  and  television  pursuant  to the terms of the
contract  between  the  companies  and  to  recover  damages  in the  amount  of
out-of-pocket costs incurred thereby.  Defendant TBA and counterclaim  plaintiff
Hard Rock International  (USA), Inc. have asserted  counterclaims for


                                                                              14
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000


$1,000,000  against  MusicWorld  for breach of  contract.  MusicWorld  has filed
motions to dismiss the counterclaims and amend the complaint which are currently
pending  before  the court and  intends  to  vigorously  pursue  its  claims and
defenses.  This matter is in the discovery stage.

Subsequent  to year end,  MusicWorld  filed for  arbitration  with the  American
Arbitration  Association against SFX Marketing,  Inc. ("SFX") claiming breach of
contract arising out of an agreement  between parties entered into in September,
2000.  In summary,  among other  claims,  the Company  claims that SFX failed to
perform  under  the  terms  of the  agreement  between  the  parties  and  seeks
rescission of the agreement and return of payments  aggregating $150,000 made by
the Company to SFX. SFX has filed a counter  arbitration arising out of the same
agreement seeking payments under the contract totaling $600,000. The parties are
currently in the process of selecting an arbitrator.

The ultimate outcome of the litigation and arbitration referred to in the second
through  fifth  paragraphs  above  is  not  presently   determinable,   however,
management  believes that an adverse outcome in any of such matters could have a
material  adverse  effect on the financial  position or results of operations of
the Company.

NOTE H - STOCKHOLDERS' EQUITY

The Board of Directors has the authority to issue 10,000,000 shares of preferred
stock in one or more series and to fix the rights,  preferences,  privileges and
restrictions,  including dividend,  conversion,  voting,  redemption  (including
sinking fund provisions),  and other rights,  liquidation  preferences,  and the
number of shares  constituting  any series and the  designations of such series,
without any further vote or action by the  stockholders of the Company.  On June
14,  1999,  the  Company  designated  and  issued  1,000,000  shares of Series 1
Preferred  Stock to its founder and  Chairman  for $1,000.  Each of these shares
entitles the holder to 100 votes for each share held on all matters submitted to
a vote of  stockholders.  The  Series  1  Preferred  Stock  does not  carry  any
dividend, liquidation, conversion or preemptive rights.

On August 2, 1999,  concurrent with the merger of MusicWorld into HBI (described
below), the Certificate of Incorporation of HBI was amended whereby it:

       o      Effected a 2-for-1 stock split,  increasing its authorized capital
              from  50,000,000  shares of common stock to 100,000,000  shares of
              common  stock,  and  increasing  its  outstanding  common stock to
              4,611,000 shares;

       o      Designated 1,000,000 shares of its 10,000,000 authorized shares of
              preferred stock as Series 1 Preferred Stock, and

       o      Changed  its name from  Health  Builders  International,  Inc.  to
              MCY.com, Inc.

Also on August 2, 1999, the Company completed its merger with MusicWorld whereby
a subsidiary  of the Company  merged with and into  MusicWorld  with  MusicWorld
becoming a  subsidiary  of the Company.  In  connection  therewith,  outstanding
shares  of  MusicWorld   common  stock  and  preferred   stock  were  converted,
respectively,  on a 1-for-1  basis into common and  preferred  shares of MCY.com
having  identical  rights.  Furthermore,  all holders of options and warrants of
MusicWorld  were given  identical  options and  warrants of the Company  under a
newly adopted stock option plan,  and their  existing  options and warrants were
canceled.

In connection with the merger,  holders of 4,000,000  shares of HBI common stock
sold  approximately  3,970,000  of such shares for $0.02 per share to certain of
the  Company's  stockholders  who also served as advisors  to the  Company.  The
Company   recorded  a  compensation   charge  to  operations  of   approximately
$23,741,000 in connection with this transaction during August 1999.

In  August  and  October,  1999,  the  Company  sold in a private  placement  an
aggregate of 6,573,333 shares of common stock at a price of $6.00 per share, for
proceeds of $35,886,000 net of commissions and fees to the placement agent. Also
in connection with this transaction,  the Company paid $900,000 to other parties
who

                                                                              15

<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

facilitated the transaction. Additionally, warrants to acquire 657,333 shares of
common stock at $6.00 per share were issued to a placement  agent in  connection
with this  private  placement.  During the year ended  December  31,  2000,  the
warrants  were  exercised  and were  paid for by the  return to the  Company  of
326,036 shares of common stock at an estimated market price of $12.10 per share.

From  February  16, 2000  through  March 9, 2000,  the Company sold in a private
placement an  aggregate of 5,006,390  shares of common stock at a price of $7.50
per share, for proceeds of approximately $34,400,000 net of commissions and fees
to the placement agent and others.

In May  2000,  management  initiated  a  stock  buyback  plan  offering  certain
stockholders  the  ability  to sell  back a  specified  number  of shares to the
Company.  The offer expired on May 31, 2000.  One employee,  one officer and one
director  sold  back  a  total  of  200,000  shares  at  $7.00  per  share.  One
non-employee  stockholder  sold back  25,000  shares at $7.00 per  share.  Three
employee stockholders sold back 52,000 shares at $5.00 per share.

During the year ended  December 31, 2000,  the Company  signed  agreements  with
vendors  to issue  1,276,313  shares of common  stock in  payment  for  services
related to the  development of software.  As of December 31, 2000,  these shares
were included in common stock payable in the accompanying balance sheet.

During the year ended  December 31, 2000,  the Company  issued 148,750 shares of
common stock to settle  disputes with vendors,  former trade partners and former
employees.

NOTE I - WARRANTS

During  the  year  ended  December  31,  2000,  the  Company  issued   warrants,
principally  to artists in  connection  with  contracts to provide  pay-per-view
web-casts  of concerts  and to vendors.  Such  warrants  permit the  purchase of
1,161,200  shares of common  stock at  exercise  prices of $2.13 to $16.00.  The
warrants were valued using the  Black-Scholes  valuation model at  approximately
$3,951,000 and are exercisable over one to three year periods. In addition,  the
Company sold to a vendor a warrant to purchase  1,071,428  shares of stock at an
exercise price of $2.25 for $750,000 cash, representing the estimated fair value
of the warrant. Further, the Company issued 17,500 shares of common stock to one
vendor in  exchange  for the  cancellation  of a  previously  issued  warrant to
purchase 33,333 shares of common stock at $5.00 per share. See Notes H and L.

Transactions involving warrants were as follows:
<TABLE>
<CAPTION>
                                                         2000                           1999
                                              -------------------------      -----------------------
                                                               WEIGHTED                     WEIGHTED
                                                               AVERAGE                       AVERAGE
                                                               EXERCISE                     EXERCISE
                                                SHARES          PRICE         SHARES          PRICE
                                                ------          -----         ------          -----
<S>                     <C>                    <C>            <C>
       Balance, January 1,                     3,216,856      $    6.03

           Warrants granted or sold            2,232,628           7.02       3,216,856   $     6.03
           Warrants exercised                   (657,333)          6.00
           Warrants cancelled                   (509,523)         10.14
                                            -------------                  ------------

       Balance, December 31,                   4,282,628      $    6.07       3,216,856   $     6.03
                                            ============                   ============
</TABLE>
As of  December  31,  2000,  outstanding  warrants  to  purchase  shares  of the
Company's common stock were as follows:

         EXERCISE
           PRICE          SHARES                     EXPIRATION
       ---------          ------      -----------------------------

       $    2.13             1,600    September 1, 2001
            2.25         1,121,428    September 12, 2005
            3.50             1,600    August 1, 2001

                                                                              16
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

            5.00         2,000,000    July 2, 2004
            6.00            50,000    July 21, 2004
            7.00             1,600    July 1, 2001
            8.44             1,600    June 1, 2001
            9.75           501,600    May 1, 2001 and July 12, 2001
           12.63             1,600    April 1, 2001
           12.75             1,600    March 1, 2001
           13.17           500,000    March 28, 2001
           16.00           100,000    March 13, 2001
                      ------------
                         4,282,628
                     =============

NOTE J - OPTIONS

The Company  adopted the 1999 Stock  Incentive  Plan, as amended (the "99 Plan")
under which options (qualified or nonqualified) and other stock awards, covering
an aggregate of  15,000,000  shares of common stock may be granted to employees,
non-employee  directors and consultants.  The exercise price established for any
awards  granted  under the 99 Plan shall be  determined  by a  Committee  of the
Company's Board of Directors.  During the year ended December 31, 2000,  options
to purchase  2,745,000  shares of the  Company's  common stock under the 99 Plan
have been granted to officers, other employees, directors and consultants of the
Company at exercise  prices  ranging from $5.00 to $12.00 per share.  Generally,
options become  exercisable over periods ranging from immediately to three years
and  expire  five  years  from the  date of  grant.  The  Company  has  reserved
15,000,000  shares of common  stock for issuance  under the 99 Plan.  During the
period ended  December 31, 2000 in connection  with the  resignation  of certain
employees,  approximately  1,375,000  non-vested options previously granted were
cancelled.  Additionally,  with respect to those certain  employees,  the period
over which approximately  303,000 vested options are exercisable was modified to
90 days from date of  resignation.  None of these vested  options were exercised
within the shortened period.

Transactions under the 99 Plan are as follows:
<TABLE>
<CAPTION>
                                                      2000                             1999
                                           -------------------------        ---------------
                                                            WEIGHTED-                     WEIGHTED-
                                                             AVERAGE                       AVERAGE
                                                            EXERCISE                       EXERCISE
                                             SHARES           PRICE         SHARES          PRICE
                                             ------           -----         ------          -----
       Balance, January 1,                  6,999,034     $      4.08
<S>                                         <C>                  <C>         <C>       <C>
           Options granted                  2,745,000            5.98        7,760,234    $    4.03
           Options exercised                 (292,500)           2.81
           Options cancelled               (1,374,790)           6.52         (676,200)        3.63
           Options expired                   (303,244)           6.53          (85,000)        2.82
                                         -------------                    -------------

       Balance, December 31,                7,773,500     $      4.27        6,999,034    $    4.08
                                         ============                     ============

       Exercisable, December 31             4,586,960     $      3.58        2,363,714    $    3.18
                                         ============                     ============

During  January 2000,  42,500  options with an exercise price of $1.50 per share
and 225,000 options with an exercise price of $3.20 per share were exercised and
paid for by the  return to the  Company of 79,874  shares of common  stock at an
estimated market price of $9.8125 per share.

The following table presents  information  relating to stock options outstanding
at December 31, 2000:
                                  OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                                 -------------------                  -------------------
                                                      WEIGHTED-
                                       WEIGHTED-      AVERAGE                       WEIGHTED-
                                       AVERAGE       REMAINING                       AVERAGE
       $     1.50        1,972,500                       3.6          1,027,500
             3.20        2,575,000                       3.8          2,575,000
             5.00          760,000                       4.6            520,000
</TABLE>
                                                                              17
<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
<TABLE>
<CAPTION>

                                       AVERAGE       REMAINING                       AVERAGE
         EXERCISE                      EXERCISE       LIFE IN                        EXERCISE
           PRICE          SHARES         PRICE          YEARS          SHARES         PRICE
           -----          ------         -----          -----          ------         -----
<S>    <C>               <C>                             <C>          <C>
       $     6.00        1,670,000                       4.6            180,000
       $     9.00          100,000                       4.6             50,000
       $     9.50          200,000                       3.6             68,000
       $    10.00          147,000                       3.7             52,000
       $    11.00           50,000                       4.0             17,000
       $    12.00          249,000                       4.0             80,460
       $    12.50           50,000                       3.8             17,000
                      ------------                                 ------------

                         7,773,500        $ 4.27         4.0          4,586,960       $ 3.58
                      ============                                 ============
</TABLE>

The  weighted  average fair value of the options  granted  during the year ended
December 31, 2000, and the period ended  December 31, 1999,  have been estimated
at $2.97 and  $6.82 per  share,  respectively,  on the dates of grant  using the
Black-Scholes  option-pricing model with the following assumptions:  no dividend
yield,  volatility  of 60%, a risk-free  interest  rate range of 5.7-6.0% and an
expected  life of three  years  from date of  grant.  Had  compensation  cost to
employees  and directors  for the  Company's  stock option plan been  determined
based upon the fair value of the options at the grant date for awards  under the
plan consistent with the methodology prescribed under SFAS No.123, the Company's
net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
                                                     PERIOD ENDED DECEMBER 31,
                                                     -------------------------
                                                      2000             1999        Inception to date
                                                      ----             ----        -----------------
<S>                                             <C>              <C>               <C>
            Net loss - as reported              $(86,208,000)    $(69,713,000)     $(155,921,000)
                                                ============     ============      =============
                     - pro forma                $(87,762,000)    $(71,509,000)     $(159,271,000)
                                                ============     ============      =============

            Net loss per share - as reported        $(1.46)           $(1.66)
                                                    ======            ======
                                - pro forma         $(1.49)           $(1.71)
                                                    ======            ======
</TABLE>

NOTE K - RELATED PARTY TRANSACTIONS

On July 29, 1999, MusicWorld entered into a license agreement with its principal
stockholder who is also the Company's  Chairman and CEO for exclusive  worldwide
rights to certain technology. The license shall continue to be in effect as long
as  compensation  equal to 0.25% of gross  revenues is paid  annually to the CEO
until the  later of 20 years or the  expiration  of the  underlying  patents  as
provided in his employment agreement.

At  December  31,  2000,  advances  to the  Company's  Chairman  and CEO totaled
$101,000.

See Note B for information with respect to the Datatek acquisition.

NOTE L - COLLABORATIVE AGREEMENT

On December 31, 1999,  the Company  entered  into a  collaborative  agreement to
develop co-branded Narrowband and Broadband Music Channels on internet sites. In
connection  with the agreement,  the Company paid $300,000 during the year ended
December 31, 2000.  In  connection  with this  agreement,  the Company  issued a
warrant to purchase  476,190 shares of the Company's common stock at an exercise
price of $10.50 per share for total  consideration  of $5,000.  Such warrant had
been valued at $2,252,000. The excess of the value over the amount paid had been
recorded as prepaid  advertising and marketing  expense and was amortized during
the year ended December 31, 2000,  commencing  with the month in which the music
internet  sites were  launched.  The  Company  authorized  the  issuance,  to an
independent  consultant,  of 110,000 shares of common stock valued at $1,155,000

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<PAGE>

MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

for services  rendered in  connection  with the  collaborative  agreement.  Such
amount has been  recorded  as  compensation  expense  during  the  period  ended
December 31, 1999.

On  December  20,  2000,  the  agreement  was  terminated  and the  warrant  was
cancelled.  Also, during July 2000, the Company and the consultant amended their
agreement to provide for the  issuance of 50,000  shares of common  stock.  As a
result, compensation cost was reduced by $630,000.

NOTE M - LICENSE AGREEMENT

In October  2000,  the Company  signed an agreement  to license its  proprietary
secure digital  encryption and distribution  technologies,  including its NETrax
software, to Applied Digital Solutions,  Inc. ("ADSX"), a provider of e-business
solutions.  The agreement,  as amended on March 30, 2001, allows ADSX to utilize
the    Company's    NETrax    technologies    for   certain    non-entertainment
business-to-business applications. Under the terms of the agreement, on April 3,
2001, the Company received net consideration of approximately $4,000,000 for the
grant of the license,  consisting of approximately 11.8 million shares of common
stock of ADSX, a publicly  held  company  whose shares are traded on the NASDAQ,
reduced by approximately 615,000 shares of common stock of the Company issued to
ADSX and cash,  not to exceed  $9,000,000,  payable to ADSX from the proceeds of
the sale by the Company of ADSX's stock.  Such net consideration is based on the
quoted  market  price of the  common  stock of ADSX and the  Company on April 3,
2001,  the date the  software  and shares were  released  from  escrow.  The net
consideration  received will be applied to reduce the  approximately  $4,000,000
carrying value of the NETrax software.

In accordance with the terms of amended  employment  agreements  entered into on
April 1, 2001,  the  Company's  Chairman  and CEO,  and its  Manager of Business
Affairs will each receive  consideration  of; (i) shares of ADSX stock valued at
$200,000  based on the  closing  bid  price on April 3, 2001 and (ii) 10% of the
ADSX shares remaining after  satisfaction of the $9,000,000  obligation  payable
out of proceeds of the sale of ADSX shares.

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